Policy Newsletter

House elects a new—and relatively unknown—speaker

October 27, 2023
The Carta Policy Team

Topline

  • House elects a new—and relatively unknown—speaker   

  • SEC outlines enforcement posture and maintains aggressive stance on crypto

  • Proposed H-1B visa program changes would ease path for immigrant entrepreneurship

  • IRS to clarify R&D amortization on software

House elects a new – and relatively unknown – speaker

After three weeks of infighting and three failed bids, House Republicans united to elect a new speaker: Rep. Mike Johnson of Louisiana. If you’d never heard of him before this week, you’re not alone. Johnson, a constitutional lawyer who was elected to Congress in 2016 previously served as head of the conservative Republican Study Committee, but has little leadership experience. Johnson’s resume is especially slim on tax and financial services experience, so expect him to give a lot of deference to the respective committees of jurisdiction to drive policy in these areas (though neither subject was referenced in a memo outlining priorities to members, which largely focuses on federal spending).

What’s next: House Republicans put up an impressively unified front to elect Johnson as speaker, but maintaining that unity among the deeply fractured conference will be a herculean task. Johnson’s fledgling speakership will face two major hurdles out of the gate: Government funding expires on November 17, giving Johnson exactly three weeks to work with other party leaders to avert a shutdown while simultaneously standing up his leadership office. The White House has also requested Congress provide more than $100B in combined aid for Ukraine, Israel, and border security, and members on all sides are divided on these issues. While we expect Johnson to receive a little more grace from conservatives than his predecessor, the honeymoon phase could be brief. 

What to watch:

  • Capital markets policy: With Patrick McHenry back at the helm of the House Financial Services Committee, he is eager to advance his policy priorities, including passing landmark crypto legislation, and will be working to include those in must-pass vehicles like the annual defense bill. Given the divisions on the topic, it seems unlikely at this point, but there could be potential for some compromise as the Senate is also looking to advance crypto anti-money laundering rules.   

  • Tax package: Before he was elected as speaker, Johnson reportedly gave assurances to New York Republicans that any tax bill would need to include increases to the state and local tax (SALT) deduction cap to move forward—a move that conservatives from lower-tax states will likely oppose. However, senior tax writers in the House and Senate doubt that a major tax package can move forward in the midst of current dynamics. 

SEC outlines enforcement posture and maintains aggressive stance on crypto

This week, SEC Chair Gary Gensler and Enforcement Director Gurbir Grewal shared key insights around the agency’s aggressive enforcement efforts. For the fiscal year that ended Sept. 30, the SEC brought 780 actions and obtained $5 billion in monetary sanctions. And there is no intention of easing up on this pace anytime soon despite concerns around resource constraints and “regulation by enforcement.” Here are a few highlights:

  • Accountability: The SEC is not just sanctioning firms; two-thirds of SEC actions last year involved charges against company executives. The Commission has been particularly focused on gatekeepers as of late and has brought charges against accountants and others in “positions of trust,” including in the private funds space.

  • Cooperation and compliance: Gensler and Grewal highlighted the benefits of self-reporting and remediation, highlighting instances where penalties were not imposed or severely reduced. Grewal stressed the importance for firms to look at recent enforcement trends and examination priorities to help evaluate potential compliance failures. 

  • Crypto: Crypto’s arch nemesis described the industry as one rife with “fraud, scams, bankruptcies, and money laundering,” and blamed recent problems in the sector on “noncompliance.” Despite recent setbacks in the courts and scrutiny from Congress, Gensler doubled down that the majority of assets and crypto intermediaries are subject to the securities laws—and the SEC is not afraid to litigate these matters (in an apparent swipe at Coinbase, who just filed its latest brief to dismiss SEC charges). 

Why it matters: As the SEC continues to increase its scrutiny in the private funds space, fund managers and others in the ecosystem should pay attention to recent rulemaking initiatives and related enforcement actions to ensure they have the requisite compliance policies and procedures in place. Private funds also remain a priority for the SEC’s exam division, and we have anecdotally seen an increase in routine exams for venture capital fund managers.

Proposed H-1B visa program changes would ease path for immigrant entrepreneurship

The Biden administration is proposing, for the first time, to allow entrepreneurs to sponsor themselves for an H-1B visa. Prior to this proposal, professionals on H-1B visas were required to be employees rather than owners of a company, which led to individuals not founding a company, giving up control of their company, or moving somewhere else to do it. There were many outspoken critics of the policy, who cited that the policy made the U.S. an inhospitable environment for immigrant entrepreneurs and pushed emerging founders to other countries, such as Canada.

Under the new proposal, entrepreneurs who hold more than half of the equity in their startup can still qualify for and sponsor their own H-1B visa.

Why this matters: Per the National Foundation for American Policy, more than half of the nation’s startups valued at $1 billion or more have been started by immigrants. The proposal recognizes the benefits of attracting and retaining startup founders in the U.S., and takes an important step in making it easier for immigrant entrepreneurs to grow their companies within the U.S. Comments on the proposal are due December 22.

IRS to clarify R&D amortization on software

The Tax Cuts and Jobs Act (TCJA) of 2017 changed R&D by shifting it from an immediate expensing tax regime to one that requires companies to spread deductions for research over five or 15 years. 

  • This change officially took effect for tax year 2022 and both taxpayers and the government have been grappling with the conversion to a new R&D amortization regime.

  • In September, IRS released Notice 2023-63, which provided a preview of upcoming proposed regulations that is expected to include substantive guidance on how software costs should be treated for R&D tax purposes, including guidance that distinguishes between routine maintenance costs versus software upgrades and enhancements.

What’s next: While taxpayers are expecting the next batch of R&D guidance to be released before year end, the Treasury has hinted that the anticipated guidance may be delayed until the spring of 2024. As the development on R&D amortization guidance continues, Congress is considering whether immediate R&D expensing should be restored.

Carta event: The Startup Guide to Taxes: Year-End Strategies for Success

Join the Carta team on November 1 at 10:00 a.m. PT / 1:00 p.m. ET for a webinar on year-end tax strategies, where we’ll delve into recent tax law, as well as policy changes and filing requirements that impact small businesses, their founders, and employees.

Tax event

News to know

  • U.S. picks 31 regional hubs to spur tech innovation. The Biden administration on Monday named 31 U.S. regional technology hubs from 370 applicants, making the areas eligible for $500 million in federal funding to help spur innovation across a variety of sectors. The new program aims to spread the benefits of tech sector growth beyond traditional hubs like Silicon Valley and New York City.

  • Federal Reserve updates anti-redlining rules. Aging rules that implement the Community Reinvestment Act (CRA) were updated this week; the changes expand the application of the rules to online and mobile banking services and broaden the geographic area in which banks must lend. 

  • Gensler hints at pullback on climate disclosure rule. At a Chamber of Commerce event, Gensler indicated that the SEC could scale back its climate disclosure rule due to intense pushback the agency has received over its proposal to make companies report on their supply chain emissions. Staff are working to ensure the rules do not have indirect regulatory impacts on private companies, which the SEC does not regulate.

  • White House indicates DOL proposed fiduciary rule coming soon. The proposed fiduciary rule will likely extend regulatory control over assets rolled out of an employer-sponsored plan into banking and insurance products. The rule is expected to be published as soon as this week, which will trigger the public comment period in the Federal Register, where it is expected that the rule will receive pushback from many on Wall Street.

  • The House Select Committee on the CCP sends letter to Sequoia. The Select Committee on the CCP expanded a bipartisan investigation into U.S. venture capital firms investing in high-tech firms in China by launching an inquiry into Sequoia Capital and Sequoia Capital China, following the announcement that the entities will split in early 2024.

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