Carta Policy: Weekly Brief for July 22

The Topline

• Senate likely to pass trimmed-down competition legislation focused on semiconductor funding next week—problematic SEC amendment to be dropped

• House lawmakers close to a deal on stablecoin legislation, which would likely subject issuers to bank-like regulations

• Lawmakers scrutinize SEC’s approach to regulating digital assets through enforcement instead of providing industry guidance, while agency brings crypto insider trading case deeming nine tokens to be securities

• House committee advances privacy legislation with federal preemption, but hurdles remain in Senate

Macro matters

Congressional agenda

This week, Congress came back to salvage what’s left of its legislative agenda following Sen. Joe Manchin’s unwillingness to move forward on a climate, energy, and tax package before the August recess following a disappointing inflation report. With the prospects of a more ambitious reconciliation and competitiveness package all but dead, this week the Congress turned its attention to the possible.  

Build Back (Manchin?)

While Sen. Manchin left the door open to potential action in September if inflation numbers improve, many Democrats are urging the Senate to move forward with a health care package that would extend Affordable Care Act subsidies and prescription drug reform—a narrow package Manchin said he would support. President Biden encouraged the Senate to pass the smaller health care package and vowed to use executive action to address climate change. Progressives are holding out for a potential energy and tax package in September, though this outcome is unlikely.

Unless Sen. Manchin changes course, qualified small business stock tax treatment, carried interest, and long-term capital gains will all be preserved in their current form, and IRAs will continue to be able to invest in alternative assets. This is likely the outcome—but it’s never over until it’s over, so we remain vigilant. 

Bipartisan Innovation Act-lite

In the meantime, the Senate has begun moving forward with a slimmed down competitiveness bill that would provide over $50 billion in CHIPS Act funding and tax credits to incentivize domestic semiconductor manufacturing. The House is expected to follow suit and pass the slimmed-down CHIPS funding package next week, sending it to the president’s desk. This means the provision we were concerned about (directing the SEC to revamp capital formation rules in private markets) will not be included, and the proposals around controls over U.S. investment into certain foreign countries will also fall away. 

Capital markets

SEC director testifies before Congress on enforcement priorities 

The SEC’s head of enforcement Gurbir Grewal testified before the House Financial Services Committee this week and outlined a robust approach to enforcement, including holding gatekeepers (auditors, accountants, and lawyers) accountable in their role to prevent misconduct, and echoed Chair Gensler’s request for additional resources to effectively regulate digital assets. Democrats largely applauded the SEC’s robust investor protection efforts, while Republicans criticized the agency’s enforcement-first approach to regulation, the lack of focus on the capital formation, and negative impacts of many of the items included on Chair Gensler’s ambitious regulatory agenda. 

When asked about specific policy matters, Grewal largely deferred to others in the agency, though he did note that “gamification” and digital engagement practices used by broker-dealers and investment advisers are a major concern not only from a policy perspective, but also from an enforcement perspective. The SEC is expected to propose rules around the practice this year. Expect to see enhanced focus in this area even before any rules are proposed. 

With respect to climate change disclosures, lawmakers questioned how the SEC’s authority and expertise to regulate an area that is difficult to measure and where standards have not been clearly defined. Lawmakers on the committee pointed out the SEC could already bring cases under its anti-fraud authority, but Grewal insisted consistent and comparable disclosures would benefit investors. Chairwoman Maxine Waters also discussed the need to increase transparency in the private markets and touted legislative efforts that would require issuers to provide the SEC with additional information when raising capital under exemptions, including Regulation D. While such legislation is unlikely to become law, congressional support gives the agency cover to impose conditions to raising capital under Regulation D, an item that is currently on the SEC’s regulatory agenda.

Another major focus of the hearing was the agency’s approach to regulating digital assets. Republicans criticized the SEC for “regulating by enforcement” instead of providing clear guidance on how the securities laws apply to this nascent industry. Despite embarking on an ambitious regulatory policy agenda, there is not a single item that is specific to the crypto market. There was also some criticism from the Democratic side for not being more aggressive in its crypto enforcement efforts. Chair Brad Sherman, who has long been a crypto critic, questioned why the agency had not brought cases against large crypto trading platforms that have been transacting tokens the SEC alleges are securities (like XRP, which is currently being litigated in the courts). There was consensus that more regulatory clarity is needed, though any comprehensive effort is unlikely to happen this Congress.

Crypto & digital assets

HFSC expected to advance stablecoin legislation next week

Next week, the House Financial Services Committee is expected to advance bipartisan legislation that would create a regulatory framework for stablecoins, digital assets typically designed to be pegged to the dollar or other traditional currencies. The effort, led by Chairwoman Maxine Waters and Ranking Member Patrick McHenry, stems from an urgency for Congress to act following the recent $2 trillion crypto market collapse and high-profile bankruptcies. The Treasury Department has also been pushing for legislative action and has been working with Congress on these efforts. While text has not yet been released as of this writing, the legislation is expected to subject stablecoins to bank-like regulation, including prudential standards on capital, liquidity, and supervision. The Federal Reserve will have a prominent oversight role. Nonbanks could issue stablecoins, provided they were subject to the same oversight, but other firms would be prohibited from doing so. Such a framework would largely track previous recommendations for stablecoin issuances from the President’s Working Group.

Even if the House can pass a stablecoin bill with broad bipartisan support, the prospects of it being signed into law this Congress are unlikely, especially given the shrinking legislative calendar and competing priorities. 

SEC brings crypto insider trading case

The Department of Justice and SEC brought an insider trading case against a former Coinbase manager who allegedly provided tips on which assets the platform planned to list in the future. What is more notable about this case, however, is that the Commission used the complaint to declare nine digital tokens to be securities—a move that could have broader implications outside of this case. The SEC’s actions will only embolden those critical of the SEC’s use of enforcement to regulate the crypto markets instead of providing regulatory guidance on the application of the securities laws to digital assets. CFTC Commissioner Caroline Pham criticized the action as “a striking example of ‘regulation by enforcement.’” Despite finding the tokens were securities, the SEC has not brought charges against the issuer or the trading platform, though the agency declined to comment about future enforcement plans on the matter. 

Banking and financial products

CFPB examining payment scams

The Consumer Financial Protection Bureau is reportedly preparing to push banks to expand the group of customers who they will pay back after getting scammed while using payment services like Zelle and Venmo. Current bank policies have held that if the customer did in fact authorize the payment, the charge would not be reversed, whether or not false pretenses or misrepresentations were involved. Under new guidance the Bureau is preparing to release in the coming weeks, banks could face expanded liability around certain scams that have become more prevalent on payment platforms. However, bank and industry groups argue that these changes could encourage customers to be less scrupulous while using payment services and ultimately the increased compliance cost would be passed on to the customers.

Taxation

IRS’s five-year strategic plan to include improved e-filing capabilities

The IRS released its FY 2022-2026 Strategic Plan, outlining its multi-year priorities in alignment with its four goals: service, enforcement, people, and transformation. The IRS is prioritizing expanding digital services, including online accounts and digital filing capabilities, though timeline is not concrete. Carta and industry leaders agree with this recommendation and continue to pursue our request for the IRS to allow e-filing of sec. 83(b) elections.  While the IRS works to modernize, if you need to file an 83(b) election, Carta solved that problem: We now have automated submission for our users.

Antitrust, privacy, and technology

Federal privacy legislation update

The House Energy and Commerce Committee advanced the American Data Privacy and Protection Act in a 53-2 bipartisan vote.During the markup, several lawmakers from California voiced concerns and two ultimately voted no over the bill’s federal preemption, suggesting the legislation should serve as a baseline that states can go beyond. The bill would create a national privacy standard that includes a limited federal preemption and a private right of action that would begin two years after the law goes into effect, cutting it down from four years in previous versions. The four-year delay was a key target of criticism from Sen. Maria Cantwell, the chairwoman of the Senate Commerce Committee, whose support is vital for any privacy legislation to be signed into law. The latest version also changed the language around protections for children, banning targeted ads to children and requiring that all information relating to individuals under 17 be treated as sensitive data. The bill is expected to pass in a House floor vote as negotiations continue in the Senate and largely depend on Cantwell’s satisfaction with the amended language.

FTC’s Khan and Phillips on competition

At a recent event, Federal Trade Commission Chair Lina Khan pointed to an ongoing need for research that focuses on what should constitute “unfair methods of competition” and explores “the full scope and reach” of the FTC’s unfairness authority granted by Section 5 of the Federal Trade Commission Act. Khan also indicated the FTC remains focused on refining the definition of substantial injury which typically refers to monetary harm. At a separate event, FTC Commissioner Noah Phillips discussed how the FTC has been removing merger guidance without properly replacing it, leaving American companies without clarity on how to proceed with mergers. Referring to the effort to modernize merger guidelines, Phillips expressed concern that the FTC could “deviate from law” and operate beyond the FTC’s statutory instruction to protect competition. 

Upcoming events

• Brookings Center “The Future of Crypto Regulation” with CFTC Chair Rostin Behnam – July 25 at 2:00 p.m. (ET)

• Senate Banking Committee hearing on “Fairness in Financial Services: Racism and Discrimination in Banking” – July 26 at 10:15 a.m. (ET)

• Federal Open Market Committee meeting – July 26 and 27

• Center for Audit Quality’s “SOX: Evolution of Corporate Reporting” with SEC Chair Gary Gensler – July 27 at 1:00 p.m. (ET)

• House Financial Services Committee markup – July 27 at 10:00 a.m. (ET)

Notable SEC proposed rules and comment deadlines

*60-days after publication in the Federal Register, which has not occurred

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