On Friday, March 10, 2023, Silicon Valley Bank (“SVB”) was seized by the Federal Deposit Insurance Corporation (“FDIC”). SVB, a prominent lender in the world of technology start-ups, recently experienced pressures from market downturns and rising interest rates. As a result of the seizure, all assets belonging to SVB were transferred to a bridge bank operated by the FDIC. The FDIC announced by Sunday, March 12 that assets would be insured and depositors would have access to all of their money by the following day. What stood out in this case was the swiftness of the collapse, occurring just two days after initiating emergency moves to handle withdrawal requests, caused in no small part by a social media fueled bank run.

While SVB is primarily known as the go-to commercial bank for technology startups, they also cater to the venture capital community and other private fund firms. With the collapse of a prominent financial institution and custodian, we thought we would take this opportunity to remind advisers of their ongoing due diligence obligations to consider the controls in place to manage fund (and firm) liquidity. While the circumstances around an individual bank collapse would be difficult to predict, SVB’s case at least suggests a line of questioning: “How are you prepared to address the velocity of withdrawal requests given the potential impact of social media and access to electronic banking?”

As we reiterated in our prior releases, it is not enough for advisers to establish adequate vendor oversight policies and procedures and internal controls. Advisers must ensure that their contracted service providers are fulfilling not only the contractual obligations, but also their obligations to the investors. As part of the adviser’s fiduciary duty, it is imperative that they conduct due diligence prior to engaging a service provider. Additionally, the SEC has proposed requirements for periodic monitoring to reassess and revaluate adviser third-party service providers.

The SEC3 compliance consulting team can assist with not only establishing reasonably designed vendor oversight policies and procedures, but we can also provide assistance in performing your vendor due diligence and managing internal controls. For more information, please contact us at info@seccc.com, at (212) 706-4029 x 229 or visit us on our website at www.seccc.com.