Federal regulators weaken Wall Street rules

Venture capital funds soon will be eligible for a huge new pot of Wall Street money, after federal regulators yesterday weakened rules that were put in place after the financial crisis.

Driving the news: Many banks had been banned from balance sheet investing in venture capital funds due to the Volcker Rule, which was part of the Dodd-Frank financial reform package passed in 2010. That prohibition will now expire on Oct. 1, based on an announcement from a group of agencies that included the SEC and FDIC.

An argument in favor of this deregulation is that the Volcker Rule disproportionately hurt smaller, regional venture capital funds that had relied on local banks for fund capital.

An argument against this deregulation is that venture capital hasn't lost any of its high risk profile.

• Other changes: Banks now will be allowed to invest in credit funds and make certain types of equity co-investments on private equity transactions (despite recent SEC criticism of PE co-investment practices). They remain prohibited from balance sheet investing in private equity funds and hedge funds.

Context: This move comes just weeks after the Labor Department loosened rules to allow defined contribution plans like 401(k)s to invest in alternative asset funds like private equity and venture capital.

The bottom line: The Volcker Rule was never fully implemented as Volcker and other advocates wanted and has been consistently watered down over time.