Policy newsletter

Carta Policy: Weekly Brief for April 1

April 1, 2022
The Carta Policy Team

TL;DR

  • President’s budget proposes tax increases on corporate rate, as well as individual top rate, including on unrealized gains for the ultrawealthy; it’s unlikely to translate into law. 

  • SEC issues proposals to reign in SPACs and subject HFTs to dealer registration; outlines 2022 examination priorities focused on private funds, ESG, cybersecurity, and crypto. 

  • SEC issued accounting guidance pushing crypto exchanges to mark customer crypto assets as liabilities on their balance sheets to account for the increased risk of financial loss. 

  • The economy added 431,000 jobs in March, lowering the unemployment rate to 3.6% from 3.8%.

Macro matters

FY 2023 president’s budget

The President released his $5.8 trillion FY2023 budget request, outlining the administration’s spending priorities for Congress’ consideration, including an 18% increase for the IRS to improve its technology infrastructure, an additional 46% for the antitrust division of the Department of Justice, a 40% increase for the Federal Trade Commission, and a 7.5% increase for the SEC’s enforcement efforts. To offset the spending, the proposal recommends raising the corporate tax rate from its current rate of 21% to 28%, increasing the top individual tax bracket to 39.6%, imposing a 20% minimum tax on income (including unrealized capital gains) of households worth over $100 million, and taxing carried interest as regular income. These items will get headlines, but do not directly translate into outcomes: The president’s budget request is a proposal for spending and not law.

Congressional agenda

The Congressional calendar is getting tight. Lawmakers remain focused on Ukraine and what additional action needs to be taken to constrain Russia. In addition, next week the Senate will vote on—and likely confirm—Ketanji Brown Jackson’s nomination to the Supreme Court. We expect Congress to appoint conferees from the House and the Senate to negotiate the COMPETES Act, the U.S. competitiveness bill. And there are rumblings that policymakers will seek to revive Build Back Better 2.0 talks in May.  

Noms, noms, noms

The Senate unanimously confirmed all four remaining nominees to the Commodity Futures Trading Commission via voice vote. The Senate also overcame a procedural hurdle to tee up the confirmation vote for FTC nominee Alvaro Bedoya who—once confirmed—will provide the Democrats a voting majority on the FTC as the Commission looks to take policy and enforcement action on privacy, antitrust, and technology applications that contribute to disparate impact for consumers. The Senate also took steps to advance the nomination of Lisa Cook to serve on the Federal Reserve Board, where she now joins Jerome Powell, Lael Brainard, and Phillip Jefferson, who are all awaiting a final confirmation vote. 

Equity 101

Carta launched Equity 101, a free, interactive course designed to help everyone learn the fundamentals of equity ownership. We at Carta, together with our customers, are on a mission to create more owners. Equity education helps people maximize the value of that ownership. Last year, $580 million worth of vested equity expired unexercised. We believe education can make a difference. The new curriculum helps employees understand how their vesting schedules work, how much they have to pay to exercise their options, and the tax implications of exercising or selling their options. Equity 101 is available at carta.com/equity/learn/

Fireside chat

Don’t forget to join the CartaX fireside chat next week on April 5 at 10 am (PT)/1 pm (ET) for a discussion on the regulatory outlook for private markets and crypto, in addition to new efforts in Congress to bolster capital formation. What better way to celebrate the 10-year anniversary of the JOBS Act? Register here.  

Capital markets

SEC proposes reforms to crackdown on SPACs

In a 3-1 party-line vote, the SEC proposed significant reforms to enhance disclosures and investor protections for special purpose acquisition companies (SPACs). SPACs are formed as shell companies to raise money in the public markets with the sole purpose of acquiring a private company (the de-SPAC transaction), which has the effect of taking that private company public without having to endure the lengthy and complicated process associated with a traditional IPO. SPACs have accounted for over half of the IPOs in the past two years. But as SPAC popularity has risen, so has the regulatory scrutiny. With this proposal, the SEC aims to ensure SPACs transactions are subject to similar disclosures and obligations as traditional IPOs, so that investors benefit from the same protections. Specifically, the proposal would: 

  • Impose specialized disclosure requirements around SPAC sponsor compensation, conflicts of interest, equity dilution, and fairness of the de-SPAC transaction;

  • Require the private company to be a co-registrant when the SPAC files a registration statement for a de-SPAC transaction;

  • Redetermine smaller reporting company status within four days after de-SPAC transaction;

  • Amend the definition of “blank check company” to make the liability safe harbor for forward-looking statements, such as projections, unavailable in SPAC filings;

  • Expand underwriter liability for those acting as underwriters in a SPAC IPO to a subsequent de-SPAC transaction when certain conditions are met

The number of SPAC transactions has already declined from the pace set these past two years due to increased regulatory scrutiny, underperforming returns, and unfavorable market conditions. As this avenue to public markets gets further tightened, it will likely decrease the number of companies entering public markets. This additional friction will be even more stark for private companies as the SEC also signaled it will propose rules to increase disclosure and compliance requirements on private growth-stage companies in an effort to increase transparency in private markets and ultimately push more private companies into public markets. 

For her part, Commissioner Peirce criticized the SPAC proposal for being “designed to damn, diminish, and discourage SPACs,” noting she would have supported a proposal focused on disclosures to aid investors in decision-making. She suggests the SEC should be focused on the shortcomings of the traditional IPO process and asked for comments on how it could be improved. 

SEC proposes rules to subject high-frequency traders to greater oversight

The SEC proposed new rules designed to address the important role principal trading firms (PTFs)–firms that invest or trade in their own account–have in providing liquidity to the markets and bring them under SEC oversight by requiring them to register as dealers. Under the proposed rules, firms or persons would have to register as a dealer if they routinely make comparable purchases and sales of the same security in the same day or earn revenue primarily through bid-ask spreads. The proposed rules would not apply to registered investment companies or traders that manage under $50M in assets. According to the SEC, the proposal would primarily require the registration of PTFs and potentially private funds, as they are not subject to the regulatory framework of the Investment Company Act of 1940.

SEC issues 2022 examination priorities

This week, the SEC announced a number of areas where the Division of Examinations will focus its efforts. Not surprisingly, many of these areas have been top priorities for the Commission and the subject of recent rulemaking proposals, including: private funds; ESG; cybersecurity; standards of conduct for investment professionals; and crypto and digital assets.

Crypto & digital assets

New SEC accounting guidance for crypto

The SEC issued new accounting guidance calling on crypto exchanges to mark the crypto assets they hold for customers as liabilities on their balance sheets to account for the increased risk of financial loss, and warn investors of risks associated with safeguarding the digital assets. The guidance would apply to a range of entities, including crypto exchanges and traditional firms, such as retail brokers and banks that are increasingly providing crypto services. In its guidance, the SEC said companies should also disclose the nature and amount of crypto assets they are responsible for holding, with separate disclosures for each significant crypto-asset, and any vulnerabilities resulting from concentration in such activities. 

Banking & financial products

House passes retirement security bill

The House passed the Securing a Strong Retirement Act, or SECURE Act 2.0, by a bipartisan vote of 414-5. Secure 2.0 would, among other things, require employers to automatically enroll eligible workers in 401(k) plans at a rate of 3% of salary. In addition, the bill would raise the catch-up limit for IRA contributions for individuals above 50 years old from $1,000 to a level indexed for inflation, as well as increase the age for required minimum IRA distributions. The bill would also allow all plans that accept pre-tax employee contributions to accept Roth contributions. The Senate is working on a retirement security package, though differences remain. Expect more attention on this in May and through the summer. 

CFPB Director recommends structural penalties to combat corporate recidivism

Consumer Financial Protection Bureau Director Chopra outlined steps beyond monetary fines to address repeat corporate offenders. He believes corporate recidivism has become the norm and is now viewed as a cost of doing business, particularly for several large financial and technology corporations he called out specifically. He suggested the CFPB and other federal regulators use a number of structural, non-monetary reforms to make penalties more meaningful and better achieve the goal of deterrence, including: caps on size or growth, bans on certain business practices or divestiture from certain product lines, terminating charters or licenses where facts warrant, and holding more individuals accountable. 

Upcoming events

Notable SEC proposed rules and comment deadlines

 

Money market fund reforms

4/11/2022

*60-day comment period after publication on SEC website or 30 days after publication in Federal Register, whichever is longer.

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