During the presidential campaign last year, Democrats released a platform that promised to scrap Trump administration investment advice regulation and Democratic presidential nominee Joe Biden proposed a litany of tax increases on the wealthy.
Biden prevailed, and when two Democrats won runoff Senate elections earlier this month, it ensured Democratic control of the U.S. House of Representatives, Senate and White House. But that doesn’t mean that financial advisers should expect dramatic changes in investment-advice or tax policy because the narrow Democratic margins in the House and Senate could rein in Biden’s agenda.
The Democratic majority in the 50-50 Senate rests on the tie-breaking vote of Vice President Kamala Harris, and the party has only a 222-212 advantage in the House. Those numbers leave almost no margin for error if Democrats want to pass legislation by a simple majority through what is known as the budget reconciliation process.
The reconciliation option can only be used once — sometimes twice a year — and all the items in the measure must be related to taxes and spending.
The biggest obstacle to legislation will be the Senate filibuster, which can only be overcome with 60 or more votes. There doesn’t appear to be enough of an appetite among Democrats to end the parliamentary maneuver. With the filibuster remaining in place, at least a few, if not several, Republicans will have to join Democrats to approve bills.
A Democratic majority in the Senate gave Biden more latitude in choosing a Securities and Exchange Commission chairman because confirmation votes only need a simple majority. He will nominate Gary Gensler, a former Commodity Futures Trading Commission and Goldman Sachs executive, to head the SEC. Gensler draws wide praise from investor advocates, but he may not come into the role with guns blazing to undo Regulation Best Interest. It’s also unclear how high on his priority list Secretary of Labor nominee Marty Walsh will put a revision of the fiduciary rule the Trump DOL finalized late last year.
It all adds up to a continuation of the uncertainty that advisers — and the rest of the country — have been living with for many years when it comes to governance.
“There is an overestimation of how much can be done in this environment,” said Michael Townsend, vice president of legislative and regulatory affairs at Charles Schwab & Co. “We just won’t have Democratic unanimity on any number of issues. You have to have every Democratic senator on board, even if you’re going to use the budget reconciliation process.”
Don’t look for any kind of major change in adviser oversight coming from Capitol Hill.
“There are not 60 votes to pass any new grand financial regulatory scheme,” said Brian Gardner, chief Washington political strategist at Stifel Financial.
The Democratic majority in the Senate also gives the party control of committees. Sen. Sherrod Brown, D-Ohio and the new chairman of the Senate Banking Committee, is a vocal opponent of Reg BI. He told former SEC Chairman Jay Clayton in a December hearing that the regulation “doesn’t put mom-and-pop customers first.”
Now that he heads the banking panel, Brown can set the agenda. It’s likely he’ll continue to press the SEC to put more teeth into Reg BI.
But legislation that would do so has a tough road ahead. Opposition could come not just from Republicans but also potentially from Democratic moderates such as Sens. Joe Manchin, D-W.Va., and Jon Tester, D-Mont., who resisted the Obama administration’s DOL fiduciary rule.
“Moderates on both sides of the aisle are going to wield enormous influence,” said Neil Simon, vice president of government relations at the Investment Adviser Association.
Barbara Roper, director of investor protection at the Consumer Federation of America, said there are “significant limits” on what can be accomplished legislatively to reform investment-advice standards. That’s why she is recommending a targeted approach. Moderate Democratic senators may not be inclined to overhaul Reg BI or prescribe significant changes to the Trump administration’s DOL fiduciary rule.
What might happen is this: A Democratic-majority SEC revises Reg BI to define “best interest” and toughen conflict mitigation requirements. Then Democratic lawmakers might be persuaded to tweak the DOL fiduciary rule to harmonize it with the tougher Reg BI.
Under this scenario, Congress would clarify that recommendations to roll over assets from a company retirement plan to an individual retirement account should be held to a fiduciary standard. “I don’t think you should start from scratch,” Roper said. “There’s a possibility that if you adopt this approach that you could get legislation passed that would close loopholes in the definition of fiduciary advice.”
For the most part, the insurance industry backs the Trump administration DOL fiduciary rule. But because it hasn’t yet gone into effect, the new Biden DOL can delay the measure and then propose changes.
“We’re certainly optimistic the posture of the new administration will be toward constructive engagement and a willingness to hear all sides of an issue,” said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute.
Although legislation on investment advice standards faces a long slog, tax policy could be fast-tracked thanks to the budget reconciliation procedure. Even though Democrats could pass such a bill on their own, they would need to hold all 50 of their Senate colleagues together, which could be a herculean task.
That could make any potential provision in a reconciliation bill — from an increase in personal or capital gains rates to changes surrounding gift and estate taxes — a jump ball.
“It’s too early to project tax policy,” said Joe Growney, a partner at the law firm Lathrop GPM. “There are still obstacles Biden and Democrats will have to overcome when dealing with such a narrow majority.”
That again puts Democrats in the middle, such as Manchin, in the driver’s seat. He could be lobbied for support from both parties.
“If I’m the GOP, I’m looking at Joe Manchin,” Growney said. Manchin could be a deal maker or deal breaker along the lines of “a swing vote on the Supreme Court. We could see that in a 50-50 Senate.”
Lobbying around a budget reconciliation bill will be fierce, as various interest groups try to secure provisions. For instance, trade associations representing investment advisers are trying to restore and expand a tax break for advisory fees. “We will be a loud voice in that discussion, but we will be one of many voices,” the Investment Adviser Association’s Simon said.
Capital gains, estate, financial transactions and wealth taxes are among the least likely to land in a reconciliation bill.
“Those are longer shots in this narrow [political] divide,” said Schwab’s Townsend.
Another area that could be divisive is climate change. During his campaign, Biden stressed the need to address environmental degradation. In a Jan. 12 letter to his Senate colleagues, Majority Leader Charles Schumer, D-N.Y., promised the chamber would "consider bold legislation to defeat the climate crisis."
“Initiatives having an environmental focus are probably the most likely of all ESG initiatives to secure the approval of all 50 [Democratic] senators and Vice President Harris,” said Gwen Williamson, a partner at the law firm Perkins Coie. But Republicans can tend to be climate-change skeptics and are likely to question ESG legislation.
As the new Congress and administration get underway, the area that is most promising for bipartisan cooperation is retirement savings.
The SECURE Act passed with overwhelming majorities in late 2019. Successor legislation to continue to expand workplace savings plans and increase the amount of money people can put away for retirement are poised for re-introduction early this year.
Those measures include a House bill written by the leaders of the House Ways and Means Committee Chairman Richard Neal, D-Mass., and ranking member Kevin Brady, R-Texas; as well as, a Senate bill written by Sens. Rob Portman, R-Ohio, and Ben Cardin, D-Md. Another measure was written by Sens. Chuck Grassley, R-La., Maggie Hassan, D-N.H., and James Lankford, R-Okla.
“Retirement security has had and continues to have the bipartisan support to advance legislation in the Senate,” said Paul Richman, IRI chief government and political affairs officer. “These three bills are going to be the foundation of the next retirement security legislation that’s going to be passed by Congress and signed into law by President Biden.”
But most issues will face uncertainty and a difficult political terrain in Washington. Landmark legislation and fundamental policy changes may be few and far between — if they’re achieved at all.
“I don't think it's going to be sweeping and dramatic,” Townsend said. “It’s going to be incremental outcomes.”
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