AI’s inflection point and what it means for policy

Topline

• Bessent doubles down on growth agenda in FSOC testimony

• AI’s inflection point and shifting policy posture

• SEC signals engagement-first approach to AI for funds

• Quick hits

Bessent doubles down on growth agenda in FSOC testimony

Treasury Secretary Scott Bessent testified before the House Financial Services and Senate Banking Committees on the Financial Stability Oversight Council’s (FSOC) 2025 annual report. Bessent framed economic growth as the foundation for financial stability, criticizing the “regulatory reflex” of the prior administration that prioritized climate, reputational, and hypothetical systemic risks over safety and soundness, which crowded out innovation and growth. Across both hearings, Bessent defended the administration’s deregulatory posture while highlighting capital formation, AI adoption, and digital asset policy as central pillars of Treasury’s agenda. Here are some key takeaways:

• Access to capital: Bessent emphasized that over-regulation has increased the cost of capital and constrained lending activity, particularly for community banks and smaller borrowers, arguing that modernized regulatory frameworks and tailored supervisory expectations are needed to reduce compliance burdens, lower financing costs, and expand access to credit for underserved businesses and Main Street borrowers. Bessent expressed support for the House-passed bipartisan capital formation package—the INVEST Act, noting its reforms are vital to maintaining U.S. economic leadership.

• AI posture: Bessent outlined a pro-innovation AI framework, centered around a new FSOC working group tasked with identifying regulatory hurdles to AI adoption in compliance, fraud detection, and risk management, and strengthening public-private partnerships to enhance system resilience. He expressed support for time-limited AI sandboxes that would allow firms to test emerging tools under supervisory oversight without immediate enforcement risk. 

• Crypto leadership: Bessent framed dollar-backed stablecoins as a strategic tool to reinforce U.S. financial dominance, arguing a clear federal framework could preempt the rise of foreign central bank digital currencies and gold-backed assets from competitors like China. Bessent warned that without market structure legislation, the U.S. risks ceding its first-mover advantage in the next generation of finance.

Why it matters: Bessent’s testimony underscores capital formation, innovation, and digital asset leadership as core tenets of U.S. economic competitiveness—and they are all dominating the congressional agenda. For the private capital ecosystem, passage of the INVEST Act would meaningfully expand access to capital for emerging fund managers and founders and create investment opportunities for more Americans. Bessent’s support—and the broader administration’s alignment—could create traction in the Senate as policymakers consider next steps. Continued engagement from the innovation ecosystem will also be critical to sustain momentum and ensure these priorities make it across the finish line. 

What’s next: Paul Atkins will make his debut as SEC Chairman before the banking committee this week. Expect a similar slate of issues—capital formation, AI, crypto, regulatory modernization—but with more actionable detail, as Atkins can speak directly to how these priorities will be implemented by the SEC, where many of the administration’s market structure and capital formation initiatives will ultimately be executed.

AI’s inflection point and shifting policy posture

Last week, public markets experienced a sharp, tech-led selloff catalyzed by AI product releases and skepticism around the scale of AI infrastructure spending. While the Dow rebounded to record highs on Friday, the volatility underscores how quickly AI can reprice risk. For policymakers and investors, it could serve as a warning shot about the potential speed and magnitude of AI-driven disruption. Here’s what to watch:

• AI policy landscape: At the federal level, the AI policy is anchored by the administration’s AI Action Plan, which emphasizes reduced regulatory barriers to accelerate innovation and maintain U.S. leadership. The administration has pushed for a pause or moratorium on state AI laws to prevent fragmentation and compliance burdens that could hinder innovation. However, recent market volatility and growing concerns about job displacement may complicate that approach, as a tech-forward AI posture increasingly clashes with Trump’s populist base and broader affordability narrative. GOP leadership has started preliminary bipartisan outreach on a potential federal framework. At the same time, states may be more emboldened to accelerate AI legislative efforts. For example, Republican Gov. Ron DeSantis has publicly criticized the federal government’s stance on AI as favoring large AI companies while undermining state autonomy and is pushing for an AI bill of rights.

• Private capital implications: PE and VC funds may need to revisit their underwriting assumptions and projected growth in a world where AI is reshaping the competition faster than financial models previously assumed. The risk is more acute for private credit, where software debt showed signs of stress even before the selloff. As AI exerts pricing power and raises operating costs, SaaS companies may face pressure to demonstrate credible AI integration and durable economics or face valuation compression and tougher fundraising conditions. 

• AI washing and disclosure risk: Regulators may increase scrutiny over how AI capabilities are marketed to investors and customers. This is an area where regulators can act quickly using existing authority, and both the SEC and FTC have signaled growing attention to exaggerated or misleading AI claims and disclosures. 

Why it matters: AI firms are demonstrating unprecedented access to capital, cultural influence, and political reach, reshaping the conversation around who sets the rules of the road and what those rules should be. Near-term responses at the federal level are more likely to come through oversight, data requests, and guidance rather than sweeping new legislation. In the absence of federal action, state regulations–particularly those adopted in California, New York, and Colorado–will become the de facto policy shaping AI deployment and compliance.

SEC signals engagement-first approach to AI for funds

Brian Daly, the SEC’s Director of Investment Management, outlined a forward-looking, engagement-oriented approach to the agency’s AI adoption. Daly emphasized that AI offers a meaningful opportunity to modernize investment management by improving disclosures, operational efficiency, and investor engagement. But there are a number of unresolved regulatory questions, including when AI outputs constitute investment advice or marketing and how liability and supervision should function in an AI-enabled environment. He urged firms to engage constructively with the agency through pilots, no-action requests, and early dialogue rather than waiting for the slow rulemaking process.

Commissioner Hester Peirce also echoed a similar sentiment, framing AI as a tool to augment human judgment and encouraging experimentation and engagement within the SEC’s existing frameworks. Peirce signaled that the agency may favor interpretive guidance and dialogue over rigid new rules, encouraging firms to shape policy through participation rather than avoidance.

Why it matters: The SEC has come a long way from the Gensler-era predictive data analytics proposal from the Gensler era, signaling a more pragmatic posture that prioritizes industry engagement to help shape guidance around rapidly evolving AI tools as opposed to top-down rulemaking or enforcement-first approaches. As this dialogue continues, private funds should remain mindful that existing anti-fraud and disclosure obligations apply regardless of the technology used, and begin formalizing AI governance policies to ensure these emerging tools are deployed consistently with compliance expectations.

Quick hits

• SEC soliciting policy recommendations for 45th Annual SEC Small Business Forum. The 45th Annual SEC Small Business Forum is back with opportunities to improve capital formation for public and private startups, small companies, and their investors. Members of the public can propose and vote for policy recommendations, which will be reported directly to Congress. Several bipartisan efforts originate from the innovation suggested in this forum. You can submit your policy recommendations by 12:00 p.m. ET on March 5.

• Fed considers “skinny” accounts. The Fed is considering a proposal to offer limited-purpose master accounts that would allow fintech and crypto firms to access the Fed’s payment systems directly without traditional bank partnerships. Banking trade groups have sharply opposed the measure, warning the move could accelerate deposit flight, enable regulatory arbitrage, and introduce anti-money laundering and financial stability risks by extending Fed access to less supervised entities. Crypto and fintech firms support the concept, arguing direct access would modernize payments infrastructure and reduce systemic chokepoints, though they have criticized the Fed’s proposed balance caps as too restrictive to support large-scale payment or settlement operations. The public comment period closed last Friday, but whether–and how–the Fed moves forward will likely be determined by Fed Chair-nominee Kevin Warsh, if confirmed, who has a mixed stance on digital assets.

• Small Business Administration updates 7(a) program. The SBA issued new policy guidance requiring 100% of business owners to be U.S. citizens or nationals to qualify for its 7(a) loan program. Under the new policy set to take effect March 1, businesses with any ownership stake held by green card holders or other legal permanent residents would no longer be eligible for the SBA lending program. SBA has framed the change as a way to prioritize access to taxpayer-backed capital for American citizens, while industry groups are warning the move could narrow access to credit, particularly for immigrant-founded businesses that have historically relied on SBA programs for early financing.

• SDNY signals heightened scrutiny of prediction markets. Manhattan U.S. Attorney Jay Clayton expects enforcement actions against prediction markets, warning bets placed outside traditional exchanges “doesn't insulate you from fraud,” citing concerns about certain contracts functioning as unregistered securities. The scrutiny follows fear of market manipulation, including six-figure trade profits from geopolitical events. The CFTC is also crafting new rules, signaling a coordinated effort to reduce legal uncertainty for market participants, and that prediction markets will be treated as legitimate derivatives subject to oversight.

Upcoming events

• Carta Event: The 2026 Comp Playbook: Precision Budgeting, AI Skills, and Data-Driven Hiring - February 10 at 10:00 a.m. PT/1:00 p.m. ET

• House Financial Services Committee Hearing: Oversight of the Securities and Exchange Commission - February 11 at 7:00 a.m. PT/10:00 a.m. ET

• Senate Banking Committee Hearing: Oversight of the U.S. Securities and Exchange Commission - February 12 at 7:00 a.m. PT/10:00 a.m. ET

• SEC Small Business Advisory Committee: Regulatory Framework for Finders - February 24 at 7:00 a.m. PT/10:00 a.m. ET

• 45th Annual SEC Small Business Forum: March 9 at 1:00 p.m. - 5:00 p.m. ET/10:00 a.m. - 2:00 p.m. PT
  

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