Regulatory Outlook | 11.18.20
Likelihood of Divided Government Eases Biden Concerns
Advisors who may be worried about the relative regulatory harshness of a Biden Administration will sleep easier if Republicans wind up taking control of the Senate.
The prospect of divided government is being gulped down like a glass of cold whole milk by an industry experiencing heartburn over the Securities and Exchange Commission's “Reg BI” rules, which took effect in July. Anxiousness over potentially higher taxes is also growing.
One former regulator has warned that a Democrat being in control of the Executive Branch could result in a more aggressive approach, with Reg BI wielded as a cudgel. But such fears could be overblown.
Watching Georgia's Run-Off Races
If Republicans win at least one of the Georgia Senatorial run-off races in January – as they are favored to do – then the GOP would maintain a slim majority. Were Democrats to win both Georgia races, resulting in a 50-50 Senate, the deciding vote would go to Vice President-elect Kamala Harris.
However, because there are enough moderate Democrats in the Senate, Biden's policy agenda would be kept in check, according to Michael Townsend, Schwab's head of legislative and regulatory affairs.
"It’s not going to be a blank check,” Townsend told Investment News, regarding even the possibility, long-shot though it might be, of a Democrat-controlled Senate.
The growing consensus, that the Republicans would hold the Senate, combined with positive news about the prospects for a COVID-19 vaccine, sent the stock market into overdrive in the first trading sessions following the unusual weekend-conclusion of the election still being disputed by President Trump.
Biden Priorities Come into View
Fighting the pandemic and stimulating the economy certainly will be high on the Biden agenda. But if history is any guide, a Democrat taking over the White House spells more aggressive oversight of the financial services industry.
Shoring up the Consumer Financial Protection Bureau, viewed as having been kneecapped in the Trump era, is likely to be among the Biden team’s first moves, members of the transition team already have said.
Created by Dodd-Frank, the CFPB carries a mandate of protecting consumers from any unfair practices that may be connected with products and services such as credit cards and loans.
In the 10+ years since the financial crisis that spawned the new bureaucracy, an entirely new challenge to the banking and insurance business has manifested – financial technology disruptors abetted by blockchain and digital assets.
Biden is viewed as much more crypto friendly relative to the current administration.
The current head of the SEC, Jay Clayton, has opened the door to tokenized ETFs and tokenized IPOs, but there’s a host of other future-of-financial-services issues pertaining to everything from digital lending apps to banks being able to accept bitcoin, all of which will require a multitude of federal authorities, chiefly among them being the U.S. Treasury and Department of Justice.
Nick Morgan, a partner at Paul Hastings and former SEC senior trial counsel, told Law360 that he expects Clayton "would stay on until Biden takes office to ensure a smooth transition and continuity."
When a Biden-picked chairman is confirmed, the SEC will have a 3-2 Democratic majority.
Under Clayton, the agency has been seen as taking a less aggressive approach to enforcement, this despite the fact that the SEC continues to target advisers and brokers for disclosure failures connected with issues such as recommending relatively more expensive mutual fund share classes.
"The agency has not been particularly aggressive with moving forward on either the regulation side or the enforcement side," Tom Gorman, a Dorsey & Whitney partner and former senior counsel for the SEC's enforcement division, told Law360.
Advisers Targeted Already
Under Clayton, the SEC's enforcement division has primarily focused on the actions of investment advisers, Gorman said.
Following a comprehensive restructuring of its enforcement division in 2010, the SEC brought a record number of enforcement actions in 2011 and 2012.
In terms of collecting financial penalties from the industry, the SEC is breaking new ground.
SEC enforcement officials posted a record $4.7 billion in disgorgements and penalties in fiscal year 2020, the Securities and Exchange Commission reported in its annual enforcement report for the period ending Sept. 30.
Parties charged by the SEC were ordered to disgorge $3.6 billion and pay penalties of $1.1 billion, an 8% increase from the previous fiscal year. More than $600 million was returned to harmed investors.
Porter’s Rising Star
Industry members will want to pay attention to news relating to the Biden transition team.
Gary Gensler, a former chairman of the Commodity Futures Trading Commission, was picked to lead the financial policy transition team. A veteran lawyer who by way of his Obama-era CFTC stewardship helped rewrite derivative rules after the financial crisis, Gensler now is widely seen as being a student and proponent of cryptocurrency.
As far as restoring teeth to the CFPB, some candidates have emerged, none named Elizabeth Warren.
One is U.S. Rep. Katie Porter, D-Calif. Porter has become known for grilling executives during House Financial Services Committee hearings.