Blog /Policy Weekly 02 23 24
Without a deal, one week remains until partial government shutdown

Without a deal, one week remains until partial government shutdown

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Read time:  9 minutes
Published date:  February 23, 2024
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Updated date:  February 23, 2024
House expected to consider capital markets package in March.
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Topline

  • Path to government funding (and tax extenders) uncertain

  • House expected to consider capital markets package next week

  • OCC pushes for increased FSOC scrutiny for private equity

  • SEC climate disclosure rules imminent—and likely weakened

  • Stablecoin framework moving forward will give authority to bank regulators  

T-minus 1 week to (partial) government shutdown

Despite the impending deadlines, there appears to be little progress made on a plan to fund the government, setting up a partial government shutdown—or a last-minute, last-ditch stopgap agreement—on March 1.

  • How we got here: To secure enough support for the current funding patch, Speaker Mike Johnson orchestrated a “laddered” deal that set the expiration date for some agency funds on March 1, but the bulk will expire on March 8. 

  • Possible scenarios: There are three potential paths to prevent a government shutdown: 1) a short-term funding patch to provide more time for negotiations; 2) a year-long continuing resolution, which would trigger automatic 1% spending cuts; 3) a bipartisan, bicameral agreement on the 12 appropriations bills. The major hangups center around the inclusion of conservative policy riders that have hampered the negotiation process. Democrats are not likely to agree to across the board spending cuts either, making a bipartisan deal the only realistic solution for long-term funding. 

  • Implications for tax package: A funding deal is still the surest path to enactment for the bipartisan tax package; if the funding deal happens later in March, it gives senators negotiating on the tax package more time to resolve some Republicans’ concerns. The restoration of expired business tax provisions, including R&D, will remain a pillar of the deal.

Call to action: 

The Carta team has been closely following the tax package and pushing for the restoration of 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

What’s next: The Senate will be tied up with the impeachment trial for Homeland Security Secretary Alejandro Mayorkas most of next week, but expect squabbling over funding from both chambers as the initial March 1 deadline approaches. The ongoing battle to enact Ukraine aid is also complicating matters. If a broader deal is not reached over the weekend, a short-term patch is the most likely path forward to prevent a partial funding lapse. Neither side wants or will benefit from a shutdown, so there is mounting pressure to strike a deal before a full shutdown on March 8. Any plan to fund the government will need bipartisan support, which will almost certainly require the exclusion of policy riders hardline conservatives are pushing for. If Speaker Johnson digs in, a shutdown is almost inevitable. If he moves forward with anything else, he could face a similar fate as former Speaker Kevin McCarthy, as patience from the right is wearing thin.

House expected to consider capital formation package next week

The week of March 4, the House is expected to consider a broad capital markets package designed to ease burdens for companies to go public and increase access to capital and investment opportunities in the private markets. The House has advanced a number of bipartisan capital formation bills, but this package failed to attract Democratic support at the committee level. This will likely remain the case on the House floor. 

Several provisions in the package are priorities for Carta and would have positive impacts on the venture ecosystem by lowering barriers and increasing the pool of available capital for founders and emerging managers:

  • DEAL Act: Would increase the ability for venture capital funds to make investments in other funds and secondaries. Under the current parameters of the venture capital exemption, funds are largely limited to primary investments in private companies.  

  • ICAN Act: Would increase the size and investor parameters for qualifying venture capital funds. A similar bill, the Expanding American Entrepreneurship Act, has bipartisan support in the Senate.

Inside baseball: House leadership has struggled to advance substantive legislation given the slim majority and increasing division in the Republican conference. With a two-vote margin, there is a chance the bill may not clear a procedural hurdle to allow the House to vote on it. 

Why it matters: Capital formation has been a pillar of Chairman McHenry’s policy agenda. McHenry’s impending retirement and his reputation as a dealmaker could provide an opportunity for these bipartisan priorities to advance, though political dynamics will be a challenge in the Senate. A partisan vote on the broader capital formation package will make it even harder—but not impossible—to build support for provisions like DEAL and ICAN. Engagement from the ecosystem will remain critical.  

OCC pushes for increased FSOC scrutiny for private equity

This week, acting Comptroller of the Currency Michael Hsu called for the Financial Stability Oversight Council (FSOC) to pursue a “tripwire approach” for assessing when various activities could pose a risk to the financial system. Hsu pointed to two areas of potential financial stability risk where the lines between commerce and banking are being blurred: the payments sector and private equity’s growing role in the provision of credit. On private equity, Hsu focused on financial stability risks associated with the rapid expansion of the PE industry into private credit, as well as the interconnectedness between PE, banks, and the insurance sector.

Industry groups representing private equity have pushed back on Hsu’s comments, arguing that these new tripwires would undermine the important role of private credit as a source of capital for small business, calling the proposal “short-sighted and harmful to the economy.”

Why it matters: Private equity is coming under increased scrutiny across the federal regulators. The SEC has increased its scrutiny on private equity both through regulation and enforcement, and antitrust regulators are shifting how they evaluate PE transactions. The prudential regulators are homing in as well. FSOC recently finalized guidance that would make it easier to designate nonbanks—including private equity funds—as systemically important financial institutions, which would subject such entities to bank-like regulation by the Federal Reserve. Hsu noted that FSOC would publish the trip wires and seek public comment before finalizing them.

SEC climate disclosure rules imminent—and likely weakened

The SEC is expected to finalize its controversial climate change disclosure rule in March, though it will likely be watered down from the proposal. 

  • According to reports, the near-final draft of the final rule has removed some of its most ambitious greenhouse gas emission disclosure requirements, most notably dropping a requirement for U.S.-listed companies to disclose Scope 3 supply chain emissions.

  • While the SEC rule may no longer require Scope 3 emission disclosures, several state governments will still require this information. Last September, the California Legislature passed legislation to require companies with over $1 billion in revenue doing business in the state to disclose greenhouse gas emissions. This new law goes further than the SEC’s proposal and would require companies to start reporting direct emissions in 2026 and indirect emissions in 2027. And while the requirements would only apply to larger companies, startups and small businesses will be impacted in the supply chain. 

Why it matters: If adopted, the new draft of the SEC rule would represent a win for the business community, who argued that the Scope 3 reporting requirements were overly burdensome (particularly for individuals and growth-stage companies). Chair Gensler will likely face pushback from progressives that the rule doesn’t go far enough, while industry will still likely challenge the rule as outside of the Commission’s authority. Stay tuned.

Lawmakers near release of bipartisan stablecoin framework

After two previous breakdowns in negotiations between House Financial Services Committee Chairman Patrick McHenry and Ranking Member Maxine Waters over stablecoin legislation, the third time may be the charm. The HFSC leaders reportedly reached an agreement before departing for the President’s Day recess. McHenry said he and Ranking Member Maxine Waters “have an understanding” but are waiting for other federal stakeholders to weigh in.

Lawmakers are under pressure from top financial regulators to advance a stablecoin regulatory framework, but disagreement between House Republicans and Democrats on the role of these regulators have been a key holdup in finalizing the terms of the bill. When discussions imploded in July, Committee Republicans advanced their own legislation to regulate stablecoins. A handful of Democrats voted for the bill, but most joined Ranking Member Waters in opposition centered on whether the Federal Reserve would have sufficient authority to regulate state-qualified stablecoin issuers. The new deal reportedly resolves this conflict.

At a high-level, the deal is expected to retain many of its key tenets:

  • Scope and reserves: Payment stablecoins, which are digital assets issued for payment and redeemable at a predetermined fixed amount, are the focus of the legislation. Issuers would be required to hold at least one dollar of permitted reserves for every dollar worth of stablecoins outstanding/issued.

  • Reporting: Issuers would submit monthly reports on outstanding stablecoins and reserve holdings that are “examined” by a registered public accounting firm.

  • Federal vs. state oversight: Banking regulators would oversee stablecoins issued by banks and credit unions, but nonbanks could choose to be subject to federal or state oversight.

  • Neither commodity nor security: The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) would not have a role in overseeing stablecoins or issuers.

Next steps: Once the stablecoin agreement is released, Chairman McHenry will try to bring it to the House floor as soon as March. In the interim, regulators are providing guidance where possible as the market continues to evolve.

Why it matters: Digital assets legislation is a legacy-making issue for Chairman McHenry, who will retire from Congress after this session. While the state of the broader cryptocurrency package still remains in flux, success in passing stablecoin legislation would mark the first major digital assets-focused legislation enacted in the United States and trigger years of related agency rulemakings.

Corporate Transparency Act: Simplify filing with Carta

Corporate Transparency Act: Simplify filing with Carta

Effective January 1, 2024, virtually all new companies formed or registered to do business in the United States will need to comply with the Corporate Transparency Act (CTA). Join the Carta team on March 7 at 10:00 a.m. PT / 1:00 p.m. ET to learn more about how you can use Carta to submit your CTA report. 

>> Register here

News to know

  • Democrats push back on Capital One-Discover merger. A proposed Capital One-Discover merger drew swift backlash from some Democratic lawmakers and consumer advocacy groups who say the deal could reduce competition and increase fees and costs for consumers. Notably, ​​Maxine Waters, the top Democrat on the House Financial Services Committee, wants regulators to block Capital One’s acquisition of Discover. 

  • House announces bipartisan task force on AI. Speaker Mike Johnson and Democratic Leader Hakeem Jeffries announced a bipartisan Task Force on Artificial Intelligence (AI) to explore how Congress can help lead the world in AI innovation while considering guardrails to safeguard against current and emerging threats. The Task Force will produce a comprehensive report that will include guiding principles, forward-looking recommendations and bipartisan policy proposals developed in consultation with committees of jurisdiction.

  • SEC small business committee to debate accredited investor definition. Next Tuesday, the SEC Small Business Capital Formation Advisory Committee will meet and deliberate possible recommendations related to the accredited investor definition. This discussion follows the SEC’s staff report on the definition of accredited investor that was published in December 2023, which outlined the current definition and reviewed frequently suggested revisions.

  • DOJ outlines approach to AI and appoints first chief AI officer. The DOJ announced the hiring of a Chief AI Officer, who will also serve as the Chief Science and Technology Advisor. It was also announced that federal prosecutors now will seek longer sentences for defendants convicted of crimes involving the use of AI.

  • PCAOB fines audit firm $2M for SPAC audit failures. The Public Company Accounting Oversight Board (PCAOB) sanctioned WithumSmith+Brown, PC for pervasive quality control violations involving SPAC audits. The PCAOB found that Withum put a significant strain on its quality control system by accepting a substantial number of special purpose acquisition company (SPAC) audit clients.

  • Labor organizations lobby the SEC for human capital disclosure rule. Several labor organizations, trade groups and the Illinois treasurer have banded together to ask that the SEC propose a rule mandating that public companies disclose human capital management metrics.

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