Congress averts shutdown—but stalemate in the House continues

Topline

• Contentious negotiation on government funding could continue in January

• Bank regulators testify in front of Congress as OCC issues guidance for banks for venture lending

• CFPB seeks to expand jurisdiction to digital payments

• FSOC revamps nonbank SIFI designation guidance

• New compliance obligations for private fund RIAs take effect

• IRS releases new inflation-adjusted income tax brackets for 2024

We will not be sending out a Carta Policy Newsletter next week in observance of Thanksgiving. We hope you are all able to take some time and enjoy the holiday. As always, thank you for reading.

Congress averts shutdown—but stalemate in the House continues 

On Thursday, Congress approved a spending bill to fund the government through early next year, averting a government shutdown. While bipartisan, Republicans splintered on the vote, with far-right members opposing the measure, setting up another contentious negotiation on government funding in January.

What’s next: While the government shutdown was averted, Congress still remains in a stalemate—and now will be forced to find a lasting solution to the government funding problem, as Speaker Johnson asserts that he will not support any further stopgap funding measures. In the meantime, legislating will be hard. With government funding deadlines being punted to 2024, there is no forcing mechanism to advance an end-of-year tax package or other policy priorities. 

Bank regulators testify in front of Congress as OCC issues guidance for banks for venture lending

Federal banking regulators testified before Congress this week and were asked about the proposed plans to hike U.S. bank capital requirements and the recent allegations of a toxic workplace culture at the FDIC, among other items. There has been bipartisan pushback on the plans to raise the capital requirements for banks, with a number of members raising concerns on the impact to small business lending.

In another potential blow to small business lending, the OCC recently released guidance regarding venture loans intended to address the heightened risk that comes with lending to emerging growth companies. Due to the high probability of failure for new businesses, the guidance recommends that banks institute clear and comprehensive loan policies for venture lending that address underwriting standards, credit risk management, and ongoing monitoring of venture loans. 

Why it matters: In the wake of SVB and other recent bank failures, there is increasing pressure on banks to assess borrowers’ ability to repay their loans in a timely manner. This heightened scrutiny will likely result in tighter lending conditions for startups and venture funds.

CFPB seeks to expand jurisdiction to digital payments

Last week, the Consumer Financial Protection Bureau (CFPB) proposed a rule to supervise larger nonbank companies that offer services like digital wallets and payment apps. 

The proposed rule would make nonbank financial companies—specifically those larger companies handling more than five million transactions per year—adhere to the same rules as large banks, credit unions, and other financial institutions already supervised by the CFPB. If finalized, the proposal would cover about 17 companies that together send more than 13 billion payments annually.

Why it matters: Proponents of fintechs argue that the rule will impede innovation in the payments space and could have downstream impacts on consumers and ultimately limit the ability of nonbanks to provide necessary services that consumers and small businesses rely on. The rule appears to be in line with the continued expansion of CFPB’s authority as it further wades into the intersection of technology and more traditional financial services. Big banks are defending their territory and have expressed support for the rule, saying that if it “walks like a bank and talks like a bank, regulate it like a bank.” Comments on the proposal will be due on January 9 and can be submitted via the Federal Register.

FSOC revamps nonbank SIFI designation guidance

The Financial Stability Oversight Council voted unanimously to revise the process for determining whether to classify a nonbank financial company as a "systemically important financial institution" (SIFI) and subject it to the Federal Reserve’s supervision and prudential standards.

• The new guidance makes three major changes: (1) it removes the “activities-based” approach to identifying risk, (2) eliminates the previously required cost-benefit analysis and assessment of a company’s potential to experience material financial distress, and (3) creates a new non-binding “analytic framework for financial stability risks.”

Why it matters: The FSOC’s shift away from an activities-based process will lead to more scrutiny of individual nonbank financial institutions, which means hedge funds and large asset managers could potentially be subject to Fed oversight and heightened capital and liquidity requirements. Lawmakers are also pushing for FSOC to have a larger role in responding to risks posed by artificial intelligence. While the new guidance enables FSOC to pursue SIFI designations more quickly, a SIFI designation is still a complex and time-consuming process. 

New compliance obligations for private fund RIAs take effect

As part of the private fund adviser rules, the SEC adopted compliance rule amendments that would require all SEC-registered investment advisers (RIAs)—not just those to private funds—to review annually and document in writing the adequacy of their compliance policies and procedures. These requirements became effective November 13, 2023.

• RIAs are already required to review their compliance programs on an annual basis. Under the new rules, RIAs will also need to document these annual reviews in writing and provide to the SEC upon request. 

• The SEC does not prescribe a format or enumerate specific requirements that must be included in the written documentation, but reviews and accompanying documentation should consider compliance matters that arose during the year, changes in business activities or practices, and any additional regulatory changes that may warrant updates to the applicable policies and procedures. 

Why it matters: SEC examiners will increasingly look to these written documentations to evaluate the adequacy of adviser compliance programs. Expect more scrutiny, particularly as new compliance obligations like those in the private fund adviser rules come online.

IRS releases new inflation-adjusted income tax brackets for 2024

Each year, the IRS makes adjustments to income tax brackets, as well as adjustments to over 60 different tax provisions. For tax year 2024, the IRS announced that it will be widening income tax brackets—a change that will help tamp down the impacts of inflation for many Americans. These new amounts will impact tax returns filed in 2025. 

• Standard deduction increase: The standard deduction will increase by $750 for single filers, $1,500 for married filing jointly (MFJ), $750 for married filing separately (MFS), and $1,100 for head of household filers. 

• Income tax bracket widening: There are seven federal marginal tax rates that apply to ranges of income, which for tax year 2024 have been broadened to the following amounts:

  • 35% for incomes over $243,725 for single filers ($487,450 MFJ)

  • 32% for incomes over $191,950 for single filers ($383,900 MFJ)

  • 24% for incomes over $100,525 for single filers ($201,050 MFJ)

  • 22% for incomes over $47,150 for single filers ($94,300 MFJ)

  • 12% for incomes over $11,600 for single filers ($23,200 MFJ)

  • 10% for incomes of $11,600 or less for single filers ($23,200 MFJ)

For comparison:

• A single filer with income of $100,000 would be taxed $14,260 in 2023 (taxable income of $86,150 after the standard deduction). The same single filer with income of $100,000 would be taxed $10,146 in 2024 (taxable income of $85,400 after the increased standard deduction).

• A married couple filing jointly with combined income of $200,000 would be taxed $28,521 in 2023 (taxable income of $172,300 after the standard deduction). The same married couple filing jointly with income of $200,000 would be taxed $20,291 in 2024 (taxable income of $170,800 after the standard deduction).

News to know

• Lawmakers seek revisions to tax treatment of digital assets. House Financial Services Chairman Patrick McHenry and Rep. Ritchie Torres asked the Treasury Department to revise its proposed treatment of digital assets for tax reporting purposes. The duo asked for a longer comment period and a more tailored definition of “broker,” among other concerns.

• Bipartisan group of Senators introduces bill to require private investment funds to disclose any assets invested in adversarial countries. The legislation would require private investment funds to annually disclose to the SEC any assets invested in countries like China and require the SEC to publicly release a report of firms investing assets in countries of concern and the percentage of those invested assets. Further, entities selling stock in the private markets would also be required to disclose the recipient of the investment, the intended location of the investment, and the investment’s intended purpose.

• House spotlight on DOJ’s Antitrust Division. Jonathan Kanter, head of the Department of Justice’s Antitrust Division, was on Capitol Hill for an appearance before the House Judiciary Committee. Lawmakers grilled Kanter on the agency’s draft merger guidelines and resource needs, but his frequent partnerships with FTC Chair Lina Khan and their joint scrutiny of private equity firms were not discussed at length.

• A bipartisan group of House members push back on foreign tax credits. In July, Treasury announced it was giving taxpayers a two-year reprieve from the foreign tax regulations, which were finalized at the beginning of last year, until the end of December. In a letter, eight lawmakers asked for additional reprieve since taxpayers are already or will soon start filing fiscal year 2024 quarterly financial statements.

• GAO predicts confusion with $600 threshold for 1099-K reporting. The lower reporting threshold for Form 1099-K that begins in 2023 is likely to “exacerbate confusion” among newly impacted taxpayers, according to a report from the Government Accountability Office (GAO). The IRS expects to receive about 44 million Form 1099-Ks in 2024, up from roughly 14 million in 2023.

Upcoming events

• SEC Small Business Capital Formation Advisory Committee Meeting - November 29 at 7:00 a.m. PT / 10:00 a.m. ET

• Carta event: Founder Q&A: A Conversation With Poppy Flowers - November 29 at 1:00 p.m. PT / 4:00 p.m. ET

• CFTC Commissioner Kristin Johnson to present at the Financial Times Crypto and Digital Assets Summit - December 5 at 4:35 a.m. PT / 7:35 a.m. ET

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