Congress scrutinizes SEC and private markets

Congress scrutinizes SEC and private markets

Author:

The Carta Policy Team

Published date:

March 22, 2024

Topline

Congress finalizing funding bills, but tax deal teeters

A $1.2 trillion deal to fund the remainder of the federal government through the end of the fiscal year is moving through Congress. The bill passed the House primarily with Democratic support and is expected to clear the Senate. The final vote may slip past the Friday midnight deadline, but a short-term lapse would not have a substantive impact on government operations. The deal came together over the opposition of many House Republicans, which could further divide the fractured caucus.

Tax Package: As the funding package came together, the threads of the bipartisan tax deal continued to fray. Senate Democrats initiated a process to consider the package on the floor after the Easter recess despite steadfast opposition from several Republicans. The tax package will need support from at least nine Republican senators to pass, a threshold that will be difficult to reach. If that attempt fails, it is likely that R&D expensing—and the broader package—will likely be shelved until a year-end negotiation.

What’s next: Lawmakers will head into the recess with the government funding debate resolved and an attempt underway to break the stalemate on the tax deal. After their return, however, election politics will creep more heavily into the day-to-day business of Washington, and it will become even harder to forge the bipartisan consensus necessary to pass laws.

Call to action: The Carta team has been closely following the tax package and pushing for the restoration of full R&D expensing. Join the effort by contacting your U.S. senators to let them know that R&D matters to the innovation community.

Download the email template here.

Corporate Transparency Act challenged in Maine

This week, a Maine resident sued the U.S. Department of the Treasury, asserting that the Corporate Transparency Act (CTA) is unconstitutional.

New businesses formed in 2024 are still bound by the CTA and should plan to file with FinCEN until further notice. Businesses should discuss their filing obligations with their legal counsel.

The Carta team has developed a free CTA-compliance tool on our Launch platform, which supplies early-stage founders with free resources to help raise funds and issue equity.

SEC climate rules halted as litigation moves forward

The Fifth Circuit Court of Appeals has stayed the SEC’s climate change disclosure rules for public companies pending further judicial review. The SEC has been challenged in at least nine different actions on both sides of the rule: environmentalists argue the SEC violated procedure by scaling back the rules, while the business community and Republican state attorneys general argue the agency exceeded its authority by mandating disclosures based on climate-specific factors as opposed to materiality-focused standards.

What’s next: The Eighth Circuit Court of Appeals, a more conservative-leaning court, will hear the challenges on a consolidated basis. Reporting obligations under the rules do not begin until 2026. The prospects of litigation and upcoming presidential election will likely cause some companies to take a wait-and-see approach to implementation.

Bigger picture: Challenging your regulator in court was once seen as a last resort, but the financial services industry has increasingly turned to the courts to challenge the SEC on its policy agenda. In addition to the climate disclosure rules, the SEC has been sued to block a number of policy priorities enacted under Chair Gensler, including a successful challenge to the stock buyback rules and pending actions from the private funds industry to vacate the private fund adviser rules and new dealer rule. The crypto industry has sued the agency for failing to engage in rulemaking to provide clarity to the industry. Courts have traditionally been deferential to regulators, though this posture is shifting particularly as agencies have become more active in implementing political policy agendas that were traditionally driven by Congress.

HFSC discusses potential SEC reforms and private market policy priorities

The House Financial Services Committee held a hearing to discuss proposals aimed at reforming the SEC and its rulemaking process. Republicans blasted the SEC’s aggressive agenda and pushed reforms to rein in the regulator, while Democrats defended the agency and pushed policies to increase transparency in the “unregulated” private securities markets. The SEC has a number of items on its regulatory agenda through which it could subject larger private companies to public disclosure requirements, including:

Why it matters: The SEC has increased its scrutiny of private fund advisers and the private markets more broadly. The SEC has imposed new requirements for venture capital and private equity fund advisers that will fundamentally change how the industries operate and are regulated, but there is support from Democratic leaders to go much further. This includes subjecting larger private companies to a public disclosure framework and preventing private companies from raising capital from investors without additional disclosures.

Europe moves first on AI

The European Parliament approved the EU’s AI Act, triggering a series of changes to the continent’s AI landscape that will begin to take effect in May and are set to be fully in effect by 2027. These include:

The statute will also ban a narrow set of AI use cases that pose an “unacceptable risk” and restrict uses focused on sensitive characteristics, like facial recognition.

Why it matters: This is the first major framework for regulating AI, putting Europe ahead of the United States on both AI and privacy. Similar to GDPR, the rules would apply to U.S.-based companies that market or provide AI-based technology in the EU. And like the GDPR, the EU’s AI statute will likely serve as a motivator—or a cautionary tale—for policymakers across the United States.

New from Carta: State of startup compensation, H2 2023

This week, Carta published the biannual “State of Startup Compensation” report, detailing trends from the second half of 2023. Notably, for the first time in at least 5 years, there were more total job departures from companies on Carta than there were total new hires. Some other key takeaways include:

Read the full report here .

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