Sens. Lummis and Gillibrand introduce long-awaited crypto bill that defines security v. commodity, largely empowering CFTC
Biden’s SEC nominees advance to full Senate vote
Chair Lina Khan says the FTC will sue to stop anti-competitive mergers, not merely negotiate settlements
Sens. Schumer and Manchin continue work on scaled-down BBB
Lawmakers brace for a sprint to the August recess
The Congressional calendar is shrinking while the agenda is growing, with policymakers working on gun control legislation and government funding bills while they await the Supreme Court’s decision on Roe v. Wade. These matters will distract attention from Build Back Better and legislative efforts on U.S. competitiveness and retirement security.
Policymakers are negotiating the Bipartisan Innovation Act, but there is still no agreement on whether to include a tax title that would expand the use of the R&D tax credit. This legislation is still likely to be enacted, but likely in the fall.
Leader Chuck Schumer and Sen. Manchin are working on a smaller version of the BBB proposal focused on prescription drug reform, climate, and deficit reduction. This is a heavy lift, with tough politics, procedural hurdles, and limited time for negotiation. Although it’s unlikely to come together, there’s still a chance Leader Schumer can get Sens. Manchin and Kyrsten Sinema on board. In that case things could move quickly, so we remain engaged on preserving qualified small business stock (QSBS) treatment.
The bipartisan pair of SEC nominees, Jaime Lizárraga and Mark Uyeda, advanced out of the Senate Banking Committee by voice vote, essentially guaranteeing Senate confirmation, which is likely to occur before the July 4 recess. Fed nominee for vice chair of supervision, Michael Barr, also advanced with bipartisan support from the Senate Banking panel.
Gensler outlines sweeping equity market reforms
This week, SEC Chair Gary Gensler previewed sweeping reforms to equity market structure meant to make public market trading more competitive and transparent for investors. The agency is likely to begin considering the reforms later this year. The most consequential and controversial reform proposed would require brokerages to route individual buy or sell orders to an auction instead of to wholesale electronic trading firms, where many brokers currently route orders for a fee (known as payment for order flow). This practice came under scrutiny after the meme stock trading saga generated questions about whether payment for order flow created conflicts of interest and limited competition for retail orders. In addition to retail order auctions, Gensler proposed a number of other changes, including allowing exchanges to quote shares in sub-penny increments and requiring more disclosures around trade execution. The industry has pushed back on many of the suggested changes as unnecessary, noting the market is functioning well and retail investors are benefiting from tighter spreads, lower costs, and meaningfully reduced costs, including zero-commission trades.
There are doubts as to whether such bold reforms can be achieved by the end of President Biden’s first term (which is as long as many expect Gensler to serve as Chair). Chair Gensler is facing industry opposition, the SEC has seen a high number of senior departures, and already has an ambitious agenda full of complicated and controversial proposals. Even if the Commission is able to finalize these changes, the rules will almost certainly be subject to engage in the inevitable litigation its reforms would provoke.
Crypto & digital assets
Senators introduce bipartisan framework to regulate crypto
This week, Sens. Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) unveiled the Responsible Financial Innovation Act – bipartisan legislation that would create a comprehensive framework for digital assets. The proposal aims to create a common set of definitions and standards for determining which digital assets are commodities and securities, and, as a result, whether they fall under the purview of CFTC or SEC. Most notably, the proposal would grant primary regulatory authority over most of the digital asset market to the CFTC instead of the SEC. Under the proposal, the CFTC would be responsible for regulating the crypto spot market for digital assets that are not securities, including “ancillary assets,” which would be regulated as commodities. “Ancillary assets” would include assets that are not fully decentralized but do not create rights to profits or other financial interests in the business entity. Issuers of “ancillary assets,” however, would have to file semiannual disclosures with the SEC.
The proposal is a win for the crypto industry, which has been pushing for the CFTC to be the primary regulator— and for CFTC Chair Behnam, who has been lobbying Congress for more authority to regulate the space and for more resources. Behnam offered his support for the Lummis-Gillibrand approach, noting the bill did a good job “deciphering between a commodity and security”—something regulators have not done to this point. While the SEC still has a role to play under the Lummis-Gillibrand proposal, their jurisdiction would be more limited. Under Chair Gensler, the agency has taken an aggressive approach to regulating the industry by asserting that most cryptocurrencies are securities and pushing crypto platforms to register with the agency or be subject to possible enforcement action.
In addition to clarifying regulatory authority, the proposal addresses a number of other issues, including:
Providing a regulatory framework for stablecoins, requiring them to be backed by 100% high-quality liquid assets and mandating disclosures;
Providing a framework for the taxation of digital assets, including reporting requirements, income sources, lending agreements, accounting for gains or losses, and the implementation of IRS guidance;
Directing a study to explore the impact of crypto mining on climate change; and
Studying potential opportunities and risks of retirement investment in digital assets.
The Lummis-Gillibrand proposal is unlikely to be enacted this year, though it will likely serve as a starting point for comprehensive discussions as well as discrete reforms pulled from this broader proposal.
States move ahead on their own crypto regulation
Meanwhile, in the absence of federal action, states are moving forward with a patchwork of crypto regulations. This week, New York issued new guidance setting forth baseline requirements for dollar-backed stablecoins that outlines redemption requirements and requires them to be fully backed by reserves that are segregated from an issuer’s proprietary assets that are attested to by an independent auditor on a monthly basis. A California lawmaker proposed a new sweeping state licensing program and oversight regime for companies engaged in “digital financial asset business activity.” The California legislative calendar is tight, so the program is unlikely to become law—but it signals the state’s policy direction. The Lummis-Gillibrand bill would push states to adopt uniform standards.
Carta makes recommendations to Treasury and IRS on their Priority Guidance Plan (PGP)
Carta submitted recommendations on items Treasury and the IRS should prioritize for the 2022-2023 PGP. We encouraged tax simplification through streamlining the filing process and reducing administrative burdens for businesses and their owners. Our letter urges Treasury and the IRS to:
Provide the ability to electronically sign and e-file section 83(b) elections
Extend the time window to qualify for incentive stock option (ISO) tax treatment, after separating from a company, from 90 days to the natural life of the stock option, thereby making it easier for companies to extend the post-termination exercise (PTE) period
Provide guidance concerning virtual currency
Provide guidance addressing amortization of R&D expenditures
Banking & financial products
Sen. Brown calls on FSOC to review consumer data activities of financial institutions
In a letter this week, Senate Banking Committee Chairman Sherrod Brown asked the Financial Stability Oversight Council (FSOC) to review the consumer data activities of financial institutions and assess their potential threat to financial stability and security. Brown raised concerns about the breadth of consumer data that financial institutions can access and sell for a profit, which could create opportunities for bad actors to obtain and use the data.
Antitrust, privacy, and technology
Privacy draft set for legislative hearing
Bipartisan policymakers in the House and Senate unveiled the American Data Privacy and Protection Act last week, breaking months of gridlock in the fight for federal privacy legislation. The draft legislation would create a data privacy framework with a limited private right of action, or the ability to sue. It also grants enforcement authority to the FTC, which would decide the level of protection certain types of data require, how companies can minimize the information they collect, and oversight of data relating to minors. Senate Commerce Chair Maria Cantwell did not sign on to the draft and is drafting a competing proposal that would differ on enforcement. Given Chair Cantwell’s lack of support and the shrinking calendar, this bill is still unlikely to be enacted this Congress.
Patent Office to accelerate climate innovation and tech
The U.S. Patent and Trademark Office (USPTO) is piloting a program to accelerate the review of patent applications for innovative technologies that mitigate climate change. To qualify, inventions must reduce greenhouse gas emissions and make a positive impact on the climate; the program’s application process is open from June 3, 2022 to June 5, 2023. For startups seeking funding, a patent is a compelling way to attract VC investments.
Khan narrows antitrust and privacy agenda
FTC Chair Lina Khan warns she’ll sue to stop anticompetitive mergers rather than negotiate settlements with companies. Khan indicated that the FTC will pay especially close attention to transactions involving emerging technologies, such as smart home technologies and virtual reality, as well as the video games industry, which has seen significant consolidation in recent years. Khan also said the FTC may examine labor issues when considering M&A deals. Although stopping short of an explicit endorsement, Khan said she supports the aim of the American Choice and Innovation Online Act, which would prevent tech companies from giving preference to their products over their rivals. Khan is also focused on regulations that would force tech companies to curtail their data collection practices, outright ban the collection of certain kinds of data, and address algorithmic discrimination and behavioral advertising.
Khan also said the FTC is considering a regulation targeting the use of non-compete provisions. She said the rules could rely on a rarely used FTC authority under the 1914 FTC Act, which broadly says “unfair methods of competition in or affecting commerce” are illegal. Republican FTC Commissioner Noah Phillips has said the agency doesn’t have the legal authority to impose competition rules, although it can use its enforcement power to investigate the use of noncompetes in specific cases.
SEC Chair Gensler remarks at RFK Compass Summer Investors Conference – June 14 at 8:30 am (ET)
House Financial Services Committee markup – June 14 at 10:00 am (ET)
Senate Finance Committee hearing, “ Examining the Impact of South Dakota v. Wayfair on Small Businesses and Remote Sales” – June 14 at 10:00 am (ET)
SEC Chair Gensler remarks at WSJ CFO Network Summit – June 14 at 1:20 pm (ET)
House Financial Services Committee hearing, “ Better, Together: Examining the Unified Proposed Rule to Modernize the Community Reinvestment Act” – June 22 at 10:00 am (ET)
House Financial Services Committee hearing, “ Monetary Policy and the State of the Economy” – June 23 at 10:00 am (ET)
House Financial Services Committee hearing, “ Where Have All the Houses Gone? Private Equity, Single Family Rentals, and America’s Neighborhoods” – June 28 at 12:00 pm (ET)
House Financial Services Committee Task Force on Financial Technology hearing, “ Combatting Tech Bro Culture: Understanding Obstacles to Investments in Diverse-Owned Fintechs” – June 30 at 12:00 pm (ET)
Notable SEC proposed rules and comment deadlines
*60-days after publication in the Federal Register, which has not occurred
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