Post-Chevron world begins to take shape

Author:

The Carta Policy Team

Published date:

July 26, 2024

SEC declines to seek Fifth Circuit review of PFA decision.

Topline

• Harris reshapes presidential race
• SEC declines to seek Fifth Circuit review of PFA decision
• Post- Chevron world begins to take shape
• House convenes hearing on AI in the financial services industry
• FTC launches probe of targeted pricing

Harris reshapes presidential race

President Joe Biden announced he will not seek reelection, concluding more than 50 years of public service to our nation. Vice President Kamala Harris quickly assumed the mantle as party leader and the presumptive Democratic nominee. President Biden endorsed Harris, followed by the overwhelming majority of the party and key donors. Harris then set a blazing fundraising course, raising over $100 million in the day following the announcement. Of the 1.1 million donors, 62% made their first donation of the 2024 cycle, showcasing the appetite among voters for the shift.

Needless to say, this has reset the presidential race.

Before becoming vice president, Harris was elected to the Senate in 2016. A former prosecutor, she previously served as the attorney general of California and San Francisco district attorney.

Here is a snapshot of where she stands on some key issues:

• Taxation. Harris previously called for tax parity between the dividends and capital gains tax rates and ordinary income tax rates. During her 2020 primary campaign, she favored a top corporate tax rate of 35%, which was 7% more than what Biden proposed during the 2020 campaign, and she proposed a financial transactions tax (FTT). The FTT would consist of a 0.2% tax on stock trades, a 0.1% tax on bond trades, and a 0.002% tax on derivative transactions.

• Technology and privacy. Harris is a Bay Area native with ties to the tech industry. She has backed some reforms to the Section 230 immunity shield and worked on legislation to combat human trafficking and the spread of nonconsensual images online. Harris has shied away from questions about breaking up consolidation in big tech, but as CA AG she sued eBay for anti-competitive hiring practices, sued Delta over app-related privacy concerns, and negotiated enhanced data security measures at Google, Amazon, and four other tech giants.

• Artificial intelligence. As vice president, Harris led some of the administration’s internal roundtables and external AI efforts which ultimately resulted in the Executive Order published in October 2023. While these efforts have served as a basic foundation for her viewpoints on AI, Harris has not taken decisive positions on AI thus far.

• Financial services. As AG, Harris battled with banks and mortgage servicers in the wake of the financial crisis. They ultimately paid $18 billion to impacted California consumers as part of a broader settlement. In the Senate, she worked with Elizabeth Warren on a bill to authorize state law enforcement officials to issue subpoenas when investigating bank fraud.

What’s next: The Democratic National Committee is expected to formally nominate Harris and her TBD running mate in early August. Harris has secured support from a majority of delegates formerly pledged to Biden. Without any serious challengers to her presidential bid, the focus has shifted to her potential VP pick, with speculation centering on three governors — Josh Shapiro (PA), Andy Beshear (KY), and Roy Cooper (NC) — and Sen. Mark Kelly (AZ).

Carta Policy Playbook: Election 2024

Policy is infrastructure. From tax reform to private market regulation, the upcoming presidential and congressional elections will influence private market policy outcomes that impact how funds and small businesses operate. Carta’s Policy team and policy leaders will preview how the elections could shape key issues. The discussion will cover:

• Key policy areas to watch in 2025, including tax reform and capital market regulation
• How funds can best navigate the shifting political and policy landscape
• How Carta and other private-market leaders are engaging to drive the policy debate

SEC declines to seek Fifth Circuit review of PFA decision

The SEC declined to ask a broader panel of the Fifth Circuit Court of Appeals to review the decision that struck down the private fund adviser rules. In June, the court overturned the regulation, which would have imposed new disclosure obligations around fund fees, expenses, and performance on private equity and venture capital fund managers, as well as curbed the use of side letters. It did so on the basis that the agency did not have the authority to implement such requirements. The SEC had until July 22 to appeal to the full panel for review.

Why it matters: The SEC’s decision not to appeal the Fifth Circuit’s ruling will trigger an order officially vacating the rules. Further, the Fifth Circuit did not just vacate the PFA rules—it took a sledgehammer to the SEC’s broader authority to regulate private fund advisers. The court’s decision will impact a number of pending rulemaking proposals, including the outsourcing and cybersecurity risk management proposals, making it unlikely these items move forward in the near term without modification. Despite constraints on its rulemaking authority, the agency has robust exam and enforcement levers to oversee private fund advisers. And anecdotally, these efforts have been increasing.

What’s next: The SEC was not expected to appeal to the Fifth Circuit, but it has until September to appeal the decision at the Supreme Court. Given the extent of the Fifth Circuit decision, a case could be made to seek review to curb its impact. But the recent posture toward the administrative state could leave the Commission in a worse position if it were not successful.

Post- Chevron world begins to take shape

The ripple effects of the Supreme Court’s decision to strike down the long-standing Chevron doctrine are being felt across DC and the broader legal ecosystem.

• Texas vs. Pennsylvania: Courts are now the first line of interpreting ambiguous statutes, and they do not always agree. Earlier in July, a federal judge in Texas temporarily halted the FTC’s noncompete ban in the state citing insufficient statutory authority to justify the rulemaking. This week, a federal judge in Pennsylvania took an opposite view of the same statute, stating that no limitations are imposed on the FTC’s rulemaking authority. Both courts will issue final decisions in August, muddying the waters ahead of the noncompete ban’s September 4 effective date.

• Republicans vs. Democrats: Competing legislative proposals set markers for how lawmakers intend to respond to the fall of Chevron. Democrats’ Stop Corporate Capture Act would attempt to revive the Chevron doctrine by giving agencies leeway to issue rules based on a “reasonable interpretation” of statutes. Republicans’ Upholding Standards of Accountability (USA) Act would enhance cost-benefit analysis requirements and require agency heads to testify before issuing a major rule, among other elements.

• Agency views: Republican SEC Commissioner Mark Uyeda, speaking only for himself, outlined his vision for a post-Chevron world, saying agencies will need to be more transparent, conduct additional analysis, and better justify rulemakings. He envisions Congress working more closely with regulators when crafting statutes rather than writing ambiguous statutes for agencies to decipher.

What’s next: The full scope of the decision’s implications is only beginning to play out. The legislative proposals are messaging bills and will not become law this session, but the Courts don’t have the same luxury and are expected to rule sometime in August.

House convenes hearing on AI in the financial services industry

The House Financial Services Committee (HFSC) held a hearing to examine the current use cases of AI in the wake of the recently released bipartisan staff report on AI applications in financial services. Witnesses at the hearing echoed the need for regulatory clarity around AI. There was bipartisan consensus on this point, with members agreeing that the committee needs to examine whether current regulation needs to be further clarified to consider if targeted legislation to close regulatory gaps may be needed. Witnesses also commented that the European approach to AI in financial services was “fairly restrictive” so far.

Why it matters: AI remains a top priority for policymakers, but most agree they should be “right rather than first.” To that end, it still seems unlikely that any AI-related legislation will move before the election. Expect AI policy to be a priority post-November, particularly as more AI firms are establishing themselves in Washington in order to gear up for major policy fights in 2025.

Carta releases H1 2024 State of startup compensation report

This week, Carta published an update on the state of startup compensation from the first half of 2024. Key takeaways include:

• Salary and equity held steady: The average amounts of both salary and fully diluted equity issued to new employees have been largely unchanged since last September. The market seems to have landed on a new normal for equity packages, which had previously declined sharply in late 2022 and 2023.

• Hiring hasn’t picked back up: There were fewer new hires this January than in any of the previous four Januaries. The same was true for this February, this March, and this April. In part due to lower hiring, total net headcount on Carta has remained flat.

• Companies raising cash are leaner: Startups that closed seed funding in H1 had an average of 5.3 employees, down from 6.9 in H1 2021. Series A startups have averaged 15.6 employees so far this year, compared to 17.6 in H1 2021. At most stages, successful fundraising teams have been smaller.

FTC launches probe of targeted pricing

The Federal Trade Commission (FTC) is examining third-party intermediaries’ use of new technologies and consumer information to set targeted—and potentially higher—prices. The agency aims to draw conclusions about the impacts of “surveillance pricing” on consumers. The initial targets of the examination all advertise their use of AI and other technologies in conjunction with customer information to calculate personalized pricing.

• The FTC is seeking information in four areas related to surveillance pricing products and services: (1) the types and uses of what the company has produced, developed, or licensed to a third party; (2) the data sources and data collection practices used for each; (3) the customers they were offered to and their intended use; and (4) the potential impacts they had on surveilled consumers and the prices consumers were charged.

• The orders were sent to Mastercard, Revionics, Bloomreach, JPMorgan Chase, Task Software, PROS, Accenture, and McKinsey & Co.

• The FTC is pursuing this effort under its wide-ranging 6(b) authority, but it tethered the orders to its broader work “documenting and investigating the hidden ecosystem of data brokers, digital platforms, and other intermediaries that specialize in monitoring and selling user data.” The focus on consumer data was likely a driver in the unanimous (5-0) vote to issue the orders.

Why it matters: This exercise centers on the companies’ collection of consumer data and whether that information is then being used to raise prices for a specific consumer. A seller altering prices based on the buyer has occurred for millennia, but the degree of consumer information amassed by companies today is unprecedented. Zooming out, this is part of the broader drip of federal activity on consumer data protections as efforts to establish a national benchmark remain stalled in Congress.

News to know

• Stabenow eyes July 31 crypto markup (Politico)
• Federal banking agencies request additional information on bank-fintech arrangements (FDIC)
• House leaves town until September with little to show voters (NBC News)
• FDIC vice chair says bank capital plan needs more unified effort (Bloomberg)
• Senate to take up social media bills (ABC News)
• SEC hands down final green-light for new crypto products (Politico)
• California top court upholds ballot measure treating Uber, Lyft drivers as independent contractors(Reuters)
• Judge stays DOL’s Retirement Security Rule (Plan Adviser)

Upcoming events

• July 30 - SEC event: Small Business Capital Formation Advisory Committee meeting
• July 30 - Senate Banking Committee hearing: Banning Noncompete Agreements: Benefits for Workers, Businesses, and the Economy
• July 30 - Senate Finance Committee hearing: Tax Tools for Local Economic Development
• July 31 - Carta event: Policy Playbook: How the 2024 Election Could Shape Private Market Policy
• Aug. 1 - U.S. Economic Development Administration: National Advisory Council on Innovation and Entrepreneurship meeting