- Banking turmoil ripples into innovation policy agenda
- Bank collapses spell new troubles for crypto
- SEC continues to make progress on its ambitious agenda with cybersecurity proposals and plans to adopt Form PF amendments
- California court grants companies using gig workers as independent contractors a reprieve
Banking turmoil, policymakers reviews, and private markets policy…
Following the takeover of Signature Bank by New York regulators, last Sunday evening, Treasury Secretary Janet Yellen announced that all depositors of Silicon Valley Bank (SVB) would be made whole, the Federal Reserve would establish a term lending facility to alleviate liquidity pressure, and that the U.S. Treasury would be ready to deploy $25 billion from its exchange stabilization fund, if necessary. Other financial institutions have acted to help shore up First Republic Bank and to restore confidence and stability in the banking system, though the markets remain volatile.
>>Read our full analysis here.
Policymakers are increasingly focused on what led to SVB’s collapse and where we go from here. Although neither side is monolith, Republicans are asserting bank supervisors failed to identify and act on SVB’s risk; many Democrats are citing a 2018 regulatory tailoring bill they claimed weakened regulatory oversight for institutions such as SVB. Congress will undertake oversight, hearings, and investigations, but do not expect legislation on this topic to pass. The Fed and other regulators will also do a review, the results of which will inform their bank regulatory standards. Policymakers will need to stabilize the financial system while addressing an array of problems:
- Preventing capital concentration
- Ensuring adequate oversight
- Higher consumers banking costs
- Regulating in a digital age
- Adapting to social media echo chamber
- Calibrating interest rates
Implications for venture capital: The failure occurred in the banking system, but its effects will be felt across the startup ecosystem SVB supported. Critics of the private markets have already seized on SVB’s failure to malign the innovation economy and call for greater private-market restrictions. Carta’s policy team expects this to embolden the SEC’s already aggressive agenda on private markets.
As Congress turns its attention to addressing SVB, Chairman Patrick McHenry’s capital formation agenda will likely be delayed, though it is still a priority. Carta’s policy team will be working to build bipartisan support for proposals to increase access to capital for entrepreneurs and funds and bolster the narrative around the importance of the innovation ecosystem to job creation, growth, and the broader economy.
>>Read our full analysis here.
Bank collapses spell new troubles for crypto
The recent bank collapses represent the latest setback for the crypto industry. With these closures, there is growing risk crypto will be walled off from traditional finance, especially as banking regulators warn lenders about the risks of dealing in digital assets. CFTC Chair Rostin Behnam cautioned the crypto industry could continue to see issues around liquidity and access to banking services and pointed to recent failures to validate the need for Congress to develop a regulatory framework for the industry. Shortly after SVB shuttered, Circle’s USDC, the world’s second-largest stablecoin by market cap, broke its dollar peg and dipped to $0.87 following reports that over $3 billion of the $42 billion underpinning the stablecoin was stuck at SVB. USDC has since recovered, though market confidence in the stablecoin has not.
Why it matters: Signature Bank, Silvergate, and SVB (though to a lesser extent) were important institutions for the crypto sector, and the fallout from their combined downfall will continue to hinder an industry plagued by recent scandals, notably the spectacular collapse of FTX. Rumors are swirling that the FDIC is pressuring potential Signature buyers to agree to stop doing business with crypto, fueling a narrative that state regulators wanted to shutter Signature to advance a strong anti-crypto message. Overall, these factors could expedite congressional efforts to enact digital asset—or narrower stablecoin—legislation, but they also provide fodder for Republicans’ growing criticism of the administration’s actions in this space.
In other news, SEC Chair Gary Gensler penned an op-ed that continues to push the crypto industry to comply with the securities laws. Gensler references various SEC enforcement actions to demonstrate how the securities framework applies to crypto; however, a patchwork of enforcement actions is unlikely to satisfy calls from Congress and the industry for regulatory clarity.
SEC continues to make progress on its ambitious agenda
SEC advances trio of proposals to address cybersecurity risks
The SEC advanced three new rulemaking proposals to address the growing cybersecurity threats:
- Proposal to amend Regulation S-P, which would require firms to establish incident response programs for data breaches and notify impacted customers
- Proposal to create new rules for broker-dealers and other market participants to implement procedures designed to address cybersecurity risks, including immediate written notice to the SEC of a significant cybersecurity incident
- Proposal to expand the scope Regulation SCI
The SEC’s new cybersecurity proposals intersect (and at times, overlap) with other proposals from the Commission, including its proposed cybersecurity risk management framework for investment advisers (for which the SEC reopened the comment period) and its outstanding proposal to compel cybersecurity disclosures from public companies, which it expects to finalize this spring.
Why it matters: Many of the requirements in these proposals, particularly around notifications and third-party contracts, will impose significant compliance burdens for impacted entities. Further, the SEC’s proposal concerning breach notification adds an increasingly confusing patchwork of data privacy and related consumer protection frameworks that has emerged at both the federal and state levels. Complying with overlapping—and sometimes inconsistent—obligations will be difficult, and the SEC did not offer much guidance in this respect in its proposals.
Form PF amendments on the docket next week
Next week, the SEC is expected to finalize amendments that would increase the detail and timeliness of information certain private fund advisers will be required to file with the SEC on Form PF. Notably, if adopted as proposed, these reforms are expected to:
- Require near real-time disclosure of certain reporting events,
- Lower the reporting thresholds for large private fund advisers from $2B to $1.5B
- Require these advisers to disclose more information around fund strategies and their portfolio companies.
Why it matters: The SEC has increased its scrutiny around the private fund advisers (and private markets more generally) in an effort to increase transparency and address the growth of the industry. The current reporting requirement in the Form PF proposal would require large private equity and hedge fund advisers to file current reports within one business day of certain adverse events. Against the backdrop of the recent market disruptions and volatility post-SVB, one can see how a one-day reporting timeline may not be reasonable if the adviser is actively managing the triggering event. We expect more regulation to come in the coming months, including the adoption of the SEC’s private fund adviser proposal, and more efforts directed toward industry oversight.
California court grants some independent contractors a reprieve
A California appellate court largely reinstated Proposition 22, a ballot initiative that allows app-based transportation and delivery companies like Uber and Lyft drivers to classify their workers as independent contractors, carving them out from the state’s strict worker classification framework. This appellate ruling overturns an earlier court ruling, and is a win for the companies; though the California Supreme Court will likely have the final say. Companies that rely on gig workers are waging battles on classification across the United States, including at the Department of Labor. California has been a proving ground for more stringent U.S. classification standards, and the ruling will allow companies that fall within the scope of the exemption to continue treating their workers as independent contractors, not employees—a distinction that provides individuals with more flexibility but less access to benefits like sick leave.
Why it matters: As the scale of the gig economy expands, so has interest in expanding participants’ access to the ownership economy. In 2021, Rep. Patrick McHenry introduced legislation to make certain gig workers eligible for equity compensation; in 2020, the SEC proposed the same concept via a temporary rule that was never finalized. Now chair of the House Financial Services Committee, McHenry included his bill in Republicans’ Capital Formation Agenda as an example of policy to improve investors’ access to private markets. As we previewed last month, increasing ownership opportunities are one topic to follow in the capital markets space this Congress.
News to know
- FASB proposes enhanced income tax disclosures. The Financial Accounting Standards Board (FASB) is seeking comments on a proposal that would require companies to publicly share details on income taxes paid to federal, state and foreign entities.
- FedNow Goes Live in July. The Federal Reserve released plans to rollout its FedNow instant payment service beginning in April, with the full launch set for July. The initial program will contain “a robust set of core clearing and settlement functionality and value-added features,” with more features added over time.
- DOJ shuts down massive crypto mixer. The Department of Justice led an international takedown of ChipMixer, a darknet cryptocurrency “mixing” service the agency says is responsible for laundering over $3 billion worth of cryptocurrency since 2017.
- FTC blocks ICE-Black Knight deal. The FTC blocked a proposed merger between Intercontinental Exchange, Inc. (ICE) and Black Knight, Inc., finding that it would negatively impact the loan origination systems market and reduce competition for product pricing and eligibility engines, among other concerns.
- CFPB launches inquiry into the business practices of data brokers. This inquiry seeks information about business practices employed in the market to inform planned rulemaking under the Fair Credit Reporting Act.
- SEC: Open Meeting – Mar. 22 at 10:00 a.m. (ET)
- Federal Open Markets Committee Hearing: Mar. 21-22 post-meeting press conference – Mar. 22 at 2:00 p.m. (ET)
- Senate Appropriations Committee Hearing: Review of the FY 2024 Budget for the Department of the Treasury – Mar. 22 at 2:30 p.m. (ET)
- Senate Small Business Committee Business Meeting and Hearing: Oversight of the U.S. Small Business Administration and Review of the President’s Fiscal Year 2024 Budget Proposal – Mar. 22 at 2:45 p.m. (ET)
- House Small Business Committee Hearing: Oversight of the Small Business Administration – Mar. 23 at 2:00 p.m. (ET)
- House Appropriations Committee Hearing: Budget and Oversight Hearing – President Biden’s Fiscal Year 2024 Budget Request and Economic Outlook – Mar. 23 at 3:00 p.m. (ET)
- Carta D.C.: Innovator Happy Hour – Mar. 23 at 6:00 p.m. (ET)
- Carta Virtual Event: Keep Calm and Legally Carry On: Insights from Chief Legal Officers – Apr. 4 at 2 p.m. (ET)