Blog /Carta Policy Weekly Brief October 28
Carta Policy: Fintech data under agency scrutiny

Carta Policy: Fintech data under agency scrutiny

Author: The Carta Policy Team
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Read time:  9 minutes
Published date:  October 28, 2022
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Updated date:  September 13, 2023
CFPB initiates rulemaking on personal financial data rights
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The Topline

  • CFPB begins efforts to force banks and fintechs to create secure data sharing methods and prevent them from restricting customer access and control over data

  • SEC continues rulemaking spree, and Gensler signals focus on competition in equity and private markets

  • DOL extends comment period for worker classification rulemaking 

  • Many gig workers can expect a new tax form as IRS lowers payment threshold for 1099-K reporting

Macro matters

Economic conditions

The U.S. economy grew at 2.6% annual rate in the third quarter, rising after two straight quarters of declines—though even this positive news is tempered. Rising interest rates are having an effect across the board. Consumer spending continued to increase, though at a softening rate. As mortgage rates hit 7%, home sales fell for the eighth straight month, the longest decline in 15 years. The Federal Reserve’s Beige Book, which pulls data and anecdotes across the country, notes that while economic activity and employment expanded modestly, outlooks grew more pessimistic. 

While the economic data is harder to determine in the metaverse, building it is costing Meta quite a bit of money, which led to disappointing earnings for the company—though the company was not alone, as many tech giants reported declines. These industry leaders may be a bellwether. One area where revenues increased, however, was the U.S. government: The annual budget shortfall declined from $2.77 trillion in FY2021 to $1.37T in FY 2022, a decline fueled by a surge in tax revenues—driven by last years economic growth that expanded the tax base—and the sunsetting of pandemic spending programs.

Election outlook

Election day is less than two weeks out. Races are tightening and Republican prospects are improving: The GOP is favored to take charge of the House. They need to net five seats to take the majority and the gavels, and pundits expect they could hold a 12-20 seat majority. 

The more meaningful shift is in the Senate: Although Senate Republicans need to net only one seat for control, it’s proving to be no easy task given state political dynamics and underperforming candidates. The outcome is still a toss-up, but rather than a limited path to control, Republican candidates in both Pennsylvania and Arizona are reviving competition in states that recently looked out of reach for Republicans, expanding the paths to a Senate majority. 

No matter your party or views, make sure to vote. 

Capital markets

Gensler highlights SEC efforts to enhance competition and reduce concentration

SEC Chair Gary Gensler highlighted the SEC’s efforts to promote competition among intermediaries in the fixed income, equity, and private markets. His remarks previewed bold equity market reforms to come, including how to improve competition for retail market orders through auctions: Brokerages would be required to route individual buy or sell orders to an auction instead of to a wholesale market maker, where many brokers currently route orders for a fee (known as payment for order flow). The industry has pushed back against the concept of retail auctions, arguing the market is functioning well and retail investors benefit from fast execution, tight spreads, and zero-commission trading. Gensler, however, appears undeterred and maintains that auctions could help price improvement for retail customers by introducing competition and reducing conflict of interest. The Commission is also expected to consider a number of other potential equity market reforms, including lowering the maximum fees exchanges can charge for access to protected quotes, improving disclosures around order execution quality, and harmonizing the tick size regardless of whether a quote or trade takes place on- or off-exchange. 

Gensler also touted the SEC’s private fund adviser proposal as a way to bring more competition and transparency to this sector of the capital markets, which indicates moving this proposal forward is still top of mind.

SEC open meeting

This week, the SEC finalized two items on its regulatory agenda and proposed new requirements for SEC-registered investment adviser oversight of service providers. 

  • Shareholder reports:In a unanimous vote, the SEC finalized rules to make shareholder reports more accessible to retail investors, among other things. The final rules require mutual funds and ETFs to provide retail shareholders with concise, tailored shareholder reports that highlight key information, such as fund expenses, performance, and portfolio holdings. Funds will also be required to post additional information online, file it with the Commission, and provide to customers upon request. Notably, the final rule scrapped the ability of certain funds to omit “acquired fund fees and expenses” (AFFE). AFFE associated with Business Development Companies (BDCs), which invest in small- and medium-sized companies, are usually high, which makes them less attractive for fund investments and prevents index providers from including them in their indices. SEC Commissioner Hester Peirce asserted these effects have prevented BDCs from realizing their potential as a source of capital to startups and small businesses. 

  • Clawback rule:The SEC finalized rules along partisan lines to govern the clawback of erroneously awarded executive compensation within public companies. Notably, this rule would lower the bar for clawbacks, applying to so-called “little r” restatements for errors that are not material to previously issued financial statements. The SEC also applied the provision to emerging growth companies and smaller reporting companies, despite potentially disproportionate costs of compliance.

  • IA oversight of service providers:The Commission also proposed amendments that would expand due diligence requirements and monitoring obligations for SEC-registered investment advisers that rely on service providers. Currently, outsourced activities fall under an adviser’s fiduciary duty. But this proposal would create new obligations advisers must satisfy before they retain a service provider to perform certain functions that are necessary for the adviser to provide its services in compliance with the federal securities law—which could arguably apply to most non-clerical services that are outsourced. Examples of some of these functions include: providing investment guidelines, portfolio management, models related to investment advice, indexes, or trading services, or software. Advisers must also periodically monitor performance, keep books and records documenting compliance with the new obligations, and report information about service providers to the Commission on Form ADV. The Commission’s Republicans and industry groups have voiced concerns with the proposal, describing it as overly prescriptive and lacking the tailored approach necessary to reflect the range of covered firms. The new rules are likely to make compliance disproportionately costly for small and emerging managers.

And next week, on November 2, the SEC will consider finalizing a proposal on reporting of proxy votes by registered management investment companies and proposing amendments related to open-end fund liquidity risk management programs and swing pricing.

Digital assets

Clock runs down on initial crypto tax reporting implementation

Congress enacted the bipartisan infrastructure law nearly a year ago, but the Treasury Department has yet to provide a timeline on when it will issue guidance to implement the statute’s new transaction reporting requirements. Crypto exchanges will be required to submit a Form 1099-DA—the new form specifically designed to handle reporting for cryptocurrency and digital assets—to both the IRS and investors, with the objective of cracking down on tax evasion. The internal tracking necessary to provide such information to the IRS does not exist at many firms, making compliance a costly and complex endeavor. Both Treasury and Congress are aware of these issues—Treasury has indicated that it’s working on regulations to clarify its view on these definitions while bipartisan legislation in both the House and Senate have been proposed to narrow the scope of crypto entities required to comply with reporting requirements. 

We do not expect crypto legislation to pass before year-end. The reporting requirements take full effect in 2024, but some components are slated to begin in January 2023. For insight into how crypto and digital assets are currently taxed, Carta’s Amy Miller offers this overview.

Banking & financial products

Chopra starts process for Section 1033 data sharing rules

The Consumer Financial Protection Bureau (CFPB) is beginning the process of promulgating an open banking rule to require financial institutions that offer certain products—including digital wallets, deposit accounts, and transaction accounts—to establish secure data sharing methods. To include nonbanks in this effort, the CFPB has invoked long-dormant authorities, a shift we discussed when Director Rohit Chopra announced his intentions in the spring. In prepared remarks, Chopra disclosed that the agency will examine ways to prevent nonbanks from restricting consumers’ access to and control of their data, alternatives to the notice-and-opt out process, options to limit improper uses of personal financial data, and safeguards against monopolization by any firm(s). The agency also later published a detailed outline of the proposals and alternatives under consideration.

The CFPB’s rulemaking process differs slightly from other agencies, and it must first convene a panel of small businesses to provide input on proposals. To kickstart this process, CFPB released a discussion guide for small firms to consider ahead of its forthcoming engagement with banks, financial companies, and intermediary data brokers. According to Chopra, this stage will culminate in a report issued in the first quarter of 2023, followed by a proposed rule later in the year. This timeline sets the agency on a path to finalizing the rule sometime in 2024. 

OCC announces Office of Financial Technology

The Office of the Comptroller of the Currency announced it will establish an Office of Financial Technology in early 2023 to build on the agency’s expertise and ability to regulate emerging technologies in the banking industry. OCC does have a role in overseeing banks that partner with fintechs to provide banking services and has also expressed skepticism of the need to more forcefully regulate digital assets. Beyond generalities, the Office’s remit remains to be seen.

Taxation & accounting

IRS prepares taxpayers for lower 1099-K reporting threshold

The American Rescue Plan Act lowered the threshold for reporting payment card transactions and third-party payment network transactions from 200 or more transactions totaling at least $20,000 to a single transaction exceeding $600. As a result, in early 2023, more gig workers, users of online marketplaces, and payment apps should expect to receive Form 1099-K (an IRS information form that reports certain payment transactions to the IRS and taxpayer) if they received payments of more than $600 in the prior year. The IRS emphasized in a recent release that funds received on payment platforms for personal expenses are not taxable, but all forms of part-time work or payments for those doing business will be taxable. The agency said the Form 1099-K information report changes will enable taxpayers to more easily track and record business-related transactions, lowering the likelihood of mistakes that could lead to IRS examinations down the road.

Carta live virtual event: How to prepare your fund for tax and audit season

Tax and audit season is quickly approaching. Ending the year with all of your finances, documents, and external partners in order can be a complicated process regardless of the size and stage of your fund. Our goal at Carta is to help make your preparations as frictionless as possible. Join us Nov. 9th at 10:00 am PT alongside a panel of tax and audit experts for a virtual event that will conclude with a Q&A session with our panelists to get your questions answered live.

Antitrust, privacy, and technology

Khan advocates for early intervention in emerging technologies

Federal Trade Commission Chair Lina Khan discussed the important role of digital platforms in commerce and pressed for a sense of urgency in regulating tech giants during an antitrust conference in Utah. Khan said the stakes are too high for the FTC to remain on the sidelines, a view backed by the FTC’s efforts to prevent Meta from acquiring a virtual reality fitness app. Meta maintains that the virtual reality market is too underdeveloped to warrant FTC intervention, but a trial on the matter is set for December. Khan argued that early action is necessary to “prevent markets from tipping and forming companies from locking in their market power in ways that can make competition much more difficult.” Doha Mekki, the No. 2 official at the Justice Department’s antitrust division, said “break-ups have to be on the table” when enforcing antitrust laws against the dominant digital platforms.

DOL extends worker classification comment window

The Department of Labor (DOL) is extending the comment window on its new worker classification proposal, which would rescind the Trump-era classification standard and move closer to the Obama-era test. Commenters raised concerns that the initial window would not allow sufficient time for interested parties to prepare substantive comments. The comment period was extended by 14 days, and comments are now due by December 13.

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Author: The Carta Policy Team
Carta’s Policy Team aims to connect the policymaking community and venture ecosystem to build an ownership economy and advance policies that support private companies, their employees, and their investors.