SEC sues SPAC adviser, alleging conflicts of interest
Biden Administration may take executive action to screen outbound investments into foreign rivals that may involve sensitive technology
FedNow, the Fed’s real-time payment system, set to go live in mid-2023
Pelosi opposes federal privacy bill as insufficient compared to California law, halting its path forward
Carta’s Policy Weekly is back. In this return edition, we will cover coming developments and give a recap of actions that happened during our August break.
Congress is back for its pre-election push—but don’t expect much beyond messaging and extending government funding. The executive agencies, however, will remain active. All policymakers remain focused on the economy.
Fed sees weak economic outlook
This week, the Federal Reserve released its Beige Book, a publication on current economic conditions across the U.S., highlighting that overall economic activity remains in balance with steady consumer spending. Financial institutions reported generally strong demand for credit cards and commercial and industrial loans, while demand for residential loans remained weak amid elevated mortgage interest rates. The report also signaled a generally weak outlook for future economic growth, indicating a further softening of demand over the next six to 12 months. Inflation pressure remains a concern, and Chair Jerome Powell as well as other Fed Governors have affirmed they will take the necessary steps to stem its increase. The Fed’s Federal Open Markets Committee (FOMC) will meet on Sept. 20 and 21, and is expected to announce a third 75 basis point interest rate hike at the conclusion of the event.
Possible administrative action on outbound investment screens
The Biden Administration is contemplating executive action to implement an outbound investment screening mechanism for investment into China and other countries for investments that may involve sensitive technology. The framework may reflect a congressional proposal that would require investors to notify the Administration of such investments and authorize the president to restrict such investment. The proposed provision fell out of the recently passed China competition bill ( CHIPS legislation), but still has bipartisan congressional support. Such a framework could have restrictive effects or a lack of clarity on private fund capital allocation to companies that may have a tether to supply chains or sensitive technology with connections to certain regions. Watch for more specifics coming out of the Commerce department and statements from congressional offices pushing this framework for possible inclusion in end-of-year legislative vehicles.
Tax planning for startups
Startups and growth-stage companies seeking to leverage tax planning and policy changes need look no further than Carta’s Amy Miller, who will be presenting at DC Startup Week. If you’re in the DC area, join her Thursday, September 15 @ 11 a.m. (ET) for Tax Planning & Policy Updates for Small Businesses.
SEC brings charges against venture capital adviser and SPAC-involved advisory group
The Securities and Exchange Commission (SEC) kicked off September by bringing charges against Energy Innovation Capital Management LLC, a venture capital adviser it said charged excess management fees. It also charged Perceptive Advisors LLC for failing to disclose conflicts of interest related to sponsors of special purpose acquisition companies (SPACs) despite encouraging clients to invest in the SPACs.
In March, the SEC proposed rules to enhance SPAC disclosures and bring additional transparency in the private funds space, though these charges make clear the agency is not waiting for the culmination of the rulemaking process to crack down on the respective industries. The Commission is expected to issue final rules with respect to both proposals early next year.
Crypto & digital assets
SEC Chair continues to make case to be crypto’s primary regulator
In remarks this week, SEC Chair Gary Gensler reiterated his position on crypto: most tokens are securities, and as such, the tokens and intermediaries trading those tokens (aside from bitcoin) should be registered and regulated by the Commission.
Gensler affirmed that various crypto activities—including lending and stablecoins—are covered by existing securities laws and do not need regulations on their own, despite calls from the industry for the SEC to provide more guidance (and despite congressional efforts to scope a regulatory regime tailored to digital assets). Gensler noted the SEC has spoken with a “pretty clear voice” with its dozens of enforcement actions, and he reiterated calls for the industry to work with staff to get tokens registered as securities. Gensler took particular aim at crypto intermediaries that offer trading and custody services, suggesting that this commingling of functions could create conflicts of interest that may require the creation of separate legal entities. Given Gensler’s strong indications that much of the industry is not in compliance, expect to see more high-profile enforcement actions coming down the pike. Gensler’s stance on crypto will certainly be a major focus when he testifies before Congress next week.
Congress returns with focus on crypto regulatory framework
Gensler’s remarks come as Congress returns from August recess and continues to debate which federal agencies (and congressional committees) will have primary oversight over the markets.
The House Financial Services Committee continues to negotiate its bipartisan stablecoin legislation, but Republicans are pushing for further changes to the bill. If a deal is struck, the panel will likely consider the bill later this month in lieu of waiting until October.
On a related note, the Senate Agriculture Committee announced a hearing to discuss bipartisan legislation introduced by Committee leadership, which would give the CFTC the authority and resources to take the lead on regulating digital commodities. CFTC Chair Rostin Benham is scheduled to testify, in addition to industry participants.
The House Oversight and Reform Committee has also entered the crypto oversight conversation, sending letters to FTX, Binance, Coinbase, Kraken Exchange, and KuCoin seeking information on several aspects of their operations. Rep. Raja Krishnamoorthi also asked the Treasury Department, SEC, CFTC, and Federal Trade Commission (FTC) to detail their efforts to ensure the private sector adequately protects consumers against fraud and other illicit activities in crypto markets, in addition to providing responses to a series of policy-focused questions.
This week, the White House released another report required under President Biden’s March 2022 Executive Order on Ensuring Responsible Development of Digital Assets. The report, focusing on climate implications of crypto, suggests that mining could threaten long-term U.S. climate goals if regulators do not develop clear environmental standards for the industry. This is one of roughly a dozen reports compelled by the EO and more releases are expected in the coming weeks, including a report from Treasury emphasizing to the White House that crypto regulation is imminently needed in order to mitigate economic risks and protect financial stability.
IRS continues crypto scrutiny with additional John Doe summons
Taxpayers are required to provide information on virtual currency transactions in their income tax returns and pay taxes on any income or gains—and the IRS is ramping up efforts to enforce compliance. On Aug. 15, the IRS served a John Doe summons on SFOX, a California-based cryptocurrency dealer, seeking details on consumers who meet certain criteria. A John Doe summons is an enforcement tool used by the IRS to investigate and collect information on a particular class of taxpayers who may have violated federal tax laws. In this case, the scope of the summons is limited to U.S. taxpayers on SFOX who conducted a minimum of $20,000 in cryptocurrency transactions between 2016 and 2021. The IRS issued similar summons to cryptocurrency exchanges in 2021 and 2016. In allowing the summons to go forward, a federal court ruled that there was sufficient basis to believe individuals in this category did not comply with applicable tax laws. SFOX is required to name the individuals, backing taxpayers into a corner should they fail to amend any incomplete disclosures and pay overdue taxes. These actions signal that crypto remains a key enforcement area for the IRS in the upcoming filing season.
Banking and financial products
FedNow system slated for mid-2023 launch
The Federal Reserve’s FedNow Service will be operational between May and July of 2023, according to an update given by Vice Chair Lael Brainard on Aug. 29. The FedNow System will facilitate instant transfers around the clock. On Aug. 15, the Fed finalized rules that establish a three-tiered system for providing financial institutions with access to Fed accounts and payment services, suggesting it will continue to integrate fintechs into its offerings going forward.
Taxation & accounting
Yellen plans speaking tour against backdrop of IRS transparency concerns
Treasury Secretary Janet Yellen kicked off a multi-week speaking tour this week to promote anticipated tax credits for semiconductor production, efforts to combat inequities in the tax code, clean energy provisions, and the benefit of an additional $80 billion of IRS funding. In regards to this funding, the Taxpayer Advocate Service highlights the need for IRS to increase e-filing options for both individual and business taxpayers, while Carta and industry leaders continue to pursue our request for the IRS to allow e-filing of sec. 83(b) elections. As we await the IRS 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
Regulatory efforts continue as privacy bill stalls amid state-level opposition
Attempts to enact federal data privacy legislation halted again on Sep. 1 with House Speaker Nancy Pelosi’s statement that the bill lacks the same level of protections the California privacy law provides. The American Data Privacy and Protection Act is the product of negotiations between the key congressional committee leaders, but the bill will not advance without the support of Speaker Pelosi and the California contingent.
Federal Trade Commission cracks down on data broker
Meanwhile, the FTC voted 4-1 to move forward with a lawsuit against Kochava, a data broker the agency said is selling geolocation data that could be used to track consumers’ movements, including to and from abortion clinics and other sensitive locations. Kochava countered that the FTC has a “fundamental misunderstanding” of its operations despite weeks of discussions with the agency. Kochava preemptively sued the FTC on Aug. 12, alleging that the agency overstepped its authority.
The FTC also hosted a public forum this week on its Advanced Notice of Proposed Rulemaking (ANPR) on commercial surveillance and harmful data security practices. Chair Lina Khan will face intense questioning on the FTC’s rulemaking ambitions during her appearance before the Senate Judiciary Committee later this month.
SEC Chair Gensler keynote at WCD Global Institute & Visionary Awards Celebration – Sept. 12 at 11:15 a.m. (ET)
House Financial Services Committee hearing, “ When Banks Leave: The Impacts of De-Risking on the Caribbean and Strategies for Ensuring Financial Access” – Sept 14 at 10:00 a.m. (ET)
Senate Banking Committee hearing “Oversight of the U.S. Securities and Exchange Commission” – Sept. 15 at 10:00 a.m. (ET)
SEC Chair Gensler remarks: DEI in the Financial Services Industry – Sept. 15 at 2:00 p.m. (ET)
House Financial Services Committee hearing, “ Under the Radar: Alternative Payment Systems and the National Security Impacts of Their Growth” – Sept 20 at 10:00 a.m. (ET)
House Financial Services Committee hearing, “ A Review of Diversity and Inclusion at America’s Largest Insurance Companies” – Sept 20 at 2:00 p.m. (ET)
SEC I nvestor Advisory Committee meeting – Sept. 21 at 10:00 a.m. (ET)
SEC Diversity, Equity & Inclusion Leadership Summit – Sept. 21 at 10:30 a.m. (ET)
House Financial Services Committee hearing, “ Holding Megabanks Accountable: Oversight of America’s Largest Consumer Facing Banks” – Sept 21 at 10:00 a.m. (ET)
House Financial Services Committee hearing, “ State of Emergency: Examining the Impact of Growing Wildfire Risk on the Insurance Market” – Sept 22 at 9:00 a.m. (ET)
Notable SEC proposed rules and comment deadlines
*60 days after publication in the Federal Register, which has not occurred
Sign up below to receive Carta’s Policy Weekly Brief:
DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.
All product names, logos, and brands are property of their respective owners in the U.S. and other countries, and are used for identification purposes only. Use of these names, logos, and brands does not imply affiliation or endorsement. ©2022 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.