Congress leaves Washington with a full agenda for 2024

Topline

• Congress leaves Washington with a full agenda for 2024

• House Judiciary Committee subpoenas investment managers in ESG probe

• FASB issues new standards for crypto accounting

As we come up on the end of the year, we want to thank you for your readership and support. The Carta Policy Team appreciates your interest, engagement, and input. We will be taking a break through the end of the year, but returning in January. We hope you all get some much deserved rest and have a great holiday season. We’ll be back in the new year.  

Congress leaves Washington with a full agenda for 2024

Congress will return in the new year needing to fund the government, and will likely be focused on additional macro matters such as immigration policy and funding for Israel and Ukraine. In addition, below  are some key priorities that we expect in the new year:

• Capital formation: HFSC Chairman Patrick McHenry is expected to pursue an aggressive legislative and oversight agenda in the new year. A key priority for McHenry has been capital formation, and the committee has advanced a number of proposals to increase access to capital and investment opportunities, including:

• Accredited investor: Expanding onramps to qualify as accredited investor, including through a testing mechanism and other qualifications.

• Retail access to private funds: Increasing SEC-established caps to allow closed-end funds (which are accessible to all investors) to invest in more private market assets.

• DEAL Act: Expanding the ability for VC funds to make fund-of-fund and secondary investments, which could help drive more capital to emerging managers..

• Qualifying venture capital funds: Increases the utility of qualifying venture capital funds by increasing investor limits and how much capital can be raised.   

McHenry’s retirement announcement and his reputation as a dealmaker could provide an opportunity for these priorities to advance, though navigating policy differences and political dynamics will be a challenge in the Senate.

• Crypto: Creating a regulatory framework for digital assets and stablecoins is also a top priority for Chairman McHenry. Others are pushing for stronger anti-money laundering safeguards for the industry. The most viable path for crypto policy is attaching any bill to broader must-pass legislation like the upcoming government funding bill or the farm bill. Legislative efforts will likely bolster the CFTC’s authority to regulate crypto, as the agency has been perceived as more constructive in engaging with the industry than the SEC, which has formally denied a petition for rulemaking to create a digital asset regulatory framework. Achieving legislative consensus, however, will still be challenging, and the regulators and courts will be responsible for shaping digital asset regulation in the meantime. 

• Tax: With hopes for a year-end tax bill extinguished, tax writers are shifting focus to next year. Government funding extensions and other priority legislation set to expire in early 2024 have become targets for carrying extensions of key provisions from the Tax Cuts and Jobs Act (TCJA). Top negotiators from the House and Senate tax writing committees are also beginning work on a tax-specific package for release in late 2024 or early 2025, as the deal will take months to craft. Carta is exploring every opportunity to enable permanent e-filing for 83(b) elections and to expand the scope of businesses eligible for the QSBS incentive.

• China. The bipartisan China Select Committee released its report this week. While the recommendations are not binding, they are expected to form the basis of legislative efforts next year. The report’s recommendations are broadly focused on three priorities: 

  • Reforming existing laws, bilateral agreements and federal regulations that form the United States’ present economic relationship with China; 

  • Expanding the U.S. export control regime and policies impacting sensitive technology research and development (R&D) 

  • Strengthening the United States’ domestic research capabilities and joint partnerships with U.S. allies to catalyze growth in critical and emerging tech sectors. 

Outbound investment also remains both a priority for the committee and a point of contention with HFSC Chairman McHenry. 

SEC small business advocate report

This week, the SEC’s Office of the Advocate for Small Business Capital Formation released its 2023 Annual Report, which provides a detailed overview of the current state of small business capital formation and provides policy recommendations to help address challenges. Notably, the report cautioned against anticipated SEC rulemaking that would increase Form D notice and disclosure burdens and raised concerns about increasing the accredited investor financial thresholds and the impact on women and diverse populations, particularly in rural areas. The report also made the following recommendations:

• Expand the accredited investor definition to include additional pathways to demonstrate financial sophistication

• Increase offering limits and allow funds to use Regulation Crowdfunding

• Classifying fund-of-fund investments as qualifying investments for VC funds

• Increase the 100 beneficial owner limit for section 3(c)(1) funds and increase the size and offering limits for qualifying venture capital funds

• Provide more tools and educational resources to help entrepreneurs navigate the capital-raising process

Why it matters: The SEC is not required to act on these recommendations, but they could help inform and potentially blunt some more of the more problematic aspects on agenda. These recommendations can provide a basis for proposals in Congress and help drive bipartisan action, and a number of these recommendations align with capital formation priorities Chairman McHenry is looking to advance.

Judiciary Committee subpoenas investment managers on ESG

Following up on information requests sent to Vanguard and Arjuna Capital in July, the House Judiciary Committee has now issued subpoenas to both in connection with its investigation into whether the promotion of environmental, social, and governance (ESG) goals violates antitrust laws. 

• House Republicans have ramped up scrutiny of ESG issues broadly this session, and the committee is reportedly finalizing subpoenas for BlackRock Inc., Glass Lewis, State Street, and Institutional Shareholder Services as its probe proceeds.

FASB issues standards for crypto accounting 

This week, the Financial Accounting Standards Board (FASB) published an Accounting Standards Update intended to improve the accounting and disclosure of certain crypto assets. 

• The amendments in the update improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period, with changes in fair value recognized in net income. 

• The amendments improve investor disclosures by requiring disclosure about significant crypto holdings, contractual sale restrictions, and changes during the reporting period.

FSOC flags AI in annual report

The Financial Stability Oversight Council (FSOC) released its 2023 annual report, and, for the first time, identified the use of AI in financial services as a vulnerability in the financial system. Notably, the report defines AI in a broad manner,  as the ability of machines to conduct tasks that were previously thought to require human intelligence.

The report acknowledges the efficiencies of using AI tools in the financial services sector, but focuses primarily on the potential risks: 

• Systemic risks — cyber and model risks

• Consumer risks — bias and disparate impact

• Compelling, but erroneous outputs

What’s next: FSOC recommends financial institutions deepen expertise and capacity to monitor AI innovation and usage and identify emerging risks.  

News to know

• FBI issues guidance to companies on SEC cyber incident reporting. The guidance outlines the process for companies to request a cyber incident reporting delay for national security or public safety reasons. The SEC’s cybersecurity disclosure requirements go into effect for public companies on Dec. 18, 2023, and the SEC is expected to adopt cyber reporting rules for broker-dealers and investment advisers in the near term. 

• IRS announces new leadership structure. The new organizational structure will feature a single deputy IRS Commissioner, instead of two. Four new IRS chief positions will oversee taxpayer service, tax compliance, information technology, and operations. The changes will streamline operational efficiencies and align with major transformation work underway at the agency through the Inflation Reduction Act funding.

• FASB issues new standards surrounding income tax disclosures. The Financial Accounting Standards Board issued an Accounting Standards Update that addresses requests for improved income tax disclosures from investors, lenders, creditors, and other allocators of capital that use the financial statements to make capital allocation decisions.

• SEC probes investment advisers’ use of AI. The SEC’s examinations division has sent requests for information on AI-related topics to several investment advisers, part of a process known as a sweep. The agency wants details on topics including AI-related marketing documents, algorithmic models used to manage client portfolios, third-party providers, and compliance training.

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