The Topline:
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GOP House leaders look to prioritize capital formation next Congress
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Senate bill would diversify 401(k) retirement plans to invest in private equity, venture capital, crypto, and other alternative assets
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FinCEN issues reporting requirements for beneficial owners of entities, which will have implications for funds and portfolio companies
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CFTC sends strong message with DAO enforcement action, while Congress struggles to reach consensus on stablecoin regime
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Salary transparency law approved in California; employers required to include pay scale for job postings
Macro matters
Congress readies stopgap funding measure, reauthorizes small business programs
Congress passed a continuing resolution (CR) Friday afternoon to fund the government through December 16, wrapping up the legislative calendar before the midterm elections. Policy priorities that were not included in the CR may still be included in a large end-of-year package or in the National Defense Authorization Act (NDAA). Bipartisan initiatives, including retirement reform legislation, have the best odds of success, as partisan riders are typically excluded from such packages.
As we previewed last week, Congress reauthorized the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SBTT) programs. These incentivize small enterprises—including startups—to undertake R&D directed at federal and public sector needs by investing federal funds into these companies. Conversely, a legislative effort to restrict lawmakers’ ability to own and trade stocks and crypto stalled out amid a crowded pre-recess schedule.
Election preview: 39 days and counting
The November midterm elections are right around the corner. As of now, it seems likely we will see a return to divided government, with Republicans reclaiming the majority in at least one chamber in Congress. On the House side, Republicans are expected to pick up enough seats to regain power, though the majority may not be as large as predicted earlier this year.
On the Senate side, Democrats are projected to hold the chamber, though a number of key battleground states are still in play: Arizona, Georgia, Nevada, New Hampshire, Ohio, Pennsylvania, and Wisconsin. Regardless of which party controls the Senate, the majority’s margins will likely remain ultra-slim, holding at the current 50-50 ratio or rising to 51-49. More election insight and analysis to come as we enter the final sprint to the polls.
California approves salary transparency law
Starting next year, employers hiring in California with 15 or more employees must include the pay scale for a position within the job posting and, upon request, provide the pay scale for the position a person currently holds. Employers with over 100 workers will also need to annually disclose expanded pay data to the Department of Fair Employment and Housing, with the information broken down by race, ethnicity, and sex within ten established job categories. The new requirements apply to any company hiring in California. Similar measures are under consideration in South Carolina and Massachusetts, but further federal action will likely be confined to relevant regulators should Democrats cede control of one or both chambers of Congress.
Capital markets
McHenry previews chairmanship with capital formation agenda
Ten years after the passage of the JOBS Act and weeks before the midterm elections are expected to flip control of the House, Rep. Patrick McHenry (R-NC)—who is expected to become chairman of the House Financial Services Committee should the flip happen—unveiled the Republican Capital Formation Agenda. This agenda is likely to drive much of the committee’s focus next Congress, with policies to expand access to capital for small businesses, increase opportunities for investors, and provide a scaled onramp for private companies that want to enter the public markets. Specific policy priorities include:
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Expanding the accredited investor definition to allow individuals to invest 10 percent of their income or net assets in private securities
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Increasing the size and investor limit for qualifying venture capital funds
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Broadening the ability of closed-end funds to invest in private companies
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Permitting gig workers to receive equity compensation under Rule 701
While it’s unlikely that Congress will approve a comprehensive capital formation package this year, some of these proposals have the potential to receive bipartisan support and advance next year—either on a stand-alone basis or as part of a bigger package. Support for these proposals could also help influence some of the problematic actions we anticipate coming out of the SEC that could reduce access to capital and investment opportunities and push more private companies into the public space before they are ready.
Senate introduces bill to boost alternative assets in 401(k) plans
Senator Pat Toomey, the leading Republican on the Senate Banking Committee, introduced legislation that would allow 401(k) plan sponsors to diversify retirement holdings to private equity, venture capital, real estate, cryptocurrencies, and other alternative assets. While the Department of Labor (DOL) has previously issued an information letter to express that private equity is allowed as part of a workplace retirement plan, the agency subsequently offered clarification that alternative investments would pose a greater risk for the fiduciary duty of smaller plans that do not have as much expertise as larger institutions. Earlier this year, the DOL also warned 401(k) plan managers to “exercise extreme care” before adding cryptocurrency options to their investment plans, as some plan providers like Fidelity have opted to move forward by allowing Bitcoin as a 401(k) offering. Meanwhile, the Senate on Thursday confirmed Lisa Gomez to oversee the DOL department that regulates employer-sponsored 401(k)s; Gomez will be tasked with developing further guidance on alternative investment retirement issues.
This 401(k) bill comes as lawmakers are working towards the SECURE 2.0 retirement savings package that many are optimistic will get done by year end. The House and Senate retirement packages are in the process of being reconciled—the two bills share rare bipartisan support, are roughly the same cost, and contain about 70 provisions (30 of which are the same).
Crypto & digital assets
Disagreements persist around House stablecoin bill
Efforts to produce a bipartisan bill to regulate stablecoins have stagnated as members on both sides of the aisle clash over various aspects of the proposed framework, including state-level crypto regulation and digital wallet disclosures. Staff will continue to work on the measure with lawmakers in recess, but any notable developments will likely be delayed until Congress returns after the midterm elections. The discussion draft will form the basis of the committee’s continued attempts to legislate in this space regardless of which party controls the chamber next session. In the absence of congressional action, federal regulators—notably the SEC and CFTC—will push forward with their own digital asset agendas. Reports stemming from the White House executive order on digital assets and a forthcoming report from the Financial Stability Oversight Council (FSOC) could help inform legislative efforts.
California governor vetoes crypto framework
California Governor Gavin Newsom vetoed Assembly Bill 2269, which would have established a state-level regulatory framework for cryptocurrencies requiring crypto companies to obtain a license to operate in the state. Gov. Newsom cautioned that it would be premature to commit to a regulatory and oversight structure, given the rapid pace of innovation in the digital assets space. He cited the estimated costs of standing up a new regulatory regime and the potential for federal activity around cryptocurrencies as additional hurdles. Industry stakeholders have highlighted the bill’s harm toward innovation in the crypto and Web3 ecosystem by forcing crypto businesses in California to navigate a burdensome, uncertain, and costly licensing requirement.
CFTC action shows that DAOs are not enforcement-proof
The CFTC is coming under fire from the crypto industry after it filed charges against members of a decentralized autonomous organization (DAO) for digital asset trading violations. The action is notable not for the alleged violations, but because the CFTC pierced the veil of decentralization to hold individual members liable for actions of the DAO based on their participation in voting on governance proposals. CFTC Commissioner Summer Mersinger criticized the agency’s action as blatant regulation by enforcement because it set policy based on new standards and definitions that have not been previously articulated. Critics warn that such action could have a chilling effect on DAO participation and innovation. The CFTC has been seen as the preferred digital asset regulator to the SEC in large part due to the SEC’s enforcement-first approach to regulation, so it will be interesting to see how the CFTC’s aggressive DAO approach impacts the regulatory power struggle. CFTC Chair Rostin Behnam reiterated calls for Congress to grant the CFTC more authority to regulate crypto spot markets at an event this week.
Banking & financial products
FinCEN issues final rule for beneficial ownership reporting
The Financial Crimes Enforcement Network (FinCEN) issued the first of three final rules to establish a reporting structure on the beneficial owners of entities registered to do business in the U.S. Under the rule, the majority of LLCs, partnerships, business trusts, and corporations will need to disclose to FinCEN the name, birthdate, address, and acceptable identification document for individuals who either exercise substantial control over the reporting company or own or control at least 25% of it. This would likely pull in reporting on beneficial owners for investment funds and the limited partners who hit those thresholds, as well as the qualifying shareholders of portfolio companies. The rule will go into effect January 1, 2024.
Antitrust, privacy, & technology
White House Competition Council focused on competition, strong antitrust enforcement
The White House Competition Counsel held its third meeting on the executive order (EO) to address competition problems in the U.S. economy and find ways to deliver cost savings to families. The council, which was created by the EO, focused on targeted strategies that would deliver on President Biden’s call to reduce or eliminate unfair fees, ban noncompete agreements, provide government funding to support smaller industry sectors, and strengthen enforcement against illegal mergers. The White House’s readout of the meeting highlighted their continued work on aggressive antitrust enforcement and greater scrutiny on mergers of banks and dominant internet platforms—including the acquisition of new competitors, serial mergers, accumulation of data, and competition through leveraging free products.
Antitrust package receives House approval
The House approved the Merger Filing Fee Modernization Act ( H.R. 3843) this week on a 242-184 vote; the package also incorporates the Foreign Merger Subsidy Disclosure Act and the State Antitrust Enforcement Venue Act. Collectively, the three bills do a few things. They update merger filing fees by significantly increasing fees for large companies and slightly reducing them for small and midsize firms. They require companies involved in mergers to disclose any subsidies they received from countries that pose strategic or economic risks to the U.S. They also give state attorneys general more control over which court will hear their antitrust cases, which will prevent companies from moving lawsuits to what they believe to be more favorable jurisdictions. Supporters of the legislation are pushing to attach the package to a moving vehicle, such as the year-end omnibus spending bill or the NDAA—though dynamics are fluid, especially post-election.
Upcoming events
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FHFA Public Listening Session on Fintech in Housing Finance — Oct. 06 at 2:30 p.m. (ET)
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DC Fintech Week — Oct. 11-12
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FTA Fintech Summit: Shaping the Future of Finance — Nov. 16
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Blockchain Association Policy Summit — Nov. 15-16
Notable SEC proposed rules and comment deadlines
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