The Topline:
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Congress to focus on innovation, capital formation, and regulatory oversight if Republicans control House
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SEC advisory committee advocates to broaden entrepreneurial ecosystems outside of traditional VC hubs, supports policies to preserve access to capital and expand investor access to private markets and funds
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FASB supports fair-value accounting to value crypto, while FSB and OECD propose frameworks to increase regulation, supervision, and reporting for the industry across the globe
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DOL proposes a more stringent totality of the circumstances approach to classifying gig workers
Macro matters
2022 election implications: capital markets policy
As previewed last week, we will likely see a return to divided government following the 2022 midterm elections, with Republicans favored to gain control of the U.S. House of Representatives. No election outcome is certain, but here is what to expect from a capital markets policy perspective from a Republican majority in the House (and potentially in the Senate).
Policy agenda under Republican majority
If Republicans win the majority in the House, Rep. Patrick McHenry (NC) is expected to become Chairman of the House Financial Services Committee. If Republicans take the Senate, Sen. Tim Scott (SC) is expected to become Chairman of the Senate Banking Committee. Both committees are expected to focus on policies to drive capital formation, expand economic opportunity, and encourage innovation, including through fintech and digital assets. McHenry previewed his capital formation agenda last month, which outlined a number of policies designed to expand access to capital for small businesses, increase investment opportunities, and provide a scaled onramp for companies that want to go public.
In a divided government, there may be more opportunities to build bipartisan consensus around policies to spur capital formation. A number of moderate Senate Democrats will be on the ballot in 2024, motivating them to forge bipartisan consensus to score legislative victories. Legislation to provide regulatory clarity around crypto and digital assets also has the potential to advance. Lawmakers have made substantial progress on this front with respect to defining a regulatory framework for stablecoins and the crypto spot markets, and these bipartisan proposals will likely serve as the basis for negotiations next Congress.
Agency oversight under Republican majority
In addition to a robust policy agenda, Republicans will leverage congressional oversight to scrutinize many of the more controversial actions taken by federal financial regulators—namely the SEC and CFPB. Rep. McHenry has already begun to lay the groundwork in this respect, with letters to the CFPB and SEC asserting that each rule making should be derived from a congressional directive and asking the agencies to justify their proposals. Congressional scrutiny around administrative overreach could also help bolster expected legal challenges to more controversial rulemaking proposals including around ESG—challenges that are more likely given recent judicial precedent striking down agency actions.
A Republican Congress will not stop SEC Chair Gary Gensler’s aggressive regulatory agenda, but it could slow it down. Moderate Democrats may lend support to some of these efforts. A bipartisan effort helped convince Chair Gensler to provide additional time for the public to comment on the SEC’;s private fund adviser proposal. Democrats have also expressed reservations around SEC plans to overhaul the equity markets and criticized Gensler’s approach to regulating the crypto markets through enforcement instead of regulation.
Republicans will have more influence on federal financial regulators if they regain the Senate majority, as President Biden will need Republican support to advance nominees. This is most relevant to the FDIC, where there are a number of vacancies, though Republicans could wield considerable influence should other key federal financial regulatory posts open up.
Capital markets
SEC reopens comment period for 11 rulemaking proposals
The SEC reopened the comment period for 11 of its rulemaking proposals, citing a technological error that prevented a number of comments submitted through its internet portal from being received. Among those affected are some of the Commission’s most high-profile and controversial proposals issued under Gensler’s leadership, including proposals on ESG and climate disclosures, SPACs, and private fund advisers. The public will have an additional 14 days to submit comments following publication in the Federal Register (which has not occurred as of this writing). While the technological hiccup is unlikely to ultimately impact the substance of any final rule, it could delay adoption of final rules, especially those that were expected to be adopted this fall.
SEC advisory committee discusses policy to support entrepreneurial ecosystems
The SEC’s Small Business Capital Formation Advisory Committee met to discuss ways to support and enhance entrepreneurial ecosystems outside of traditional VC hubs and recent IPO trends. While the Committee did not formally adopt any recommendations, they reaffirmed support of previous policy positions to promote capital formation, including maintaining current financial thresholds to qualify as an accredited investor and expanding alternative pathways to qualify, as well as maintaining portions of the exempt offering framework that work well—a “do no harm” approach—should regulatory changes to Regulation D be considered. The Commission is expected to propose increasing the accredited investor threshold and reforms to Regulation D over the next year. The Committee also reaffirmed support for the Commission to take steps to facilitate investor access to the private markets through pooled investment vehicles and are working on recommendations for the Commission to consider ways to allow retirement vehicles to invest in private securities.
The Committee provides advice and guidance to the Commission when considering policy matters impacting small businesses, though their recommendations are not binding. It is unlikely the SEC will move forward on any of the Committee’s recommendations under current leadership, but they will help inform and support work in Congress to bolster capital formation.
Other SEC news:
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Broker-dealer recordkeeping: The Commission voted to modernize its electronic recordkeeping rules for broker-dealers, providing an audit-trail alternative to more closely align with current electronic recordkeeping practices.
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DEI & fiduciary duty: SEC staff issued guidance clarifying that investment advisers could consider factors related to diversity, equity, and inclusion when recommending or selecting investment advisers and are not required to base such recommendation or selection on characteristics such as performance and assets under management to meet their fiduciary obligation. The Asset Management Advisory Committee noted such selection criteria have had the effect of excluding diverse asset managers.
Crypto & digital assets
FSB recommends crypto crackdown
The Financial Stability Board (FSB), which helps coordinate national regulatory bodies across the globe around regulatory frameworks, proposed recommendations for crypto asset supervision and regulation along the principles of “same activity, same risk, same regulation” to address financial stability risks posed by the industry. The report includes nine recommendations that range from ensuring regulators have the appropriate tools and resources to regulate the crypto market to requiring that crypto-asset entities institute certain data collection and privacy practices. For crypto providers and platforms that offer multiple services, such as trading, lending, and custody, the FSB stressed the importance of ensuring that each function is properly supervised and regulated, suggesting the possibility of breaking up crypto conglomerates if appropriate. The FSB simultaneously released a review of its 2020 recommendations on the regulation of global stablecoins that examines developments from the intervening years. Public feedback on both documents is due by December 15.
OECD publishes crypto tax transparency framework
The Organisation for Economic Cooperation and Development (OECD) published a new global tax transparency framework to guide the reporting and exchange of information on crypto assets in an effort to increase transparency and prevent tax evasion. The framework would cover most crypto assets that have function as payments or investments and require most crypto exchanges and companies to report inflows and outflows of these assets to regulators—who would also collect data on payments made to merchants with cryptocurrency. The crypto industry has generally pushed back on reporting requirements as contrary to the fundamental premise of crypto and blockchain anonymity. The U.S. is not expected to implement the OECD framework, and instead will develop its own reporting regime as required by the bipartisan infrastructure law, though the OECD framework will likely be implemented globally.
FASB favors fair value accounting for crypto assets
The Financial Accounting Standards Board (FASB) released a tentative decision on how entities should measure certain crypto assets, though some NFTs and stablecoins are excluded from the scope. FASB settled on measuring crypto assets at fair value, using the guidance from FASB’s Accounting Standards Codification (ASC) 820, which will allow companies to immediately recognize losses and gains in value for each reporting period. In addition, certain costs related to the acquisition of crypto assets would be reported as expenses. If finalized, the decision would quell uncertainty around how to properly account for crypto assets and please most companies and accountants, as it would generally enable them to treat crypto assets as financial assets, not intangibles, for accounting purposes. FASB decided against providing additional guidance on the application of the fair value method to crypto assets and declined to apply different requirements to private companies and other groups. FASB formally added this project to its technical agenda in May, though FASB has not provided any timing details on when the board would formally vote to release a proposal.
Banking & financial products
House Republicans seek clarity on bank-fintech partnerships
Rep. McHenry and other House Financial Services Committee Republicans sent a letter to acting Comptroller of the Currency Michael Hsu requesting regulatory clarity around the agency’s treatment of partnerships between banks and financial technology firms, asserting the OCC actions to support innovative banking services have been insufficient. The majority of fintechs providing a banking product or service do so through partnering with a bank because they lack a charter or license to operate. The OCC—and factions in Congress—have been increasingly skeptical of these partnerships, contending in some cases the arrangement allows fintechs to operate outside of regulatory oversight. The letter’s signatories outlined the pros of bank-fintech partnerships, citing their benefits for competition, speed, and costs. Acting Comptroller Hsu recently acknowledged these partnerships are here to stay, but believes they are accelerating and growing so complex it will lead to a crisis.
Taxation & accounting
Stock buyback tax could impact SPACs
The 1% excise tax on stock buybacks that was included in the Inflation Reduction Act may have been targeted at large corporations, but the provision could have unintended consequences for the special purpose acquisition companies (SPACs)—shell companies formed to raise money in the public markets with the sole purpose of acquiring a private company (the de-SPAC transaction). SPACs have faced challenges as of late in light of market conditions and enhanced regulatory scrutiny, including proposed rules from the SEC, which could threaten the viability of the market. Absent regulatory guidance to the contrary, the buyback tax that goes into effect next year will likely apply to redemptions of SPAC stock in connection with a de-SPAC transaction and unsuccessful SPAC liquidations, which will negatively impact SPAC share prices, making the SPAC model an even less attractive vehicle to go public.
Antitrust, privacy, & technology
DOL unveils new worker classification standard
A proposed rule from the Department of Labor (DOL) would revisit the test used to classify individuals as workers or employees, adopting one closer to the Obama-era standard and formally replacing a halted Trump-era rule. This rule will have a significant impact on gig workers, who are already waging classification battles in several states. Under the proposal, a totality of the circumstances approach would be applied when examining the economic realities of a worker and employer relationship. The economic reality test centers on five factors (investment, permanence, control, integral, and opportunity for profit/loss) and the proposal would allow for equal consideration of all factors, eliminating the Trump-era rule’s emphasis on control and opportunity. Democrats in Congress and in state legislatures increasingly favor a stricter, three-prong “ABC” style worker classification method, but DOL believes the legal precedent supporting the use of an economic reality test prevents it from adopting the more restrictive approach. This handicap is a relief for the gig economy; while the proposed standard is less favorable than the Trump-era rule, it is more flexible than an ABC test. The proposed rule is now open for public comment.
Upcoming events
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CFTC Commissioner Pham to Participate in OECD-IOSCO Roundtable on Public and Private Markets – Oct. 19 at 11:00am (ET)
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CFTC Commissioner Johnson at the MIT Golub Center for Finance and Policy Annual Conference: Building and Regulating the New Financial Infrastructure – Oct. 19 at 3:45pm (ET)
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Blockchain Association Policy Summit – Nov. 15-16
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FTA Fintech Summit: Shaping the Future of Finance – Nov. 16
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Carta Equity Summit 2022 – Dec. 7 at 1:00pm (ET)
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