Midterm momentum swings to Republicans
NYC compensation disclosures go live, with employers now required to post salary range for advertised positions
Republicans confront SEC Chair on IG report and SEC recordkeeping failures
Senate Ag Committee appears poised to wade into DeFi regulation
U.S. patent and copyright offices won’t protect AI-generated IP—bipartisan senators urge them to reconsider
Fed raises interest rates, plans to account for cumulative impacts in December
The Federal Reserve increased the target interest rate by 75 basis points to a target range of 3.75-4%, hiking rates for the sixth consecutive time. The Fed signaled it would continue to raise rates, though at a slower pace than its current rate, even if it hits a higher range over time.
The central bank’s public recognition of the ripple effects of tightening monetary policy is unlikely to quell rising concerns with the state of the economy. Sen. Elizabeth Warren and other Democrats pushed Chair Jay Powell to detail the impacts of rising interest rates on employment and its implications across demographics. Meanwhile, the economy added 261,000 jobs in October.
NYC implements compensation transparency
On November 1, New York City began requiring employers with four or more employees to publish a pay range for advertised positions—the role’s minimum and maximum salary or hourly wage at the time of hire. Although states such as Colorado and Nevada have already enacted standards around compensation disclosure, the concentration of employers operating in NYC is likely to drive a larger swath of companies to adopt the practice. The city’s action has also pushed progress in other markets, including California, which just enacted a law that will require companies with more than 15 employees to publish salary ranges with job postings and provide salary ranges to current employees, as well.
Polling favors Republicans to regain the House, Senate control remains in the air
Voters are already casting their ballots for next week’s election, with over 33 million early votes cast as of this writing. The latest FiveThirtyEight projections give Republicans an 85% chance to win the House and a 55% chance to win the Senate majority.
House outlook: The Cook Political Report’s latest update ranks 35 House seats as toss-ups and an additional 29 seats as competitive, though many races are trending Republican and Democrats are expected to face double-digit losses. Republicans must net only five seats to flip the House, though the latest projections anticipate Republicans could end up with a 15-25 seat majority.
Senate outlook: Control of the Senate remains a toss-up, but Republicans have the momentum heading into the elections. Republicans are expected to pick up a Senate seat in Nevada and maintain seats in Wisconsin, Ohio, and North Carolina, which were once considered pickup opportunities for Democrats. Assuming this scenario holds, Republicans only need to win one of the four remaining competitive races to gain a 51-49 majority. Races in Georgia and Pennsylvania are essentially tied, and Republicans are closing the gap against Democratic incumbents in Arizona and New Hampshire. The ultimate outcome, however, may not be decided on Tuesday if neither candidate wins 50% of the vote in Georgia. In this case, a run-off election would be held on December 6.
The outcome of the election will have significant policy implications for capital markets and tax policy. Stay tuned next week for the Carta policy team election postmortem and what it means for policy priorities next Congress.
Republicans press Gensler on IG report, SEC recordkeeping failures, and small business impact
Congressional Republicans are amping up oversight of the SEC and its Chair Gary Gensler. Republican committee leaders Rep. Patrick McHenry and Sen. Pat Toomey and other GOP senators homed in on a recent SEC Inspector General (IG) report that outlined staff discontent and concern with the agency’s aggressive rulemaking process and high levels of staff attrition. Lawmakers are pushing Gensler to respond to criticisms that the agency is rushing to enact too many rules without proper research, analysis, and feedback, which SEC staff has cautioned could lead to increased litigation risk. Gensler has also received criticism for the agency’s failure to consider the impact of its rule proposals on small businesses.
Senior House Republicans also focused on reports that the SEC is not properly recording official business communications that take place via “off-channel” platforms, such as WhatsApp. Lawmakers pointed out the hypocrisy of the SEC’s alleged conduct by referencing the SEC’s recent enforcement actions for similar conduct. Shortly after the letter’s release, Gensler—who previously used his personal email to conduct official business while chair of the Commodity Futures Trading Commission (CFTC)—touted these “high-impact” cases against market participants who failed to uphold their recordkeeping obligations and warned of harsh penalties if regulated entities mismanage employee communications in an enforcement-focused remarks.
Crenshaw defends SEC climate rule
SEC Commissioner Caroline Crenshaw defended the agency’s proposed climate-related disclosures at a European Corporate Governance Institute event. She grounded the proposal in investor demand for information on climate risks, citing the rise in related shareholder proposals and surveys of asset managers and investors. Crenshaw also discussed the SEC’s authority and long-standing rulemaking processes underpinning the proposal, which has been a key criticism of Republican lawmakers and will likely be challenged in court if the proposal is finalized. Pushing back against concerns of mission creep, she said the agency is responding to clear market shifts around climate-related information and bringing uniformity to the myriad of existing voluntary disclosures and commitments.
SEC acts to enhance transparency and improve liquidity risk management for mutual funds
A divided Commission issued a proposal to impose new liquidity risk management requirements on mutual funds, including adopting swing pricing and providing more frequent disclosures around portfolio holdings. The proposed changes are intended to make the mutual funds more resilient in times of market stress and significant redemptions, though critics suggest these changes would fundamentally alter current industry practice at significant costs to investors with no obvious benefit. Republican Commissioner Hester Peirce likened the SEC’s action to a Greek tragedy, noting it will be investors, administrators, and intermediaries who ultimately pay the cost for the Commission’s actions.
The SEC also adopted rules along partisan lines to improve investor transparency around corporate proxy voting. Under the new rules, registered funds—mutual funds and ETFs—and their managers will be required to report on categories of proxy votes cast (including ESG), disclose “say-on-pay” votes, and disclose how securities lending activities impacted proxy voting.
SEC marketing rule compliance begins for SEC-registered private fund advisers
Today (November 4, 2022) marks the compliance date for the SEC’s investment adviser marketing rule. The marketing rule, which was adopted in December 2020, overhauls the previous advertising and cash solicitation rules and expands the definition of advertising, allows for marketing through new channels, and requires enhanced disclosures, specifically around performance. The new rule applies to SEC-registered investment advisers, including SEC-registered private fund advisers. It does not apply to venture capital advisers and other exempt reporting advisers. The SEC previously issued a risk alert noting compliance with the new marketing rule will be a focus area during examinations.
Crypto & digital assets
Senate Ag Committee explores DeFi policy
Leaked drafts of the legislation backed by leadership of the Senate Agriculture Committee, which oversees the CFTC, are stoking industry concerns that an updated draft of the legislation may give the SEC more power in determining a digital asset’s status as a security or commodity, or affect how decentralized finance (DeFi) developers register with the CFTC. Centralized exchanges are created and run by a company that oversees all the transactions and sets the exchange’s rules and fees. Decentralized exchanges, on the other hand, involve automated transactions and trades run by smart contracts on a blockchain that do not rely on a third party intermediary. While the crypto industry’s policy priority has been focused on setting rules for centralized exchanges, like Coinbase, many in the industry are also keen to protect DeFi trading and payment systems, advocating that DeFi services should not have to meet the same standards as their centralized counterparts. As currently drafted, the Senate Ag bill appears to prioritize building customer protections in centralized retail-facing platforms while potentially forcing decentralized exchanges to adhere to the same requirements—flagging concern from industry stakeholders.
Other crypto announcements:
JP Morgan, along with DBS Bank and SBI Digital Asset Holdings, conducted the first live industry pilot cross-currency transaction involving tokenized Japanese yen and Singapore dollar deposits—in an effort to explore DeFi applications in wholesale funding markets.
Fidelity announced they will be launching commission-free crypto trading to retail investors beginning with BTC and ETH.
Goldman Sachs is set to unveil a data service that will classify digital coins and tokens to allow institutional investors to analyze, research, benchmark, and manage investment products based on sectors including DeFi, smart contracts, and other crypto platforms.
Taxation & accounting
Treasury in early stages of implementing the corporate AMT
The 15% book minimum tax (BMT) created by the Inflation Reduction Act is effective for tax years beginning after December 31, 2022; the BMT is an alternative minimum tax applied to companies with adjusted financial statement income above a certain threshold. Stakeholders are urging Treasury to supply immediate guidance as companies struggle to report the impact of the BMT in filings that will need to be disclosed in 2023 Q1 financial statements. Treasury recently shared that the agency’s efforts to implement the policy are still in initial phases. Meanwhile, the SEC’s Investor Advisory Committee (IAC) recommended the creation of an advisory committee dedicated to reviewing the state of U.S. accounting standard-setting practices, as investors have increasingly voiced concerns that accounting standard-setting has not kept pace with the modern evolution of industry and the economy. FASB is a private standard-setting body operated by the Financial Accounting Foundation, but the SEC has ultimate responsibility in this space. A result of the new BMT is that the effect of any accounting standard changes to financial statement reporting may now directly impact taxable income.
Antitrust, privacy, & technology
Bipartisan push for examination of AI and intellectual property laws
The U.S. Copyright Office (USCO) and U.S. Patent and Trademark Office (USPTO) maintain that AI-generated works are not covered by intellectual property (IP) protections due to the algorithmic nature of their inventorship, but Sens. Thom Tillis and Chris Coons are asking the agencies to consider revisiting the scope of IP protections. The duo are requesting that the agencies establish a joint commission to review the state of AI and examine whether existing law should be modified to support AI development; they proposed that the commission be stood up by October 17, 2023, and issue a final report by December 31, 2024. AI-related matters have become increasingly common at USCO and USPTO in recent years, and the latter features an AI hub on its website.
SEC Enforcement Director Gurbir Grewal at Securities Enforcement Forum – Nov. 15
Blockchain Association Policy Summit – Nov. 15-16
FTA Fintech Summit: Shaping the Future of Finance – Nov. 16
SEC Commissioner Hester M. Peirce to participate in Financial Network Analytics: CBDC Broadcast #11 – Nov 17 at 10:00 a.m. ET
Carta live virtual event: How to prepare your fund for tax and audit season – Nov. 17 at 10:00 a.m. PT
Carta Equity Summit 2022 – Dec. 7 at 1:00 p.m. (ET)
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