Policy weekly: SEC’s IAC meeting foreshadows potential private market reforms

The Topline

• IAC panel examines private markets, foreshadows Commission-level activity

• SCOTUS to determine fate of CFPB funding structure

• Republicans’ financial data privacy bill clears committee but faces headwinds

• Congress supports rollback of DOL’s ESG rule, setting up first Biden veto

• Treasury launches CBDC working group

IAC panel examines private markets, foreshadows Commission-level activity

As we previewed last week, the SEC’s Investor Advisory Committee (IAC) met to scrutinize the growth of private markets relative to the public markets. The panelists pointed to the regulatory gap between public and private markets as a significant factor for the decline in public markets, though views on how to close the gap varied. A majority of the panel suggested imposing more disclosures on private offerings and requiring private companies with a large number of stakeholders to become public. However, one panelist (and Commissioner Hester Peirce) suggested the emphasis should be on reassessing the burdens imposed on public companies instead of extending that regime to the private markets. Next week, the House Financial Services Committee will hold a hearing to examine challenges smaller companies face raising capital in the public markets, and we expect proposals to make the public markets more attractive, in addition to expanding access to private market capital, to be considered during a markup later this month. 

Why it matters: Based on recent speeches and the IAC discussion, the SEC is likely to propose private market reforms in the near future. Many of the recommendations discussed at the IAC meeting to narrow the public-private market divide are reflected on the SEC’s rulemaking agenda, and SEC Chair Gary Gensler specifically requested feedback on modifications to Section 12(g) and Regulation D, including potential updates to the accredited investor definition. Commissioner Caroline Crenshaw has also advocated for a private company disclosure regime, in addition to narrowing 12(g). If implemented, such changes would have wide-ranging impacts and significantly impair the ability for startups and funds to raise capital in the private markets, particularly outside the coasts, and force more companies into the public markets at an earlier stage.

SCOTUS to determine fate of CFPB funding structure

The U.S. Supreme Court agreed to consider a 2022 Fifth Circuit decision that held the CFPB’s funding structure is unconstitutional in violation of the appropriations clause. The CFPB receives funding through the Federal Reserve, providing insulation from congressional oversight through the traditional appropriations process. The Fifth Circuit ruled this congressional decision to cede appropriations power violates the Constitution’s separation of powers, which is the foundational issue the Court will consider. Oral arguments are expected this fall as part of the October 2023 term, with a decision in the first half of 2024.

Why it matters: While SCOTUS is unlikely to invalidate the CFPB’s existence, there is a good chance the Court’s conservative majority will hold the agency’s funding structure to be unconstitutional, which would eliminate its financial resources and make it subject to congressional appropriations from a skeptical Republican House. Such a ruling could also expose CFPB rulemaking and enforcement actions to legal challenges grounded in the unconstitutional funding structure under which the agency was operating. This decision will be particularly relevant for the nonbanks and fintechs, as the CFPB has taken the lead in regulating these companies at the federal level. Until SCOTUS decides the fate of CFPB funding, expect more challenges and delays in enforcement actions as courts may be reluctant to move forward without clarity. 

Republicans’ financial data privacy bill clears committee but faces headwinds

The House Financial Services Committee approved Chairman McHenry’s Data Privacy Act legislation along party lines, but its prospects for floor consideration are rocky given Republicans’ slim majority in the chamber. Democrats attempted to remove preemption of state and local privacy laws from the bill and add provisions that would create a private right of action and require express written consent from consumers for certain data collection and sharing arrangements, though these efforts were voted down. 

Why it matters:  Data privacy legislation will need to resolve differences around state preemption and enforcement before it has a path forward, and that will take time. Key states such as California have strict laws in place, and more states are considering privacy bills. The longer Congress waits to finalize legislation, the more difficult the patchwork of state regulation will be to navigate. McHenry has been careful not to infringe on the bipartisan efforts in the House Energy and Commerce Committee that reignited this week, which are broader in scope and build off efforts from last Congress.

Congress supports rollback of DOL’s ESG rule, setting up first Biden veto

This week, the House and Senate used the Congressional Review Act (CRA) to pass a resolution to overturn a Department of Labor rule that allows retirement plan fiduciaries to consider environmental, social and governance (ESG) factors when making certain investment decisions, with several moderate Democrats breaking ranks to vote with Republicans. President Joe Biden reaffirmed ahead of the votes that he would veto the resolution, and lawmakers do not have the necessary two-thirds majority in each chamber to override a presidential veto. Overriding a presidential veto on any CRA resolution is a nearly insurmountable task; the purpose is in part to highlight the continued opposition of Republicans (and some moderate Democrats facing tough reelects in 2024) to the Biden administration’s regulatory agenda.

Why it matters:ESG investing has started to fall out of favor, and asset managers have increasingly come under fire for ESG-focused investment strategies. Expect this issue to remain at the forefront as the SEC continues to pursue rulemakings on climate-related disclosures. The pushback—and expected legal challenges—have reportedly led Chair Gensler to moderate his aggressive first proposal, which would have had downstream impacts on private companies that do business with public companies subject to disclosure requirements. 

Treasury launches CBDC working group

Under Secretary of the Treasury Nellie Liang reiterated that the Federal Reserve would only issue a central bank digital currency with the support of the executive branch and Congress, but the Treasury-led interagency Central Bank Digital Currency (CBDC) working group is developing an initial set of recommendations to inform a path forward if it is deemed in the national interest.” The CBDC would have three core features: (1) it would be legal tender; (2) it would be convertible one-for-one with other forms of central bank money; and (3) it would clear and settle instantly. Policy questions that inform whether to proceed include:

• Global financial leadership: Does a CBDC help preserve the U.S. dollar’s global role?

• National security: Without a CBDC, would the U.S. financial system become less central, diminishing our ability to track, sanction, and deny illicit activity?

• Privacy, illicit finance, and financial inclusion: How could a CBDC promote financial inclusion, as well as protect privacy while minimizing illicit activity?

Why it matters: This is the most concrete step the government has taken toward the possibility of a Fed-issued digital dollar. Though Republicans and industry are skeptical of a CBDC, Under Secretary Liang seems to be messaging national security and economic competitiveness to build the case to move forward.

News to know

• Ways and Means approves oversight plan. The House tax writing committee set its oversight agenda for the upcoming session, which outlines priority issues under each subcommittee’s jurisdiction.

• Wilson sets FTC departure date. FTC Commissioner’s Christine Wilson’s last day at the agency will be March 31, leaving only the agency’s Democrats to vote on rulemakings and enforcement actions.

• President Biden nominates Julie Su for Secretary of the Department of Labor. If confirmed, Su would succeed Marty Walsh as Labor Secretary, though she faced a tough road to confirmation for her current role as Deputy Secretary in 2021.

• CFTC names new Enforcement Director. Ian McGinley, a SDNY veteran, was involved in early cryptocurrency prosecutions, which is expected to be a priority as federal financial regulators continue to crack down on the industry.

• McHenry, Lummis send letter seeking clarity on digital asset accounting regulations. Bicameral legislators assert guidance jeopardizes custodial arrangements for digital assets and asks banking regulators whether SEC consulted with them prior to issuing guidance.

Upcoming events

• SEC Chair Gensler fireside chat at CII Spring Conference – Mar. 6 at 5:15 p.m. (ET)

• SBC hearing: The Semiannual Monetary Policy Report to the Congress – Mar. 7 at 10:00 a.m. (ET)

• SBC hearing: The Federal Debt Limit and its Economic and Financial Consequences – Mar. 7 at 2:30 p.m. (ET)

• HFSC hearing: The Federal Reserve’s Semi-Annual Monetary Report – Mar. 8 at 10:00 a.m. (ET) 

• Senate Ag hearing: Oversight of the Commodity Futures Trading Commission – Mar. 8 at 10:00 a.m. (ET)

• HFSC hearing: Holding the Biden Administration Accountable for Wasteful Spending and Regulatory Overreach – Mar. 8 at 2:00 p.m. (ET)

• HFSC hearing: U.S. Public Markets Built for the 21st Century: Exploring Reforms to Make Our Public Markets Attractive for Small and Emerging Companies Raising Capital– Mar. 9 at 10:00 a.m. (ET) 

• HFSC hearing: Consumer Financial Protection Bureau: Ripe for Reform – Mar. 9 at 10:00 a.m. (ET)

HFSC hearing: Coincidence or Coordinated? The Administration’s Attack on the Digital Asset Ecosystem – Mar. 9 at 2:00 p.m. (ET)

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