Senate working group outlines priorities on AI regulation

Topline

• SEC, FinCEN propose new AML requirements for investment advisers

• Carta CEO visits DC to meet with policymakers and stakeholders

• Bipartisan Senate working group releases AI policy guidance

• Innovation Coalition engages on tax policy priorities

• Supreme Court upholds funding for Consumer Financial Protection Bureau

• HFSC advances SEC reform package

SEC, FinCEN propose new AML requirements for investment advisers

The SEC and Financial Crimes Enforcement Network (FinCEN) proposed a joint rule that would impose new anti-money laundering standards on venture capital and private equity fund advisers. These efforts are part of a broader effort by the Treasury Department to crack down on illicit finance, which includes closing perceived gaps in the anti-money laundering and countering the financing of terrorism (AML/CFT) program. 

• The proposed rule would require registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish, document, and maintain written customer identification programs (CIPs). This would require advisers to implement reasonable procedures to identify and verify the identity of each customer and maintain records of the information used to verify. 

• Notably for private funds, the proposal suggests the rule would only apply to the private fund itself as the direct customer of the fund manager, as opposed to the fund investors (though this interpretation seems to be at odds with the broader goal of preventing bad actors from accessing the U.S. financial system).

• The CIP proposal complements a recent FinCEN proposal that would subject private fund advisers to the AML/CFT requirements under the Bank Secrecy Act.

Why it matters: Many private fund managers have some AML/KYC protocols in place, but the application of a formal regulatory regime with prescriptive requirements and recordkeeping obligations will impose significant compliance obligations, particularly for smaller private fund managers who lack the scale and resources of their larger counterparts. The SEC will be responsible for examining for compliance with the new illicit financing rules, which will subject venture capital funds to another level of regulatory scrutiny that the industry has not historically experienced.

In other SEC rulemaking news:

• New consumer data protection requirements: The SEC adopted rules that would require financial firms, including registered investment advisers (RIAs), broker-dealers, and transfer agents, to develop incident response programs and customer notification requirements for unauthorized access to or use of customer information.

• Additional feedback needed: Chair Gary Gensler suggested that the agency’s controversial proposal regarding predictive data analytics, the SEC’s so-called artificial intelligence proposal, as well as the custody proposal could be reopened for public comment and potentially modified. Gensler faced significant backlash from industry and policymakers on both sides of the aisle with respect to the breadth and significant costs of the proposals, among other concerns.

• Increasing scrutiny for private credit: Gensler remains focused on the private fund industry, suggesting the growth and leverage of private funds could raise financial stability concerns. Expect SEC scrutiny to increase, particularly with respect to private credit—an issue that has also been top of mind for FSOC.

Carta CEO visits DC to meet with policymakers and stakeholders

This week, Carta CEO Henry Ward came to DC to meet with lawmakers and regulators to discuss the future of the private markets. The Carta team remains engaged with policymakers to shape rulemakings, improve processes, and support our customers, founders, and fund managers by helping them navigate the regulatory landscape. 

Bipartisan Senate working group releases AI policy guidance

The Bipartisan Senate AI Working Group released a roadmap for artificial intelligence policy. The working group was formed last year to help the Senate better understand the AI policy landscape.

Policy priorities highlighted in the roadmap include:

• Increasing funding for AI innovation to propel U.S. leadership in AI, maintain our global competitiveness, and perform cutting-edge AI research and development.

• Ensuring enforcement of existing laws for AI, including ways to address any gaps or unintended harmful bias; prioritizing the development of standards for testing to understand potential AI harms; and developing use case-specific requirements for AI transparency and explainability.

• Determining the impact AI will have on our workforce, including the potential for job displacement and the need to upskill and retrain workers.

• Scoping national security threats, risks, and opportunities for AI.

• Addressing challenges posed by deepfakes to fair elections and nonconsensual images.

• Ensuring universities and smaller companies can leverage AI technology and compete in AI innovation, including through funding for the National AI Research Resource (NAIRR).

What’s next: Schumer hinted legislation may move as soon as this year and plans on engaging with the House on the framework. He noted that the Senate will advance individual provisions as they’re ready, rather than wait for a comprehensive bill to come together. In the meantime, states will continue to push forward with their own AI legislation to fill the gaps evident at the federal level.

Carta hosts virtual roundtable on expiring business tax incentives

Join our expert panelists on Tuesday, June 4 at 10 a.m. PT / 1 p.m. ET for a discussion on the current tax landscape and practical guidance to navigating upcoming changes that will have significant impacts on your business. The panelists will cover:

• An overview of expiring tax incentives and the expected impact on businesses (corporations and pass-throughs)

• Strategies for adapting to the evolving tax landscape and maximizing existing tax benefits

• Pending tax policy issues—and what Carta’s policy team is doing to support the innovation ecosystem

Innovation Coalition engages on tax policy priorities

Carta and its coalition partners submitted a statement for the record to the House Committee on Ways & Means advocating for tax policies to expand the innovation ecosystem, expand employee ownership, and modernize the IRS, including:

• Expanding the qualified small business stock (QSBS) eligibility to more businesses to spur job creation and incentivize long-term investment in startups and small businesses.

• Preserving tax treatment for long-term capital gains and carried interest to incentivize long-term investment in the private market.

• Promoting corporate investment in innovation to restore full R&D expensing costs to boost innovation.

• Aligning taxation to the year that shares are sold to help employees realize the full value of their hard-earned equity, and extending the duration in which former employees can exercise their options following their departure from a company.

• Allowing e-file of section 83(b) elections to ease tax compliance burdens.

What’s next: As 2025 draws near, many important provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire and tax policy will become the focus. Carta and its coalition partners will continue to work to shape tax policies that empower small businesses and strengthen economic competitiveness.

Supreme Court upholds CFPB funding structure 

In a 7-2 decision, the Supreme Court held the CFPB’s funding mechanisms do not violate the Constitution’s Appropriations Clause—a big win for the agency.

• The decision settles a longstanding legal dispute over whether the CFPB’s funding structure—it is funded by the Federal Reserve and not congressional appropriation—was constitutional. Had the Court ruled otherwise, it would have thrown past and future rulemakings, as well as the CFPB’s ongoing operations into question. 

• This ruling was limited to the CFPB’s funding structure, which was directed by Congress, and does not prevent other legal challenges on the CFPB’s various rulemakings, which will continue. And the courts will likely continue to view expansive agency rulemakings with more scrutiny. 

HFSC advances SEC reform package

The House Financial Services Committee advanced the SEC Reform and Restructuring Act, which aims to boost transparency at the agency by increasing congressional oversight and making improvements to the rulemaking process, among other changes.:

• The bill would require the SEC to consider the cumulative impact of each rulemaking, conduct cost-benefit analysis before proposing regulations, and mandate minimum comment periods.

• The bill would also create a public accounting oversight office at the SEC by consolidating the Public Company Accounting Oversight Board with the agency.

What’s next: The SEC reform bill passed along partisan lines, so the prospects of any of these provisions becoming law are dim. But the measures provide signal as to SEC reform priorities Republicans may pursue should there be an administration change after the November elections.

News to know

• Crypto bills to reach the House floor next week. Next week, the full House will vote on the Financial Innovation and Technology for the 21st Century (FIT21) Act, which seeks to establish federal requirements over digital assets, providing the CFTC with new jurisdiction over digital commodities and clarifying the SEC’s jurisdiction over digital assets offered as part of an investment contract, according to the release.

• Senate votes to kill SEC crypto accounting rule. In a 60-38 vote in the Senate, legislation striking down the SEC’s staff accounting bulletin 121, which makes it very expensive for financial institutions to participate in the crypto custody business, has passed.

• Federal court blocks CFPB credit card late fee rule. A federal judge in Texas granted banks’ request for a preliminary injunction blocking the Consumer Financial Protection Bureau’s rule capping credit card late fees from taking effect as scheduled next week.

• FTC’s antitrust case against private equity firm dismissed: A Texas federal district court dismissed an antitrust lawsuit filed by the FTC against Welsh, Carson, Anderson & Stowe, a private equity firm accused of monopolizing the Texas anesthesia market through a series of stealthy acquisitions. However, the case against U.S. Anesthesia Partners, a group established by Welsh Carson that now controls the Houston and Dallas anesthesia markets, is still pending.

• FDIC Chair Gruenberg grilled at oversight hearings on toxic culture at the FDIC. In a series of hearings in front of the House and Senate this week, FDIC Chair Martin Gruenberg was grilled by both Democrats and Republicans on a recent report highlighting findings of a toxic workplace culture at the FDIC, including pervasive instances of sexual harassment and discrimination. 

Upcoming events

• House Ways and Means Tax Subcommittee Field Hearing: Creating More Opportunity and Prosperity in the American Rust Belt - May 20 at 4:00 p.m. ET at the Warner Theatre in Erie, Pennsylvania

• SEC Chair Gensler to speak at the Investment Company Institute 2024 Leadership Summit - May 23 at 5:30 a.m. PT / 8:30 a.m. ET

• Securities Enforcement Forum West 2024 - May 23 at 8:00 a.m. PT / 11:00 a.m. ET

• CFTC Commissioner Commissioner Pham to speak at the Hellenic Capital Market Commission Public Conference at the IOSCO Annual Meeting - May 29 at 5:45 a.m. PT / 8:45 a.m. ET

• OCC to host the Roundtable for Economic Access and Change (Project REACh) Financial Inclusion Summit on May 29-30

• U.S. Department of Treasury: 2024 Conference on Artificial Intelligence & Financial Stability - June 6-7

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