Harris, Trump compete for startups, corporates, and investors

Topline

• Harris, Trump expand on their economic plans as presidential race tightens

• FinCEN finalizes rules to impose AML requirements on private fund managers

• SEC abandons PFA rule, but scrutiny to continue

• SEC advances rulemakings, enforcement actions with private market implications 

• California AI bill sent to governor’s desk

Harris, Trump expand on their economic plans as presidential race tightens

Vice President Kamala Harris expanded on her economic platform, proposing plans to support entrepreneurs through an expanded $50,000 tax deduction to help small businesses cover startup costs, along with a new standard deduction for smaller firms. Harris is positioning herself as more business-friendly than the current administration: She broke with President Biden’s current proposal to tax capital gains at ordinary income rates for households earning over $1 million and has instead floated a smaller increase to maintain investment incentives. 

Former President Donald Trump also sharpened his economic policy pitch at the Economic Club in New York, proposing to cut the corporate tax rate to 15%, expand R&D and manufacturing tax incentives, and establish a government efficiency commission aimed at eliminating fraud.

Coming attractions: Election day is two months away. Polling shows Harris narrowing or eliminating Trump’s lead in key battleground states. The candidates are scheduled to debate on September 10, and Congress will be focused on preventing a pre-election government funding lapse when it returns from August recess next week—both of which could further shake up what has already been an unprecedented election cycle. 

How to keep up: Carta is continuing to map out what the upcoming elections mean for the industry’s top issues.  Tax policy will be a centerpiece of the 119th Congress regardless of its makeup. What will tax policy mean for the innovation economy?

[Read the Carta team’s latest tax election outlook here]

FinCEN finalizes rules to impose AML requirements on private fund managers

The Financial Crimes Enforcement Network (FinCEN) finalized new rules to apply anti-money laundering/countering the financing of terrorism (AML/CFT) requirements to investment advisers, including private equity and venture capital fund advisers. The rule aims to address illicit financing threats involving investment advisers and counter concerns that venture capital funds have been a haven for illicit proceeds and are used by foreign actors to access critical technologies.

The SEC will be responsible for examining compliance with the new requirements, which include: 

• AML/CFT program: Funds must develop and implement a risk-based AML/CFT program, which includes internal controls and policies, a designated AML officer, compliance staffing and training, routine independent audits, and ongoing customer due diligence

• SARs: Funds must file suspicious activity reports (SARs) with FinCEN for suspicious transactions over $5,000

• Recordkeeping with respect to the transmittal of funds

• Other compliance obligations under the Bank Secrecy Act (BSA) that apply to financial institutions

Why it matters: Many funds have AML protocols in place; however, this formal regulatory regime will shift the standard, imposing significant compliance obligations particularly for smaller private fund managers. Exempt reporting advisers (ERAs), who are currently not subject to these types of regulatory obligations and exam scrutiny, will be subject to the same requirements of larger, well-resourced SEC-registered investment advisers (RIAs), creating a disproportionate compliance cost and burden. These rules are scheduled to take effect January 1, 2026.

Private Fund Adviser rules officially dead, but scrutiny likely to continue

The SEC declined to petition the Supreme Court to review the Fifth Circuit decision that struck down the private fund adviser rules, officially marking the end of the litigation and cementing a major win for the industry. 

What this means: Venture capital and private equity fund managers will not have to comply with the rule’s requirements to prepare and distribute prescriptive quarterly statements and disclose side letter terms (among others). However, the SEC has robust exam and enforcement levers to oversee PE and VC fund managers, and the agency has identified specific areas of focus that were the foundation for the rules as exam priorities, including private fund fees and expenses, disclosures, valuations, and offsets. Expect scrutiny around these areas, as well as broader compliance obligations, to continue.

Broader impacts: The Fifth Circuit did not just vacate the PFA rules—it took a sledgehammer to the SEC’s broader authority to regulate private fund advisers. The court’s decision will impact a number of pending rulemaking proposals, including the outsourcing and cybersecurity risk management proposals, which makes it unlikely these items move forward in the near term without modification. Existing rules that impose disclosure requirements on private fund advisers, such as the marketing rule, could also come under fire. These proposals and rules were all promulgated using the same legal authority justification used for the private fund adviser rules. The impact of the Fifth Circuit decision, as well as Loper Bright, on the SEC’s agenda will undoubtedly be an area of focus as SEC Chair Gensler is expected to testify before Congress later this month.

SEC advances rulemakings, enforcement actions with private market implications 

The SEC kept busy in August, advancing a number of rulemakings and ramping up enforcement. 

Rulemaking: On the rulemaking front, the agency:

• Finalized two PCAOB proposals that revise audit standards and lowers the auditor liability threshold from “reckless” to “negligence,” which heightens risks for auditors but aligns with practices at the SEC and certain states.

• Updated the definition of qualifying venture capital funds, expanding the exemption by raising the dollar threshold from $10 million to $12 million. The agency also established a procedure for imposing routine inflation adjustments every subsequent five years.

• Proposed rules, in concert with other financial regulators, to create uniform data collection standards as required by the Financial Data Transparency Act.

Enforcement: The agency has continued its crackdown on crypto. Recent enforcement efforts have also targeted investment advisers on various compliance failures related to off-channel communications, custody obligations, and mishandling of material nonpublic information. 

California AI bill sent to governor’s desk

Last week, the California State Assembly passed SB 1047 (the Safe and Secure Innovation for Frontier Artificial Intelligence Models Act) in a bipartisan 49-15 vote. The question is whether Governor Gavin Newsom will sign it.

The bill mandates specific safety testing for AI models that cost more than $100 million in computing power to train and that use a specific, high level of computing power. If they fail to implement safety testing, they will be held liable if their AI system leads to a “ mass casualty event” or causes more than $500 million in damages, whether in a single incident or across a set of closely linked incidents. Notably, as of September 2024, there are no AI models that exceed the threshold for required safety training. 

The political landscape: Critics have argued that SB 1047 is overly focused on catastrophic harms and could unduly harm small, open-source AI developers. The bill was amended in response, replacing potential criminal penalties with civil ones and narrowing enforcement powers granted to California’s attorney general.

In response to the amendments, several AI companies and executives have emerged with cautious support of the bill, including Anthropic and Elon Musk. The bill still largely remains opposed by venture capital firms and larger tech companies, including Meta and OpenAI. 

What’s next: Governor Newsom has until September 30 to sign SB 1047 into law or veto it, and he has not yet provided any public feedback on the bill or indicated if he intends to sign it. If Newsom does sign the bill into law, the majority of the requirements will come into effect in 2026, although the first compliance deadline will be January 1, 2025, which will require tech companies to submit safety reports for their AI models and allow California’s attorney general to request an injunctive order, requiring an AI company to stop training or operating their AI models if a court finds them to be dangerous.

Tune into Policy Live on September 13

Carta Policy Insights: QSBS

The Qualified Small Business Stock (QSBS) tax exclusion drives innovation and the industries of tomorrow, which creates jobs, economic growth, and maintains U.S. competitive edge. The August edition of Carta Policy Insights highlights QSBS its crucial role in powering the innovation economy by driving investment and talent into venture-backed startups.

News to know

• Federal judge strikes down FTC’s ban on noncompete agreements (Federal News Network)

• US requests trade dispute consultations with Canada over new digital services tax (Reuters)

• DeFi firm Uniswap Labs to pay $175,000 in CFTC settlement (CFTC)

• The regulatory state is in flux like never before, and businesses are hating it (WSJ)

• US SEC abandons in-house malpractice suits after Supreme Court ruling (Reuters)

Upcoming events

• September 10 - House Financial Services Committee: Decoding DeFi: Breaking Down the Future of Decentralized Finance

• September 10 - House Financial Services Committee: The Fall of ESG: Scrutinizing the Failed Use of Environmental, Social, and Governance Standards and the Influence of Proxy Advisors

• September 10 - SEC Chair Gensler will deliver remarks at the Peterson Institute for International Economics

• September 11 - House Financial Services Committee: Transparency in Global Governance

• September 12 - Carta virtual event: VC Fund Performance: New Benchmarks for 2024

• September 13 - Carta Policy Live

• September 24 - Securities Enforcement Forum Central 2024

• September 25 - Carta virtual event: The Startup Guide to UK Fundraising: EIS and SEIS