The Topline
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Washington prepares for bank oversight hearings
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TikTok faces the music
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SEC signals impending Coinbase action
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SBA hearing focuses on fintech access to SBA lending portal
Washington prepares for bank oversight hearings
Next week, Treasury Under Secretary Nellie Liang, FDIC Chair Martin Gruenberg, and Fed Vice Chair for Supervision Michael Barr will appear before the Senate Banking and House Financial Services Committees on March 28 and 29, respectively. These will be the first in a series of hearings on the recent tremors in the U.S. and international banking systems; officials from the San Francisco Federal Reserve are expected to testify in the coming weeks, and senior leadership from SVB and other banks are also being targeted.
HFSC Chairman Patrick McHenry and other leading policymakers have encouraged fellow lawmakers to understand and investigate the situation prior to proposing solutions and assigning blame, but the posturing has begun Two weeks into the turmoil, here’s where lawmakers are beginning to coalesce on the issues:
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Deposit insurance:Universally guaranteeing deposits over the current cap of $250,000 on FDIC insurance ( broadly or temporarily) has been discussed, but is unlikely to cross the finish line. There has also been bipartisan interest in allowing depositors to pay a fee for additional insurance for deposits over the current $ limit. Treasury Secretary Janet Yellen downplayed the idea of a “blanket” deposit guarantee, but said the U.S. would repeat actions taken to protect bank depositors if small lenders are threatened
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Accounting standards:SVB accounted for many of its Treasury securities in a “held to maturity” portfolio, meaning the bank reflected the value based on their original price or “par,” not the market price, which declined as interest rates rose. When the public learned of the decline in value, it became one of the factors that led to the depositor run. This has ignited a debate on whether securities—and what portion—should be marked to market. Changing the accounting treatment for these securities would be a major shift, and it would also have implications on whether other assets on the balance sheet should be treated similarly, an adjustment banks oppose.
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Enhanced regulation: Both sides agree that banking supervisors failed to appropriately monitor and identify the risks SVB’s practices posed and will push for more oversight. As for the underlying regulatory framework, Democratic proposals to reimplement the components of Dodd-Frank that were rolled back in 2018 and subject critical banking institutions in certain sectors to more supervision are also floating around. Such legislation will create a political fight—including among Democrats—but not advance. The Fed can take unilateral action to implement a stronger regulatory regime for institutions over $100 billion in assets, but do not expect any action until after the Fed issues its SVB report on May 1.
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Executive compensation: Democrats are advocating for Biden-backed reforms to enable expanded clawbacks of executive compensation and pushing the SEC to complete rules around incentive-based compensation arrangements under Section 956 of the Dodd-Frank.
Implications for the venture ecosystem:The collapse of SVB and its ties to the venture community emboldens the SEC’s agenda to enhance the regulation and scrutiny of private markets, particularly with respect to private funds and private fund advisers. The SEC was originally supposed to adopt a current reporting framework for Form PF this week, though it was delayed at the last minute. The SVB fallout has also delayed—and complicated—the path forward on potentially bipartisan congressional proposals to expand investor access and bolster private markets. The House Financial Services Committee was initially expected to conduct a hearing and vote on private markets-focused legislation this month. And based on conversations with policymakers, some prefer to assess how the SVB debate will unfold before driving the capital formation agenda forward. A key factor that drives the policy debate will be whether the blame shifts from this being a banking issue to one that targets the unique nature of SVB’s client segment: venture capital and private companies. A number of emerging narratives criticize venture’s role in the bank collapse, including VCs driving the heavy concentration of high-risk startups by “requiring” their portfolio companies to bank at SVB. And when those same VC firms saw weakness at SVB, they made their companies pull their money.
Carta Policy Briefing: “Navigating the private markets: How venture funds are regulated”
Wednesday, April 5 at 1:00 pm ET/ 10:00 am PT
The Carta Policy Team will discuss private market policies and current events impact venture capital and funds should be thinking about the current regulatory and political landscape, including:
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How current market turmoil will affect the policy agenda for private markets
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How proposals such as the private fund advisor rule will impact funds
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How Congress will respond and what that means for capital formation
Register here.
TikTok faces the music
TikTok CEO Shou Zi Chew appeared before the House Energy and Commerce Committee as pressure increases to ban the popular Chinese-owned social media platform. Members on both sides of the aisle lobbed criticisms on many fronts, with a focus on national security concerns, data privacy, content moderation and child protection. The Trump administration began pushing for a sale of TikTok’s U.S. operations in 2020, and the Biden administration doubled down on a domestic ban in recent weeks. TikTok announced a plan to wall off its U.S. segment from its Chinese parent company, ByteDance, though policymakers dispute the benefits of a separation if the Chinese government would still be able to access data. Ahead of Chew’s congressional testimony, China’s commerce ministry cautioned that it could block TikTok’s planned divestiture as it involves the export of technology, further imperiling the company’s plans.
Why it matters: Chew’s contentious appearance before Congress only strengthened bipartisan concerns around the platform and makes it more likely Congress takes action. This is a rare area where there is general alignment among Democrats, Republicans, and the White House. TikTok is one of many Chinese companies in U.S. markets, and if it is forced to shutter U.S. operations, other companies could face a similar predicament should U.S.-China relations continue to sour. A forced sale could also set a standard of enhanced scrutiny for companies from other countries with which the United States has an adversarial relationship.
SEC signals impending Coinbase action
This week, Coinbase—the largest U.S.-based crypto exchange— disclosed the SEC issued the company a Wells notice, signaling upcoming enforcement actions against the platform’s exchange, staking, and wallet businesses. A Wells notice is typically one of the final steps before the SEC formally issues charges and generally lays out potential violations and offers the opportunity for rebuttal. Such a move, however, is not surprising. Last year, the SEC brought insider trading charges against a former Coinbase manager, under which it declared nine digital tokens that traded on the platform to be securities, though the SEC declined to bring charges against the trading platform—which is not SEC-registered—at that time.
Why it matters:The SEC has been increasingly ramping up its crypto enforcement efforts, but a court has yet to weigh in on the SEC’s authority over crypto products as securities. If the SEC takes action, Coinbase will likely join Ripple, Gemini, and a handful of others who have challenged the SEC’s position. A court decision in any of these matters could have broad implications for the SEC’s ability to continue to aggressively police the industry without additional authorities from Congress, so it’s one to watch.
Next week, SEC Chair Gary Gensler is slated to appear before the House Appropriations Committee next week; expect aggressive questions around the agency’s enforcement-first approach to crypto, in addition to other aspects of his ambitious rulemaking agenda.CFTC Chair Rostin Behnam is also on the docket and is expected to continue to push for more authority and resources to monitor the crypto industry.
SBA hearing focuses on fintech access to SBA lending portal
This week, Small Business Administration Administrator Isabella Gusman defended proposed rules around the 7(a) lending program that would allow fintech participation, highlighting research into the benefits of fintech lenders for individuals in banking deserts. Democrats supported expanding the program to enable broader participation by both lenders and borrowers, while some Republicans expressed caution that fintech participation would compromise the integrity of the program.
Why it matters: The SBA’s 7(a) program is the most common loan program for small businesses. With traditional bank lending to small businesses declining, the SBA’s recent proposal to create a pathway for nonbanks to participate could enhance small business access to capital. With credit markets tightening, particularly with the fallout from SVB, access to capital for startups will be even more important.
News to know
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White House report casts doubt on utility of crypto. The latest Economic Report of the President claims crypto assets fail to offer any widespread economic benefits, such as improved efficiencies or increased financial inclusion. Instead, it characterizes the assets as largely speculative, many having “no fundamental value.” The SEC also issued an investor alert around crypto asset securities.
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SEC proposes expanded electronic filing requirements. Broker-dealers and certain other entities would be required to make electronic filings through the EDGAR system using structured data, where appropriate.
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FTC releases negative options proposal.The Federal Trade Commission published a proposed rule to make it easier for consumers to cancel memberships and subscriptions.
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IRS issues tax guidance around NFTs. The IRS will treat non-fungible tokens (NFTs) as collectibles, implying less favorable treatment under capital gains tax rules.
Upcoming events
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Senate Banking Committee Hearing: Recent Bank Failures and the Federal Regulatory Response – Mar. 28 at 10:00 a.m. ET
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House Small Business Subcommittee on Economic Growth, Tax, and Capital Access Hearing: The End of Relationship Banking? Examining the CFPB’s ‘Small Business Lending Data Collection’ – Mar. 28 at 10:00 a.m. ET
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House Appropriations Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Hearing: Fiscal Year 2024 Request for the Commodity Futures Trading Commission – Mar. 28 at 1:00 p.m. ET
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House Financial Services Committee Hearing: The Federal Regulators’ Response to Recent Bank Failures – Mar. 29 at 10:00 a.m. ET
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House Appropriations Subcommittee on Financial Services and General Government Hearing: Fiscal Year 2024 Request for the U.S. Securities and Exchange Commission – Mar. 29 at 2:30 p.m. ET
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Carta Virtual Event: Keep Calm and Legally Carry On: Insights from Chief Legal Officers – Apr. 4 at 2 p.m. (ET)