Carta

Carta Policy: Weekly Brief for September 16

September 16, 2022
The Carta Policy Team

The Topline

  • Gensler defends SEC climate disclosure proposal and crypto stance before Congress, and senators introduce legislation to push large private companies into the public reporting regime
  • CFIUS EO sharpens foreign investment screening process into U.S. supply chain and key technologies
  • CFTC, industry leaders support Senate Ag bill in hearing that gives CFTC authority to regulate digital commodities markets
  • CFPB report focuses on risks from rapid growth of BNPL lending

Macro matters

Congress faces a truncated calendar and copious to-dos

Finally back in force from the August recess, the House and Senate have only two full weeks of legislating before they break for most of October in the lead-up to the midterm elections. We’re also rapidly closing in on the government funding deadline of Sept. 30. Lawmakers still need to pass a continuing resolution to push the funding cliff into November, and will also seek to pass the National Defense Authorization Act and retirement security package sometime before the end of the year.

Inflation report shakes markets ahead of Fed meeting

The consumer price index (CPI) increased 0.1% in August, marking an 8.3% increase year-over-year and upending predictions that inflation would fall slightly at the close of summer. The startling CPI report signals the Federal Reserve will likely approve a 75 bps interest rate hike when it meets next week; a smaller segment of analysts are speculating that inflation’s continued growth could provoke a full 1% increase.

Biden signs CFIUS EO, holds off on outbound investment actions

The Biden Administration issued an Executive Order (EO) related to the Committee on Foreign Investment in the United States (CFIUS), which is an interagency committee that reviews—and can nix—foreign investment in the U.S. The order does not change the existing process, but further directs the committee to assess five factors as part of its consideration, including the investment’s impact on the U.S. supply chain, U.S. persons’ sensitive data, as well as technology such as microelectronics, AI, biotech, and clean energy. The CFIUS process can pull in startup and growth stage companies with foreign investment interest, even if in certain cases it is a minority investment.. This is separate from the EO the president may issue to review and filter outbound investment to certain geographical regions.  

Capital markets

Gensler testifies before Congress on SEC agenda

The SEC’s increasingly divisive agenda was on display this week as Chair Gary Gensler testified before the Senate Banking Committee, which largely focused on the SEC’s climate disclosure proposal and on digital assets. Democrats largely praised Gensler’s leadership on ESG and strong enforcement, while Republicans criticized Gensler for pursuing a political agenda that largely falls outside of the SEC’s expertise, authority, and mission. Both sides of the aisle raised concerns about Gensler’s rulemaking process, which fails to provide adequate time to comment or consider the cumulative impact of overlapping proposals. 

On ESG, senators from both sides raised concerns with the downstream impact of the proposal’s Scope 3 emissions disclosure requirements, which would force certain public companies to report on the emissions impact of their supply chain, including those of private businesses. The concern is public companies could require their value-chain partners to track and report Scope 3 emissions in order to do business, which could be an onerous burden for individuals or growth-stage companies. 

On private markets, Gensler defended the SEC’s private fund adviser proposal as necessary to promote transparency, while Republicans argued it would negatively impact access to capital for innovators to protect large, sophisticated investors. Sen. Jack Reed announced legislation that would force large private companies to be subject to public reporting and disclosure requirements. This concept tracks an item on the SEC’s agenda, which would have regulators look through investment structures for purposes of counting shareholders under section 12(g). The SEC is also expected to consider additional changes to Regulation D, which will likely impose additional conditions on the capital-raising process and limit who qualifies as an accredited investor. These changes, if adopted, would have a drastic impact on the private market fundraising process, as well as force more private companies to go public earlier than they would like.

With respect to digital assets, Sen. Pat Toomey, the Banking Committee’s lead Republican, pressed Gensler on the agency’s failure to provide guidance to the crypto issuers and intermediaries to help them comply with the federal securities laws, highlighting a number of differences in the operation of the crypto industry compared to traditional securities markets. Gensler said the SEC could use its exemptive authorities to tailor its regulations to specific issuers, suggesting any plans for rulemaking are not in the near future. The SEC’s use of enforcement to regulate crypto assets and related services instead of formal rulemaking and guidance (in addition to aggressive industry lobbying) have spurred efforts in Congress to create a new regulatory framework for digital assets where primary regulatory authority will reside in another agency, notably the CFTC.

Crypto & digital assets

Senate Ag discusses framework for digital commodities market 

The Senate Agriculture Committee took a major step toward creating a regulatory framework for digital commodities this week by considering S. 4760, the Digital Commodities Consumer Protection Act, in a  hearing featuring testimony from CFTC Chair Rostin Behnam and crypto industry leaders. This bipartisan legislation, introduced by the leaders of the Committee, would give the CFTC the resources and authority to regulate the digital commodities markets—-including bitcoin and ether—-while preserving the SEC’s authority to regulate digital assets that are securities and related intermediaries. Behnam praised the legislation as an important first step in building a broader regulatory framework for digital assets and touted the CFTC’s expertise and experience to effectively oversee these markets. While the legislation is unlikely to be enacted this Congress, it will certainly serve as a starting point in future negotiations, as it enjoys support from the regulator, the industry, and consumer advocates.

Ethereum merge could draw SEC scrutiny

This week, the long-awaited Ethereum merge was completed, as the second-biggest blockchain moved from a proof-of-work to the more energy-efficient proof-of-stake model to authenticate transactions on the blockchain. Such a move, which is expected to reduce energy use by 99.95%, has been cheered by environmentalists and lawmakers, and CFTC Chair Behnam called it a step in the right direction. Previous SEC leadership has suggested ether was not a security, and bipartisan legislation would deem it a commodity subject to CFTC oversight. SEC Chair Gensler, who continues to assert most digital assets are securities, has not opined on ether, though his testimony this week suggests the SEC will be taking a look at its new “staking” model. Though he did not reference any specific asset, Gensler suggested that intermediaries offering staking services look very similar to lending. The SEC has been pushing crypto-lending products to register with the Commission, which was the subject of its $100M settlement with BlockFi.

SEC announces new crypto disclosure office

The SEC announced plans to create a new office devoted to disclosure review for crypto businesses. Chair Gensler has pressed the industry to work with SEC staff to get their tokens registered and regulated, and the Office of Crypto Assets will help provide more specialized support for crypto assets. At the same time, it will provide the SEC an opportunity to engage in more targeted scrutiny. The SEC previously expanded its enforcement efforts by doubling the size of its Crypto Assets and Cyber Unit and has been the most aggressive regulator when it comes to crypto enforcement, with more actions expected in the future. 

Agencies weigh in on the crypto debate in series of reports

Agencies are releasing their crypto findings and recommendations in reports mandated by President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets. On Friday, the Treasury Department published three reports: 1) The Future of Money and Payments, 2) Implications for Consumers, Investors, and Business; and 3) Action Plan to Address Illicit Financing Risks of Digital Assets. In the first report, Treasury recommends that the U.S. government advance work on a possible CBDC, encourage use of instant payment systems, establish a framework for payment regulation, and prioritize improvements on cross-border payments. Treasury’s second report highlights the need for regulatory guidance to protect financial stability, and the third report focuses on priority actions to monitor emerging illicit financing risks and improve global anti-money laundering/combating the financing of terrorism (AML/CFT) enforcement. Separately, the Office of the Comptroller of the Currency (OCC) identified emerging challenges related to digital technologies as an area of focus for its new five-year strategy

Banking & financial products

Banking Republicans foreshadow renewed scrutiny of CFPB

The CFPB issued a report outlining the rapid growth and risks to consumers with Buy Now, Pay Later (BNPL) financing, noting BNPL products lack protections that otherwise exist in the consumer financial marketplace. Although the CFPB does not currently oversee the BNPL companies, it is expected to issue guidance or regulation to align the industry with the credit card sector. Under Director Chopra, the CFPB has increasingly focused its attention on fintech companies offering products that compete with traditional finance. Banks and consumer advocates have also teamed up to push the CFPB to apply the same regulatory standards to nonbank fintech as those that apply to traditional lenders. Expect this posture—and accompanying scrutiny—on fintechs to increase.

Senate Banking Republicans leveled criticisms at the CFPB, urging the Bureau to operate within the boundaries of the law and its authorities. If Republicans take control of one or both chambers of Congress, oversight and congressional scrutiny will intensify, though it will likely not stop the CFPB from expanding its reach and scrutiny into fintechs.

Taxation & accounting

Economic blueprint doubles down on old priorities, including carried interest

Looking to the long-term, the White House released an economic blueprint last week that, among other things, expressed Biden’s continued support for a series of tax policy changes that were ultimately dropped from the final, trimmed-down version of the recently passed Inflation Reduction Act. These familiar proposals include reversing the Tax Cuts and Jobs Act’s decrease in rates for individuals making over $400,000 annually, curtailing step-up in basis, and treating carried interest as ordinary income for tax purposes. These changes would need to be enacted by Congress, and are unlikely to happen, but represent the posture of the Biden Administration and the political rhetoric to come on taxation around the industry.

Antitrust, privacy, & technology

DOJ strengthens antitrust bench ahead of enforcement actions

The Department of Justice’s (DOJ) Antitrust Division is continuing to hire Big Law attorneys to compete with the extensive legal teams retained by companies like Google and American Airlines, both of which are currently facing legal challenges from the agency. The Biden administration is charting a more aggressive anti-monopoly agenda than its predecessor, a message many see reflected in the priorities of the Federal Trade Commission’s (FTC) latest FY26 Strategic Plan agenda. 

Upcoming events

Notable SEC proposed rules and comment deadlines

 

 

Form PF amendments

Comment deadline

 

10/10/2022

 

 

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