Investment advisers served new illicit-finance regulations from Treasury

Investment advisers served new illicit-finance regulations from Treasury

Author: The Carta Policy Team
Read time:  9 minutes
Published date:  February 16, 2024
Tax bill restoring R&D provisions still in limbo.


  • Lawmakers recess without a funding package

  • Investment advisers served new illicit-finance regulations from Treasury

  • House Financial Services Committee holds hearing on the CTA’s sweeping filing requirements

  • SEC proposes expanding qualifying venture capital funds

  • SEC Chair Gensler homes in on artificial intelligence

Lawmakers recess without a funding package

Staring down a list of rapidly approaching deadlines and an ever-growing list of priority issues, lawmakers have now left Washington until February 26. The pre-planned recess leaves the bipartisan tax bill and government funding efforts in limbo. Before departing, House Republicans voted to impeach Homeland Security Secretary Alejandro Mayorkas. This will derail the Senate’s agenda for at least a few days upon the chamber’s return. Here’s a cheat sheet for the next few weeks:

  • Tax bill: The House-passed tax bill is still awaiting Senate consideration. Republicans are pushing for a markup in the Senate Finance Committee, but Ranking Member Mike Crapo is working to negotiate a deal that would allow the bill to be amended on the Senate floor instead. The bill’s prospects are loosely tied to the fate of government funding efforts.

  • Government funding: Existing funds expire in two tranches on March 1 and 8. Appropriators are still aiming for full-year funding, but the logistics make it all but certain that another short-term patch will be needed on March 1. If the tax bill’s pending issues are resolved, it could hitch a ride to passage on the next continuing resolution.

  • Impeachment theater: The Democratically controlled Senate will not convict Alejandro Mayorkas. However, the House’s impeachment triggers a trial in the Senate as soon as the chamber returns to session. In the best case scenario, this will take three to five days to complete. Precedent says that no other business can be considered while trial is ongoing, but a trial has never collided with a government funding deadline before. Stay tuned!

What’s next: Not much until after the recess. Staff will remain in Washington and continue working, but members of the House and Senate have retreated to their districts. TLDR: this is the relative calm before Congress weathers a self-made storm. 

Call to action 

Carta sent a letter to Senate leadership to support restoring full R&D expensing. Join the effort by contacting your U.S. Senators to let them know that R&D matters to the innovation community. Download the email template here.

Investment advisers served new illicit-finance regulations from Treasury

As previewed last week, the Financial Crimes Enforcement Network (FinCEN) officially proposed applying its anti-money laundering (AML) and countering the financing of terrorism (CFT) measures to investment advisers, including private equity and venture capital advisers. Under the proposal, investment advisers registered with the SEC (RIAs) and exempt reporting advisers (ERAs) would be designated as “financial institutions” under the Bank Secrecy Act (BSA), which would subject them to the same regulatory requirements that apply to banks and broker-dealers.

At a high level, the proposal would require RIAs and ERAs to:

  • Implement an AML/CFT program, which includes internal controls and policies, compliance staffing and training, independent audits, and ongoing customer due diligence

  • File suspicious activity reports (SARs) with FinCEN to report suspicious transactions over $5,000

  • Keep records related to the transmittal of funds

  • Comply with other Bank Secrecy Act (BSA) obligations that apply to financial institutions

FinCEN would delegate its examination authority to the SEC, which is consistent with its delegation of exam authority for broker-dealer BSA compliance. It would also allow investment advisers to delegate AML/CFT obligations to third parties, so long as the adviser retained legal accountability. 

Why it matters: Many private fund managers have some AML/CFT protocols in place, but the application of a formal regulatory regime will impose significant compliance obligations, particularly for smaller private fund managers. This latest regulatory proposal follows a new complex beneficial ownership reporting regime that funds must navigate under the Corporate Transparency Act (CTA) and a host of new SEC obligations under the private fund adviser rules that will significantly change how venture operates and is regulated. This shifting regulatory landscape is why Carta released its VC regulatory playbook, a resource designed to help fund managers keep up with the pace of regulatory change in private market regulation.

What’s next: The comment period for the proposal closes on April 15, 2024. Advisers would have 12 months to comply with the new requirements after the final rule goes into effect.

House Financial Services Committee holds hearing on the CTA’s sweeping filing requirements

On Jan 1, FinCEN began enforcing its sweeping set of CTA rules, which require businesses to disclose information about their ownership and allow banks to access those details to aid in their own enforcement efforts.

  • In this week’s hearing, FinCEN representatives noted that 32 million businesses are required to file initial mandatory beneficial ownership information (BOI) reports through 2024, and approximately 5 million reports annually thereafter (comprised of new company and updated/corrected BOI reports). Nearly 2 months into implementation, close to 500,000 of those 32 million have submitted BOI reports. 

  • Republicans argued that the new filing requirements inflict excessive burdens on businesses and pose a risk to data security while Democrats rallied behind the CTA compliance regime, urging additional funding for FinCEN to work on implementation and further guidance. 

Why it matters: In an effort to support and equip small businesses with the resources to navigate the new regulations, Carta is helping founders comply by offering a free CTA compliance solution. This solution is embedded in Carta’s free Launch plan so startups (and their counsel) can use it even if the company has not raised any financing. It only takes a few clicks and we will ensure you file on time. For a step-by-step guide to understanding CTA compliance, download Carta's CTA compliance checklist.

CTA Compliance checklist

Click here to download the checklist.

SEC proposes expanding qualifying venture capital funds

The SEC showed venture capital a little love on Valentine’s Day and proposed increasing the “ qualifying venture capital fund” dollar threshold from $10 million to $12 million to adjust for inflation. 

  • Under Section 3(c)(1) of the Investment Company Act, a venture capital fund is limited to 100 beneficial owners, which makes it difficult to raise a sufficient amount of capital unless it is all coming from large checks. This is even more challenging for emerging managers in emerging ecosystems. 

  • The qualifying venture capital funds exemption under Section 3(c)(1) permits venture capital funds to raise up to $10 million in capital from 250 beneficial owners.  Congress created this category to help emerging managers, including those from less capital-dense regions, assemble competitive funds by collecting smaller contributions from a greater number of investors. In practice, however, the current parameters are not reflective of economic realities and have limited the utility of the provision.

Why it matters: A $2 million increase is a positive step, but in order for the qualifying venture capital fund exemption to effectively serve its intended purpose, the dollar and beneficial owner thresholds should be increased much higher. There is bipartisan legislation in Congress that would provide meaningful expansions of both of these limits, which will help foster the development of more localized networks and provide greater access to capital for entrepreneurs in emerging ecosystems. Carta will continue to work with its ecosystem partners to advance policy that would expand the utility of this important provision.

SEC Chair Gensler homes in on artificial intelligence

In remarks this week, SEC Chair Gary Gensler turned his attention back to AI, highlighting the potential risks of AI to financial stability. Outside of the macro-level risks of AI, which Gensler asserts will require a new approach to risk management guidance, he notably doubles down on cautioning companies and funds against “AI washing,” or making exaggerated or unfounded artificial intelligence claims to investors. Gensler’s warning comes as the increasing use of AI has led to concerns that marketing claims might not match what companies are delivering to customers. 

Why it matters: Gensler has been outspoken on potential risks AI poses to financial markets. His critical comments signal we could see the SEC take a similar approach to “AI washing” as it has taken on greenwashing, so expect to see more targeted examination and enforcement efforts in this space. This follows a continued pattern of the SEC beginning to use its rulemaking tools to target the increasing adoption of AI, as seen with the proposed rules to require investment professionals to assess whether the use of AI or predictive data analytics poses any conflict of interest. Generally, these efforts by the SEC have been widely criticized by the industry and policymakers as overly broad and unworkable, but Gensler’s remarks indicate that the SEC’s interest in regulating AI is here to stay.

News to know

  • McHenry says GOP has deal with Waters on stablecoins. House Financial Services Chair Patrick McHenry said Thursday that Republicans "have an understanding" with ranking member Maxine Waters on stablecoin legislation — but are still waiting on the green light from the Biden administration and Senate. The text of the bill, which would be the first piece of digital asset legislation, has yet to be released.

  • Ro Khanna drafting bill to tax companies into sharing AI gains with workers. Rep. Ro Khanna, whose district includes tech giants like Intel, Apple, and Nvidia, noted this week that he is drafting a bill to regulate AI with tax policy aimed at protecting workers from AI-related layoffs.

  • Countries agree on digital tax delay. The United States, Austria, France, Italy, Spain, and the United Kingdom formalized an agreement to delay the rollout of Pillar 1 of a two-phase digital tax plan until June 30, 2024. The OECD/G20 Inclusive Framework was agreed to in October 2021 and is intended to prevent the creation of  patchwork of digital tax frameworks. 

  • Suozzi's win narrows House Republican majority. The special election to fill the vacancy created by former Rep. George Santos’s expulsion was held on Tuesday night. The victor, Tom Suozzi, is a former member of the House who ran a moderate campaign. This narrows House margins to 219 Republicans and 213 Democrats, with three additional vacancies. 

  • Bitcoin regains $1 trillion market cap. Despite ongoing congressional scrutiny, Bitcoin’s market capitalization rose above $1 trillion for the first time since 2021. The company reported experiencing the largest daily inflow since the cryptocurrency launched. The surge is likely to fuel House Republicans’ efforts to enact digital asset legislation. 

  • Barr unbothered by CBNY wobbles. Michael Barr, the Federal Reserve’s Vice Chair for Supervision, said in prepared remarks that there are no signs of liquidity issues in the banking system. The regulator previously indicated plans to closely watch banks with commercial real estate loan portfolios, a profile that would include New York Community Bank. He also previewed that interest rates will hold steady until sufficient data confirms that inflation is waning.

  • Banks urge SEC to amend SAB 121. The Bank Policy Institute (BPI), American Bankers Association (ABA), Financial Services Forum (the Forum), and the Securities Industry and Financial Markets Association (SIFMA) collectively sent a letter to SEC Chair Gensler requesting the SEC to consider modifications to SAB 121 to tweak accounting guidance that makes it more expensive for US banks to hold digital assets for their customers. The letter cites recent events, such as the approval of certain Spot Bitcoin ETPs, as reasons to reconsider the guidance.

Upcoming events

Sign up below to receive Carta’s Policy Weekly Brief:

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. ©2024 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.

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.