Congress back in action with new committee leadership

The Topline

• New Speaker, new House rules, new constraints

• Republicans attempt to pull back IRS funding as tax filing season set to commence

• Republicans select members for Financial Services Committee, announce leadership posts

• Crypto regulation in the 118th Congress

• CFPB continues to expand scrutiny of nonbanks

New Speaker, new House rules, new constraints

After 15 ballots, Speaker Kevin McCarthy secured the gavel by making commitments to the party’s right wing holdouts that sought to diminish the power of congressional leadership, empower rank-and-file House members, and install legislative and policy constraints. The House passed its rules package—its operating document—to reflect those commitments, including:

• Motion to vacate: Established that any single member can call for a vote to remove the Speaker.

• Cut-go spending offset: Required legislation that increases mandatory spending must be offset with equal or greater decreases in spending.

• Supermajority for tax increase: Established a three-fifths majority threshold to pass tax rate increases.

• Debt ceiling: Eliminated a procedural mechanism used to expedite efforts to adjust the debt limit. 

These operational constraints—along with some of the reported informal commitments made—are likely to make governing harder, force moderate Republicans into tough votes, and leave Speaker McCarthy vulnerable. 

Coming flashpoint on debt ceiling 

The date may be fluid, but the debt ceiling deadline is very real. Within the first half of the year, Congress will need to raise the debt ceiling to enable the country to pay the bills it already accrued. President Biden’s position is that he and Democrats will not negotiate over the debt ceiling. Despite that, House conservatives are indicating that they will not raise the debt ceiling without substantial concessions. Speaker McCarthy will have to navigate these warring political factions and the global economy. If he cannot do so successfully, the country could see the economic ramifications, and a single member can trigger a vote on his Speakership—the 15th ballot may not be his last. 

Why it matters: Legislating was always going to be hard in this environment. Now the rules package constrains leadership and empowers the right flank. This means that beyond oversight activities, legislation that is sufficiently conservative to pass the House will be difficult for the Democrat-controlled Senate to consider, and critical measures such as the debt ceiling, government funding, and more, will be exercises in brinkmanship. 

Republicans attempt to pull back IRS funding as tax filing season set to commence

Ten Republicans joining Ways and Means Committee

Republicans have begun legislating on their campaign priorities, including a proposal to claw back the funding provided to the IRS to hire 87,000 new agents. This bill will not be taken up in the Senate, but signals the tone of the “messaging” bills likely to hit the House floor this year. 

The House GOP Steering Committee, which decides committee membership and ratios, agreed on  the composition of Ways and Means, the powerful tax-writing panel. Incoming House Ways and Means Chair Jason Smith will use his gavel to conduct aggressive oversight of government spending. While the bump in IRS funding is safe for now, he is planning to probe how the funds are used. Despite this polarizing first step, Chairman Smith signaled hopes to work across the aisle on a tax bill in early 2023, going as far as to note that he would be willing to consider supporting an expansion of the Child Tax Credit, a change favored by Democrats.

Taxpayer Advocate releases report to Congress 

The IRS has announced that the 2023 tax filing season will kick off on Jan. 23 when the agency will begin accepting 2022 tax year returns. Of the IRS’s $80 billion new cash infusion, $4.75 billion is allocated towards modernization of the agency’s business systems. In this week’s release of the IRS National Taxpayer Advocate’s 2022 Report to Congress, the impact of paper processing and e-filing barriers were highlighted in the report’s list of top 10 most serious problems—areas where modernization is severely needed. 

Why it matters: In line with the Taxpayer Advocate’s report, Carta and industry leaders continue to pursue our request for the IRS to allow e-filing of sec. 83(b) elections. This is increasingly important as our current e-signature relief is only in place through October 31, 2023. If you need to file an 83(b) election before then, Carta has simplified the process: We now have automated submission for our users.

Republicans select members for Financial Services Committee, announce leadership posts

New members were added to the House Financial Services Committee (HFSC), and Chairman Patrick McHenry finalized the new roster of leadership for the Committee’s (HFSC) six subcommittees. These subcommittees will drive McHenry’s economic prosperity agenda, which will largely focus on driving access to capital and investment opportunities and financial innovation. HFSC will get a revamp under McHenry’s leadership, including a shakeup in leadership posts in the capital markets and financial institutions subcommittees as a result of GOP-imposed term limits. The Republicans are also establishing a new subcommittee focused on financial technology and digital assets, a long-time priority for McHenry. In addition, each subcommittee will have a mandate to consider diversity and inclusion as it pertains to its jurisdiction, rather than having a subcommittee solely devoted to the topic.

Why it matters:HFSC subcommittees will be tasked with developing the agenda to advance Committee priorities and conducting agency oversight. We expect a big part of the agenda to focus on bolstering capital formation in the venture ecosystem and increasing investment opportunities for retail investors. New committee mandates and leadership will help bring diverse perspectives to the role and provide opportunities for education and engagement.

Crypto regulation in the 118thCongress

HFSC subcommittee to focus on crypto and fintech

Under the leadership of Rep. French Hill, one of the Committee’s most knowledgeable and well-respected members, this new HFSC subcommittee on digital assets, financial technology, and inclusion will play a key role in crypto policy development. Though bipartisan skepticism of the industry is growing following the FTX collapse and broader industry woes, there is still bipartisan support to craft legislation to provide a regulatory framework for stablecoins, among other areas. The subcommittee will also focus its attention on the regulators. Crypto proponents have been critical of the SEC’s approach to regulating digital assets through enforcement and its failure to provide regulatory clarity to help the industry develop in a responsible manner. 

Even if the House can agree on a path forward, there will be challenges building consensus in the Senate. Sen. Sherrod Brown, returning chair of the Senate Banking Committee and long-time crypto skeptic, will prioritize investor protection and enforcement of the industry, largely relying on the efforts of SEC Chair Gensler (who has noted the agency does not need additional tools or legislation to effectively police the industry).

The SEC continued its crypto crackdown this week by bringing charges against crypto lender Genesis Global Capital and crypto exchange Gemini for the unregistered offering and sale of securities through the Gemini Earn crypto asset lending program—a fact pattern similar to the SEC’s previous settlement with BlockFi. Expect the crypto-related investigations and enforcement actions to continue, which would spill over into the private market space as concerns around due diligence for crypto-related investments continue.

Meanwhile, SBF keeps talking

Disgraced FTX founder Sam Bankman-Fried’s appearances before Congress were precluded by his arrest in the Bahamas in December, but SBF has laid out more of his version of events in a lengthy Substack post—an unusual step for someone awaiting trial on related charges. 

Why it matters: Crypto is a lightning rod for bipartisan scrutiny from lawmakers in both the House and Senate, but the appropriate balance of power between the agencies involved in regulating this space is one of several points of contention. Brown and McHenry will approach crypto regulation from vastly different perspectives, making it harder for Congress to reach consensus despite bipartisan support to act. In the meantime, expect continued regulation through enforcement.

SEC appoints investor advocate

The SEC tapped Cristina Martin Firvida to lead its Office of the Investor Advocate, an office charged with assessing the impacts of SEC activities on retail investors and driving forward investor-centric policies at the agency. Firvida, a long-time executive at AARP, will likely collaborate closely with Barbara Roper, Chair Gensler’s adviser on retail investor protection; agenda items of note are expected to include monitoring enforcement of standards of conduct for investment professionals, promoting enhanced disclosures for investors, and bolstering oversight of private fund advisers and crypto markets. 

The SEC also announced the departure of Renee Jones, the director of the Division of Corporation Finance. Jones has been critical of the growth of the private markets and has advocated for changes to the 12(g) threshold to push more large private companies into the public reporting space. The SEC is expected to consider changes to the 12(g) threshold in the next year. 

Why it matters: The Investor Advocate can be a powerful voice for retail investors across the broader scope of the SEC’s activities and conducts research on a host of topics that can help inform rulemakings and congressional legislation. Firvida, unfortunately, will likely help push forward items on the SEC’s agenda to raise the accredited investor thresholds and make it harder to access capital in the private markets, where there is less disclosure and regulatory oversight. Jones’ departure is not expected to impact Gensler moving forward with his private market agenda.

CFPB continues to expand scrutiny of nonbanks

Building on its proposal to establish a nonbank enforcement action registry, the Consumer Financial Protection Bureau (CFPB) unveiled a second proposed registry around form contract terms. The agency cites concerns that specific types of terms and conditions (including language related to servicemembers’ legal protections, individuals’ rights under the Fair Credit Reporting Act, lender liability, and Truth in Lending Act restrictions) can be misleading and trips consumers into agreeing to provisions that would waive or limit their legal protections. Much like the initial registry, the CFPB asserts this will increase transparency in the market and improve oversight broadly among consumer protection-focused regulators. 

HFSC Republicans are preparing to ramp up CFPB oversight, and Director Rohit Chopra’s decision last year to exercise long-dormant authorities to supervise nonbank entities (including fintechs) will come under additional scrutiny. This latest development indicates that Chopra will not be deterred by criticism from congressional Republicans, setting up clashes between the two at oversight hearings this year. However, lacking a majority in the Senate or control of the executive branch, Republicans’ ability to meaningfully influence the CFPB’s activities is fairly limited. 

Why it matters: Fintechs, even those once believed to be outside the reach of the CFPB, should brace for further scrutiny from the agency for the duration of the Biden administration. This could take the form of enforcement actions, both formal and informal guidance, and messaging via publications like the CFPB Circulars, among other means.

News to know

• Biden to deliver State of the Union address on February 7

• Yellen to stay on as Treasury chief through Biden’s term

• Senators voice concerns over law firm’s role in FTX bankruptcy

• FTX has recovered $5 billion worth of ‘liquid’ assets, lawyers say

• Powell vows that Fed ‘will not be a climate policymaker’ 

• Fidelity acquires equity management software business Shoobx

• SEC Charges McDonald’s Former CEO for Misrepresentations About His Termination

Upcoming events

• Carta Policy x DC Small Business Development Center virtual event: Tax Planning & Policy Updates for Small Businesses – Jan. 24 at 12:00 p.m. ET

• Carta live virtual event: How to talk about your company’s valuation – Jan. 24 at 10:00 a.m. PT

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