Election Outlook: Capital Markets

This edition of Carta’s Election Outlook outlines how Congress and the new administration will approach capital market regulation and potential implications for the innovation ecosystem. We will cover:

• The state of private market policy

• Congressional leadership and party priorities

• Potential for bipartisan compromise

• SEC regulatory outlook

The state of private market policy

Private markets play a critical role in our economy, providing an essential source of capital for the startups and small businesses that drive U.S. innovation. Private markets supply the patient, risk-forward capital that allows entrepreneurs to transform unproven concepts into thriving businesses—a financial function that public markets  and traditional lending typically do not  perform. 

As private markets have grown in size, complexity, and importance to the U.S. economy and global competitiveness, policymaker scrutiny has increased. Capital formation initiatives—policies to support the ability of private companies to raise funds— have traditionally benefited from bipartisan support, but this posture is shifting. 

Below is a graphic that reflects recent rules and initiatives that have been adopted, proposed, or anticipated that would be applied to private funds and markets. These are in addition to the already robust regulatory requirements that were in place.

These actions could impact every sphere of the private market ecosystem. 

However, the November 2024 elections will determine which party will have greater influence over private markets policy. Here’s our take on where things stand:

Congressional leadership

In Congress, capital markets policy is driven primarily by the Senate Banking and House Financial Services Committees. The party that holds the gavel controls the policy agenda—and party control will be determined in November. 

Democrats: Rep. Maxine Waters will continue to lead House Democrats on Financial Services, and Sen. Sherrod Brown is expected to remain at the top of Senate Banking if he survives his tough reelection campaign. Democratic leadership in both committees leans progressive, particularly with respect to private markets. 

Republicans: Rep. Patrick McHenry, the current Republican chair of the House Financial Services Committee, will retire at the end of the current Congress. McHenry has been a champion for the innovation ecosystem. Whoever wins the contested race to succeed him is expected to build upon his efforts.  Sen. Tim Scott will be the lead Republican on Senate Banking, and likely Chairman, if Republicans win the Senate majority as expected.

Political perspectives

Both parties support entrepreneurship and capital formation, but diverge on the means to that end and the policy trade-offs to accomplish it.

Capital markets policy objectives at a glance

Republicans: Republicans support policy to expand capital-raising by and investment opportunities in private companies and funds.  And they believe the best way to do this is by reducing regulatory barriers.

Republican committee leaders in the House ( Rep. McHenry) and Senate ( Sen. Scott) have both put forth agendas to drive capital formation, which will serve as the foundation for efforts next year. Priorities include:

• Expanding accredited investor on-ramps through testing or additional professional designations that reflect financial sophistication 

• Increasing size and investor limitations of qualifying venture capital funds to allow emerging funds to reach more investors with smaller check sizes

• Increasing the ability of venture capital funds to invest in secondaries and fund-of-fund investments to help drive capital to emerging ecosystems

• Implementing structural reforms at the SEC to increase accountability in the rulemaking process

Democrats: Most Democrats support innovation in the private sector, but prioritize investor protection. Progressives in the Democratic caucus are skeptical of private markets based on their size, opaqueness, and structural advantages that favor incumbents. As  such, progressives anchor their policy positions around investor protection and transparency, which generally means more disclosure and regulation.

Progressives have supported SEC Chair Gary Gensler’s efforts to rein in private markets and at times have even pushed him to go further to impose additional transparency measures for companies and funds. There is support among the progressive ranks for:

• Changing Section 12(g) triggers, which would essentially force larger private companies to go public before they are ready 

• Imposing additional disclosures on companies and funds that raise capital through Regulation D

• Limiting the ability for private equity to invest in certain industries

• Scope 3 emissions  and DEI disclosures

Although much of the skepticism is directed at the hedge fund and private equity industries, the resulting policies coming out of the SEC have impacted funds across the board, including emerging VC managers.  

Congressional outlook

Congressional Democrats are unlikely to be able to advance legislation that would substantially change the structure  of private markets in a divided government, but they can use their influence to move policy to the left. If Democrats regain control of the House, they can use the gavel to hold hearings to support a more aggressive SEC agenda, launch investigations into private equity and venture capital practices, and bring more scrutiny on the private funds and their portfolio companies.

Republicans could advance a comprehensive capital formation package if they have unified control, but competing priorities and governing dynamics will make significant change unlikely. Efforts to develop a regulatory framework for digital assets and roll back policies from the Gensler SEC will dominate the agenda, but incremental changes to expand capital access and broaden investment opportunities are possible and expected.

Potential for bipartisan compromise

While congressional Republicans and Democrats disagree on aspects of private market regulation, there are issues where majorities from both parties have common ground.  

• Accredited investor criteria: Lawmakers in both generally agree that financial metrics do not necessarily equate with financial sophistication, and limiting investment opportunities and that the potential for diversification to the economically privileged is not a desired outcome. Efforts to expand accredited investor on-ramps have passed the House with near unanimous support, and a Republican Senate could help push them across the line. 

• Private market access through structured funds: Retail investors are generally precluded from accessing private market investments, which deprives them of the benefits of diversification and return potential they offer. Tailored approaches that balance investor protection with investor access are more likely to gain traction with Democrats than other means of access. Professionally managed fund vehicles offer investors the benefit of fiduciary obligations, diversification, and institutional diligence.  Democrats may use any effort to expand retail access to private markets as a bargaining chip to push for increased disclosures. 
  

• Expanding VC fund parameters: Until recently, expanding venture capital fund parameters to include fund-of-fund investments and secondaries  had bipartisan support.  However, a lack of focus on private market policy and growing skepticism of the industry—not to mention recent high-profile frauds and venture-associated bank collapses— have shifted the sentiment, which has even chilled support among Republicans. Engagement and education could help rebuild bipartisan support.

Process challenges

• Slim margins: Regardless of which party controls each chamber, margins in both the House and Senate are likely to be razor-thin, and there is a high probability the 2024 election will result in a divided government. As a result, the new administration will have to find common ground with the opposition party to advance any legislative priorities.

• Competing priorities: Senate confirmations and tax reform will take up much of the oxygen over the first year of the new Congress. Policymakers will also grapple with how to regulate the artificial intelligence landscape and with crafting a digital asset framework for crypto. This will distract from private market policy.  

• Court challenge: Recent Supreme Court action repealing the Chevron doctrine may complicate the legislative process. Chevron  responded to a shortcoming inherent in the legislative process: Congress typically legislates in broad terms and cannot anticipate every issue that could arise, so federal agencies charged with implementing the law often resolve gaps or adapt policies to address changing circumstances. With Chevron’s repeal, there will be more pressure on Congress to pass laws with clear legislative intent, which will require more engagement from regulators and industry in the legislative process.

Private market policy: The U.S. Securities and Exchange Commission

Federal agencies are increasingly the drivers of policy. For capital markets, this is the SEC. 

The Gensler-led SEC has taken an aggressive approach toward private market regulation, increasing scrutiny through both rulemaking and enforcement initiatives. Private markets have traditionally been subject to less oversight than the retail-facing public markets, and as a result, less of a focus for the SEC. But Gensler’s SEC has moved forward with an agenda focused on private fund advisers—both private equity and venture capital fund managers—and private markets more broadly.

Judicial impact on policymaking

The courts have recently pushed back on agency powers, overturning the SEC ‘s work on specific rulemakings and curbing all agencies’ wide latitude when it comes to rulemaking. 

Private fund oversight: The Fifth Circuit struck down the SEC’s most aggressive rules—the private fund adviser rules—and this decision could further limit outstanding agenda items aimed to impose new obligations on venture capital and private equity fund managers, at least in the near term. Despite that constraint on rulemaking, the Commission has increased  efforts to regulate through exam and enforcement levers. 

Chevron: The SEC will have to grapple with the Supreme Court’s rollback of the Chevron doctrine, which will limit the SEC’s ability to fill in regulatory gaps and address novel challenges without explicit authority.  This is likely to chill future rulemakings, pushing  the SEC to re-evaluate its rulemaking processes to ensure the agency is  operating within the bounds of its congressionally directed authority—and devote more attention to justifying that authority—now that they no longer have wide latitude to interpret the statutes they enforce. 

The SEC is still the SEC

Despite the court's curtailing of agency powers, the SEC will have significant influence over private markets. Many of the private market policy items on the current SEC regulatory agenda fit squarely within the SEC’s congressionally directed authority, including:

• Increasing accredited investor thresholds, which would decrease the number of investors who can access private markets and reduce an important source of capital for founders and fund managers, particularly in lower-income regions.

• Regulation D reforms, which could impose frictions in the capital-raising process that could disproportionately impact smaller fund managers and startups who lack access to established capital networks.

• Changing Section 12(g) triggers, which could push larger private companies to go public before they are ready, reduce competition, and limit investor access if the use of SPVs and other fund structures are constrained.

Whether the SEC pursues any of these initiatives likely depends on SEC leadership, which is partially a consequence of which party controls the White House.

SEC: Harris administration

There is growing sentiment the SEC under a Harris Administration may be more friendly to the innovation ecosystem. This posture could help encourage efforts to expand capital access, particularly in underserved communities. Harris will still have to appease the progressive wing, which means robust enforcement efforts and continued scrutiny around private markets may continue in line with the current SEC’s posture. 

Personnel: SEC leadership traditionally steps down when there is a change in administration, providing the new president the opportunity to select a chair. But there is a chance that Gensler stays on board and continues to drive the agenda, at least in the near term. In a Republican Senate, Harris may face hurdles and delays to move a new Democratic commissioner through the confirmation process, and the SEC will fall lower in the priority stack of the other positions she will need to fill—potentially giving Gensler more time on the job. Gensler’s unpopularity—even among Democrats—is the wild card, and many Harris supporters are pushing for her to pursue new leadership. 

Potential agenda priorities:

• Robust examination/enforcement efforts: The SEC is likely to continue prioritizing  strong enforcement initiatives through the lens of investor protection. Expect the focus on private fund advisers to continue, and for new anti-money laundering requirements for venture capital and private equity advisers to give the agency additional reasons to examine private equity and venture capital funds. 

• Increased transparency for private companies: There will be a strong push by progressives for the SEC to continue efforts to drive transparency in the private markets. Democratic Commissioner Caroline Crenhsaw, whose renomination is currently pending before the Senate, has pushed to expand private market disclosures, including expanding  Form D  to impose public reporting-like on private companies.

• Capital formation: Harris has announced a range of policies to bolster entrepreneurship  and economic growth, including through federal programs and small business tax incentives. Given this posture, there could be an opportunity for a Harris SEC to work with Congress to advance policy initiatives to drive more capital to underserved regions. These changes would be incremental, given the progressive opposition to expand the private markets.

SEC: Trump administration

The SEC would undergo a sharp policy pivot from the Gensler era in a second Trump administration, indexing more for the capital formation, market efficiency, and innovation over the current investor-protection lens. Much of the focus will be rolling back rules and oversight initiatives  put in place under Gensler, including the climate change disclosure rule.  A second Trump SEC may introduce incremental adjustments, but is likely to leave private markets alone.

Personnel: Trump is not likely to face the same challenges as Harris in navigating the confirmation process in a Republican Senate to get his commissioner picks confirmed. Several names have been rumored—largely sitting or former SEC commissioners or former Republican administration financial officials—but a SEC chair pick is not likely until other financial heads have been selected. 

Potential agenda priorities:

• Gensler rollback and structural reforms:  Much of the term would focus on undoing controversial rules adopted under Gensler. A Trump SEC may look to impose guardrails around the regulatory process given the criticism around Gensler’s approach to rulemaking, which included overlapping proposals and short comment periods.

• Capital formation: A Trump SEC is likely to focus on making it easier for companies to go public. Any policy efforts to expand access to private capital will largely be driven by Congress. A Trump SEC is not likely to pursue efforts to impose barriers or restrict access to private capital, so increased Reg D disclosures or changes to 12(g) are almost certainly off the table.

• Investor access to private markets: A Trump SEC may continue efforts contemplated by former Chairman Jay Clayton to permit retail investors to participate in  private markets through appropriately structured fund vehicles, including retirement vehicles. Given the bipartisan support in Congress, the agency could also look at further expanding accreditation through exams or additional professional designations that demonstrate financial sophistication. 

Engagement

Regardless of election outcomes, there is an opportunity to shape and drive policy next Congress that preserves the ability for founders to access capital and that expands private market investment opportunities for more investors. Private market policy is often overlooked, but it can be consequential in unlocking opportunities and innovation.

Education on the industry and engagement will be key.

Carta has been working with policymakers on a bipartisan basis on a number of initiatives, including: 

• Increasing the size and investor limit for qualifying venture capital funds

• Expanding the scope of qualifying venture investments to include secondary transactions and fund-of-fund investments 

• Modernizing the accredited investor definition

• Permitting structured access to private market investments through funds and retirement vehicles.