Carta joins push for FinCEN clarity on corporate transparency rules

Topline: 

• Carta and 19 CTA coalition members author letter to FinCEN

• Grayscale wins case against SEC in fight for Bitcoin ETF

• IRS issues long-awaited reporting guidance for digital-asset brokers

• Bank regulators raise the bar on capital requirements

Carta and 19 CTA coalition members author letter to FinCEN

Carta and 19 co-signatories are urging the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), in its final rulemaking for implementation of the Corporate Transparency Act (CTA), to include methods for startups, small businesses, and other covered entities to easily submit required information. 

The coalition recommends that FinCEN:

• Establishes an appropriate technology-enabled portal for reporting companies and their intermediaries to furnish beneficial ownership information (BOI) to FinCEN,

• Enables batch upload to streamline broad-based compliance and adoption, and

• Provides clarity on the responsibility of reporting companies to comply.

Enacted in 2021, the CTA requires FinCEN to collect BOI from millions of entities. It aims to cover companies that do not have an existing regulatory reporting regime in place with the government. 

In effect, the CTA mandate and its reporting requirements will apply to the startup ecosystem and small businesses (the majority of limited liability companies, partnerships, business trusts, and other non-public corporations) because large and publicly owned companies are exempt from reporting. In some cases, such as with public companies, this is because those companies are already regulated with layers of required government filings. 

The new reporting requirements begin January 1, 2024, and business entities subject to the rules will face significant new reporting and recordkeeping obligations.

The CTA has been the subject of bipartisan scrutiny because of its fast-approaching implementation date and lack of clarity and guidance on the filing process leading up to January 1, 2024. Business, banking, and finance organizations have testified in Congress about their concerns for small businesses. 

Specifically, stakeholders are concerned that FinCEN’s slow rulemaking process does not provide small businesses ample time to understand the rules, nor does it allow third-party providers to offer simple ways for companies to comply.

Bottom line:Carta and coalition partners are working to get clarity on how companies can best comply and how intermediaries can help support broader compliance. The CTA represents a substantial shift in the reporting obligations for companies, especially startups—and companies need to start preparing for those obligations. 

We will continue to monitor Treasury and FinCEN closely for any changes in the coming weeks as we expect the final set of proposed regulations regarding BOI collections to be released this fall.

Read the full issue brief here to learn more about the nuances of the implementation of CTA.

Grayscale wins case against SEC in fight for Bitcoin ETF

This week, a federal appeals court ruled that the SEC must reconsider crypto asset manager Grayscale’s application for the first spot Bitcoin ETF. This ruling serves as yet another setback for the SEC, which was dealt a partial loss last month in its case against Ripple. 

• Circuit Judge Neomi Rao noted that the SEC’s decision to deny Grayscale’s application was “arbitrary and capricious” because the SEC failed to treat “like cases alike” by approving Bitcoin futures ETFs and rejecting spot Bitcoin ETFs.

• The ruling was unanimous in a three-judge panel, which consisted of one judge nominated by a Republican, and two that were nominated by Democrats.

What this means:The decision does not require the SEC to approve the listing of a spot Bitcoin ETF, only that it reconsider Grayscale’s application given the court’s views. The SEC has two realistic options: 

• Reject spot Bitcoin applications on alternate grounds. The SEC could continue to reject spot Bitcoin ETF applications on alternate grounds, but the agency will likely find itself back in court if they do so. 

• Approve a spot Bitcoin ETF. Ultimately, the Grayscale decision will likely pave the way for an eventual spot Bitcoin ETF approval, though the SEC could delay further consideration or action on the pending applications until next year.

Why this matters: The Grayscale decision is the latest blow to the SEC from the judicial system. While the SEC has generally been given deference, courts have pushed back as of late when the SEC has overreached through enforcement. This track record could also bolster challenges to controversial rulemakings—including the recently adopted private fund adviser rules. Expect SEC Chair Gary Gensler to be questioned on these issues when he testifies before the House Financial Services and Senate Banking Committees later this month.

IRS issues long-awaited digital-asset reporting guidance

Last week, the IRS issued proposed regulations that provide new reporting requirements for digital-asset brokers, which included guidance to:

• Increase taxpayer compliance in the digital-asset space by requiring cryptocurrency exchanges like Binance and Coinbase to report certain sales to customers, on a new Form 1099-DA, with respect to digital-asset transactions.

• Implement new broker-to-broker reporting requirements and mandates that business transactions of more than $10,000 in value be reported to the IRS.

What’s next: The crypto industry and House Republicans have already pushed back on the proposed reporting requirements. House Financial Services Committee Chair Patrick McHenry denounced the guidance proposal as “another front in the Biden administration’s ongoing attack on the digital-asset ecosystem.” Written comments regarding the proposed regulations must be submitted by October 30, 2023, and there is likely to be extensive pushback.

Bank regulators raise the bar on capital requirements

The long-term fallout from the collapse of SVB and Signature Bank continued this week with new capital requirements proposed by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency (OCC).

• The proposed rules would require banks with over $100 billion in consolidated assets to maintain a certain level of long-term debt, similar to the requirements already in place for larger banks; prohibit them from engaging in certain activities; and disincentivize holding the long-term debt of other banks.

• The total amount of debt each bank must hold would be determined by the highest of their risk-weighted assets, total assets, or total leverage.

• The FDIC estimates that banks, which would have three years to comply with the new standard if adopted, would need to raise their long-term debt issuance by approximately 25%.

Bottom line:Interested parties can provide feedback on the proposed rule, which has already drawn criticism from some banking groups. Many regional banks would be subject to the proposed standards as well as the changes to “living will” plans that were also proposed at the meeting.

News to know

• FDIC votes to expand board role in sale of large failed banks. Under the new procedure, each board member would be consulted on the sale of a failed bank with more than $50 billion in assets, and if a majority of the board wanted to hold a vote on the deal reached by staff, it would have such a vote.

• HFSC Republicans send letter to Fed on stablecoin regulation. The letter, penned by Chairman McHenry, Rep. Hill, and Rep. Huizenga, claimed that the recent actions by the Fed relating to stablecoins are subverting progress made by Congress to establish a payment stablecoin regulatory regime.

• SEC takes first action against an NFT project as an unregistered security. This week, the SEC charged Impact Theory LLC with an unregistered securities offering through its sale of NFTs, marking the first time that the SEC has brought an enforcement action involving the sale of NFTs as unregistered securities. 

Upcoming events

• Carta Policy Weekly Live – Weekly at 9:00 a.m. PT / 12:00 p.m. ET

• Cato Institute conference: Staying Ahead of the Curve: Crypto Regulation and Competitiveness – September 7 at 6:30 a.m. PT / 9:30 a.m. ET

• House Small Business Economic Growth, Tax and Capital Access Subcommittee: Enabling Success: Examining the Competitive Landscape for Small Businesses – September 13 at 7:00 a.m. PT / 10:00 a.m. ET

• Securities Enforcement Forum Central 2023 – September 19 at 6:30 a.m. PT / 9:30 a.m. ET

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