Senate initiates funding stopgap as House stalls

Topline

• Senate initiates funding stopgap as House stalls

• Small Business Forum report outlines recommendations to improve capital-raising process

• FDIC proposes new rules for banks working with FinTech companies

• House grills SEC Chair Gensler on approach to digital asset regulation

• Fed lowers interest rates for first time in four years

• Senators push for financial derivatives for small businesses

Senate initiates funding stopgap as House stalls

Shutdown watch continues after the House, as expected, failed to pass Republicans’ six-month stop gap funding measure. The length of the patch was an issue for some, but the bigger hurdle was the inclusion of the controversial SAVE Act, a partisan voting reform bill backed by former President Trump. Speaker Mike Johnson is hesitant to move a clean funding bill without Trump’s blessing, and it’s unclear whether Trump will back down in time to avert a shutdown. Wary of the state of affairs in the House, Majority Leader Chuck Schumer acted on Thursday to begin the procedural process of moving a continuing resolution through the Senate that is expected to extend current funding levels into December.

Bottom line: Neither side wants a shutdown six weeks before election day. Expect Congress to pass a funding patch through December, even if just before the deadline.

Small Business Forum report outlines recommendations to improve capital-raising process

This week, the SEC released a report from its Small Business Forum, which included recommendations to improve access to capital for emerging funds and founders. These recommendations include:

• Expanding qualifying VC investments to include fund-of-fund investments and investments in secondary transactions

• Bolstering and expanding tax incentives that promote equity ownership and drive investment in the startup ecosystem 

• Expanding the accredited investor definition to include additional measures of financial sophistication, including through exams

• Focusing SEC rulemaking efforts on reducing administrative and regulatory burdens on small businesses and their investors

• Providing more resources to help emerging founders and fund managers navigate the regulatory framework

Why it matters: The report noted the top problem facing emerging fund managers is regulatory barriers to entry. The SEC has been increasing its scrutiny of the private markets, with a regulatory agenda that would impose, rather than reduce, regulatory burdens on smaller funds. While the Private Fund Adviser rule was struck down by the court, other anticipated actions to Regulation D and the accredited investor thresholds could increase barriers, reduce access to capital, and limit private market investment opportunities. 

The Forum’s recommendations are not binding on the Commission, but they have served as the basis for capital formation efforts in Congress. Carta submitted a number of recommendations that were included in the report, and we will continue working with Congress and our ecosystem partners to help advance these policies to help emerging funds, founders, and startups continue to build and grow.

Stay tuned: Next week, the Carta Policy Team will be releasing our latest Election Outlook, which will preview how the next administration will approach private market policy and what it means for the ecosystem.

FDIC proposes new rules for banks working with fintech companies

The FDIC proposed a new rule to impose additional recordkeeping requirements on fintechs that store customer funds in bank accounts.  The revisions are driven largely by the collapse of Synapse, whose customers struggled to access their funds as the company’s accounts were frozen due to bankruptcy. The proposal aims to strengthen recordkeeping requirements for accounts held by fintechs on behalf of their customers. One of the provisions of the rule will require banks partnering with fintech firms to identify the beneficial owners of each account and its balance. Further, the proposed rules would allow third parties like Synapse to maintain records as long as they ensure that their bank partners retain unrestricted access to customer data even in the event of a middleman's bankruptcy or insolvency.

Why it matters: This rule, if passed, has the potential to significantly hamper the growing banking-as-a-service sector. Requiring beneficial ownership information will introduce a new, time-intensive compliance burden for banks, which may make them hesitant to partner with fintech firms. 

What’s next: The rule has a 60-day comment window. With the comment period ending right after the election, the rule will not be finalized before a new administration takes over in January. However, regardless of which administration comes into power, we do expect continued scrutiny on the banking-as-a-service sector in the aftermath of the Synapse collapse.

House grills SEC Chair Gensler on approach to digital asset regulation

The House Financial Services Subcommittee held a hearing on the SEC’s approach to regulating digital assets. Republicans criticized the SEC for creating uncertainty and pushing innovation overseas, and also denounced the SEC over its refusal to provide any technical assistance on recent digital asset legislation. Democrats on the committee commended Gensler’s approach to regulating digital assets, noting that investors are best protected under the “long-standing” protections embedded in existing securities law.

The hearing comes amidst a string of digital asset related enforcement actions by the SEC. This week, the SEC charged DeFi platform Rari Capital and its founders with misleading investors and acting as unregistered brokers. This caps off a year with record-breaking fines against crypto-related entities, indicating that the SEC’s strategy of regulation through enforcement is likely to continue. Throughout the hearing, Democrats on the committee cited the rise of enforcement cases brought by the SEC as proof of rampant fraud in the industry. 

What’s next: While there were a series of crypto-related bills tied to the hearing, it is unlikely that any of the bills ( including FIT21) become law this year given the extremely limited time remaining in the 118th Congress and lack of bipartisan agreement. Further, the hearing clarified that the SEC does not appear willing to come to the table to discuss legislative solutions to regulating crypto, and prefers to use enforcement tools to be able to do so. 

Fed lowers interest rates for first time in four years

The Federal Reserve cut interest rates for the first time in four years with an aggressive move that lowers its benchmark rate by a half percentage point. The cut reflects the Fed’s new focus on bolstering the job market, which has shown clear signs of slowing. The Fed’s policymakers also signaled that they expect to cut interest rates by an additional half-point in their final two meetings this year, in November and December. They noted that they envision four more rate cuts in 2025 and two in 2026.

Why it matters: Coming just weeks before the presidential election, the Fed’s move also has the potential to reshape the economic landscape just as Americans prepare to vote. While the Fed is an independent organization, Republicans are pushing back on the timing of slashing rates so close to the election. The economy has been a hit on the Biden administration, and improvements stemming from lowered interest rates could help the Harris ticket.

Senators push for financial derivatives for small businesses

Senators Jeanne Shaheen and Bill Cassidy are proposing a bill to help small businesses manage rising costs by allowing them to purchase energy derivatives contracts through a Small Business Administration (SBA) pilot program. The bill, named the Helping Small Businesses to Hedge Risk and Insure against

Volatile Expenses (Helping Small Businesses THRIVE) Act, would enable small businesses to "lock in" prices for key commodities, similar to how large companies hedge against price volatility. The program would initially cover commodities like gasoline and diesel, with the potential to include electricity, natural gas, and lumber. The bill aims to provide small businesses with tools to compete with larger companies and create jobs, and it is supported by several business advocacy groups. Notably, financial firms are excluded from participating in the program.

News to know

• FDIC’s issues final statement of policy on bank merger transactions (FDIC)

• Newsom says he’s concerned about ‘chilling effect’ of AI bill (Bloomberg)

• SEC adopts rules to amend minimum pricing increments and access fee caps (SEC)

• House Republicans pass anti-ESG bills, teeing up 2025 priorities (Bloomberg)

Upcoming events

• September 24 - Securities Enforcement Forum Central 2024

• September 24 - House Financial Services Committee: Oversight of the Securities and Exchange Commission

• September 25 - House Financial Services Committee: Regulatory Recipe for Economic Uncertainty: The Endless Basel Endgame and an Onslaught of Hurried Rulemaking Undertaken by the Administration

• September 25 - Senate Banking Committee: Oversight of the Securities and Exchange Commission

• September 25 - Senate Finance Committee: Providing Small Business Relief from Remote Sales Tax Collection

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

• September 25 - Carta virtual event: What’s New, What’s Next: Carta Fund Admin in Q3

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