A top U.S. financial regulator is inquiring about how private equity firms steered deposits, including client funds, out of Silicon Valley Bank before its collapse.
The Securities and Exchange Commission’s examinations unit has requested records of some investment firms’ money transfers and investor communications over the first three weeks of March, as well as emails with SVB, according to people familiar with the matter who asked not to be identified discussing confidential information. Some questions focused on whether executives with personal accounts at the bank cashed out before clients — and where deposits went, they said.
The inquiries send a warning to venture capital and private equity firms over how they handle client funds at troubled banks. Under Chair Gary Gensler, the agency is taking a stronger stance against the industry on several fronts, ramping up scrutiny of fees and mandating more disclosure from firms that have long been more lightly regulated than mutual funds.
It couldn’t be determined which firms are the focus of the SEC unit’s inquiries. The division has directed its inquiries to smaller private equity firms, one of the people said.
A representative for the agency declined to comment.
Silicon Valley Bank had positioned itself as a one-stop shop for startups. It swelled in size during a period of low interest rates and significant tech-sector and venture-capital growth. It failed on March 10 after an interest-rate shock in its bond portfolio that led to a fast and furious deposit run.
“Banks like SVB became critical to the infrastructure and economic framework of the tech world,” said Amy Lynch, a former SEC regulator and founder of FrontLine Compliance. “Regulators want to know what the impact is for the industry.”
Queries from the SEC exams division aren’t necessarily an indication of wrongdoing and often don’t lead to investigations. SEC examiners are able to refer potential wrongdoing to the agency’s enforcement staff, who can open formal probes.
Money managers face a number of SEC rules over how they handle client funds and can face investigations and lawsuits, as well as fines, if they are violate them. Many private equity firms, for example, are generally barred from mixing firm money with those of clients in one account.
SVB was a major bank for smaller PE firms who couldn’t get the same white-glove service from big banks. It offered credit lines to juice returns for investment funds and extended loans to the startups they invested in to buoy valuations. Some investment executives also had personal accounts with the lender.
A rush of withdrawals pushed the flailing bank over the edge. In an extraordinary move, the government later said would cover all of SVB depositors — including those above the federal deposit-insurance coverage limit of $250,000.
As the private equity industry has grown, its money machine has become more interconnected with the banking system.
First Republic Bank, which attracted buyout billionaires and other wealthy people, in May became the second-largest bank failure in U.S. history. It was seized by regulators and sold to JPMorgan Chase & Co.