Policy Newsletter

Carta Policy: Weekly Brief for June 17

16 June 2022
The Carta Policy Team

Executive summary

  • Senate confirms two new SEC Commissioners; SEC seeks comment on regulatory framework for information providers

  • Congressional leadership narrows negotiation parameters on U.S. competition bill, aiming to pass a bill by August.  

  • IRS signals it will examine and propose regs to limit basis-shifting between related parties

  • CFPB shifts away from product-specific sandbox approach and encourages formal rulemaking petitions

Macro matters

Congressional agenda

Policymakers reached a framework agreement for gun safety and continue to process nominations, with SEC nominees Jaime Lizárraga and Mark Uyeda being confirmed yesterday. Negotiators are working on legislation for U.S. competitiveness, Build Back Better, and government funding. Casting a shadow over all of that, however, is the declining economic data and rising inflation.

Faced with further inflation, FOMC approves 0.75 percentage point interest rate hike

Inflation rose to a 40-year high of 8.6% last week, with consumer sentiment at a record low. In response, the Federal Open Markets Committee raised the target federal funds rate 75 bps this week, the largest single increase since 1994 and a shift from the previously telegraphed 50 bps increase. The message: the Federal Reserve will stamp out inflation even if it increases the economic contraction. 

COMPETES conference continues chipping away

Congressional leadership is narrowing negotiations on the final Bipartisan Innovation Act. Negotiators will limit discussions to where there is legitimate deal space between the House and Senate bills. This could benefit our efforts to eliminate a last-minute House provision that would direct the SEC to rewrite certain private market offerings. We expect the core of funding for semiconductors and research to remain, and a narrowing of the outbound investment screening provision, which deals with the U.S. government’s ability to limit U.S. investment abroad to “countries of concern.”  It is increasingly unlikely that policymakers will add a tax section, which could include an expansion of the R&D tax treatment and many other tax provisions. Negotiators want an agreement by the July 4th break, and floor action by August break. Possible, but still hard. 

Capital markets

SEC requests comment on application of investment adviser framework to information providers

This week, the SEC issued a request for comment on whether certain information providers, including index providers and pricing service providers, should be subject to the investment adviser regulatory framework. With the increase in passive investing, the influence of information providers has grown significantly in the asset management space. There are questions on whether this influence and decision-making discretion constitutes investment advice rather than just the provision of information. The SEC is considering whether and how the investment adviser framework should apply in the context of index providers, which would give the SEC direct regulatory oversight over those entities. The comment period is open for 60 days following publication or 30 after publication in the Federal Register. 

Senators push back on SEC climate proposal; agency uses enforcement to achieve its climate objectives

Senate Banking Committee Republicans continue to push back on SEC Chair Gary Gensler and the agency’s climate change disclosure proposal as unnecessary, outside of the SEC’s jurisdiction, and harmful to the economy and consumers who are facing skyrocketing energy prices. In a letter, the senators requested clarifications on the SEC’s cost-benefit analysis and posed questions about potential coordination and communication with other federal agencies and climate activists, among others. The comment period for the proposal closes today, June 17. 

Outside the rulemaking space, the SEC is continuing its scrutiny of ESG disclosures. The SEC is reportedly investigating Goldman Sachs over funds that purport to focus on clean-energy or have ESG in their names. The Commission recently proposed rules to target “greenwashing” in funds, though it is clear it will continue using its investigation and enforcement tools as a means to achieve its ESG priorities before final rules are implemented.

Cryptocurrency

State of crypto markets may impact path toward regulatory clarity

Decentralized finance and digital assets remain under pressure, with the once $3 trillion market falling to under $1 trillion. While crypto markets are still reeling from the collapse of the so-called stablecoin TerraUSD, crypto lender Celsius suspended withdrawals due to extreme market volatility. The price of Bitcoin is around $20,000, down about 70% from its all-time high in November. Many big players in the industry are announcing hefty layoffs. Given the current state of the markets, many in the industry are fearful of regulatory backlash, particularly in the crypto lending space.

Legislative proposals escalate the crypto debate

In Congress, a number of legislative efforts are underway to create a regulatory framework for digital assets. Most of these efforts, including the Lummis-Gillibrand proposal we highlighted last week, would give the CFTC primary jurisdiction over most of the crypto markets—a move the CFTC chair advocated, and which has the support of many in the industry. Such efforts, however, have been criticized by investor advocates and SEC Chair Gensler, who has aggressively asserted the agency’s jurisdiction. When asked about legislative proposals this week, Gensler suggested certain legislative efforts in Congress could create regulatory loopholes and undermine the regulation of the broader capital markets. The latest market volatility may bolster the SEC’s position and the arguments of crypto skeptics, leading to a tougher regulatory crackdown. 

SEC Commissioner Hester Peirce, on the other hand, expressed frustration in remarks this week with the SEC’s refusal to “engage productively” with the crypto industry and characterized the agency’s approach as confusing, unhelpful, and inconsistent. She specifically called on the SEC to embark on a more productive path to regulate crypto instead of building a regulatory framework through one-off enforcement actions. Peirce listed a number of ways to engage, including through joint roundtables and workstreams with the CFTC. She also called for the Commission to stop categorically denying spot market Bitcoin exchange-traded products.

Retirement investment in crypto comes under more scrutiny 

Efforts to offer Bitcoin as an investment option for retirement plans came under more scrutiny this week. The Department of Labor is looking at potential rulemaking that would address whether cryptocurrencies are appropriate investments for retirement accounts. The DOL has been critical of the decision of Fidelity Investments—the country’s largest retirement plan administrator—to move forward with making Bitcoin an investment option for 401(k) plan sponsors. Fidelity’s decision came after guidance from the DOL cautioning plan fiduciaries against adding crypto to investment menus and threatening scrutiny and “investigative programs” for doing so. House Ways and Means Committee Chairman Richard Neal has requested the Government Accountability Office (GAO) assess the use of retirement accounts to invest in cryptocurrencies given their volatility and limited oversight. Current legislative proposals would provide clarity for plan fiduciaries to invest in alternative assets, including crypto, though such efforts are not likely to be successful this Congress, especially in light of current market conditions.

Banking & financial Products

CFPB not interested in playing in product sandbox

The Consumer Financial Protection Bureau (CFPB) recently shifted its posture on incubating company-specific innovative products through its product sandbox and related no-action relief, instead pushing companies towards formal rulemaking petitions to provide any needed clarity on underlying regulations. This shift reflects the CFPB’s broader restructuring of its newly-named Office of Competition and Innovation. Although the CFPB notes its sandbox is still accepting applications, it has yet to grant any no-action relief under Director Chopra.

Taxation

An IRS official confirmed that auditors have uncovered several cases involving tax basis shifting between related parties, which include transactions between immediate family members; an individual who owns more than 50% of a corporation’s stock; grantors; and beneficiaries of trusts, among others. Auditors have uncovered, in some cases, up to $5 billion of basis shifted in a single transaction without paying tax, thus drawing heightened IRS scrutiny to tax free step-ups in basis. While legislation has been introduced aimed to curtail this practice, it is unlikely to move forward. We should expect to see the IRS pursue regulation that mitigates related-party activities and transactions involving tax-free step-ups in basis. 

Finance committee examines 2018 SCOTUS case

In June 2018, the U.S. Supreme Court ruled on South Dakota v. Wayfair,deciding that states can mandate that businesses without a physical presence in a state may collect and remit sales taxes on transactions in the state. In the ensuing years, businesses have altered operations and taken steps to comply with the new requirements. A Senate Finance Committee hearing highlighted a recent GAO study showing that businesses have incurred disproportionate costs in order to keep up with software, auditing, and research and liability associated with the multistate sales tax rules, with some businesses incurring liabilities because they couldn’t comply with requirements. Legislation to address these burdens is unlikely to pass this year, but budding bipartisan interest may set the foundation for the next Congress. 

Antitrust, privacy, and technology

Bipartisan privacy bill garners attention, but uphill battle

The House Energy and Commerce Committee convened a hearing on bipartisan privacy legislation, the American Data Privacy and Protection Act, which includes a federal preemption with exceptions for certain categories of state laws and a limited private right of action that does not permit statutory damages. The bill is unlikely to be enacted into law given Senate Commerce Chair Maria Cantwell is withholding support and that some in industry are opposed, but the bipartisan agreement on preemption and private right of action—the two issues that have always impeded progress—will be the new starting ground for future efforts in the next Congress. 

Upcoming events

 

Notable SEC proposed rules and comment deadlines

*60-days after publication in the Federal Register, which has not occurred

 

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