President-elect Joe Biden is painted by many as a centrist Democrat with wide appeal — but make no mistake, his administration is likely to represent a 180-degree turn from the economic policies of the Trump administration.
Whether it be taxes, regulation or legislative priorities, Biden is going to reverse much of President Donald Trump’s agenda from the past four years. Some moves will come quickly, via executive order, while others will take shape through the bureaucracy or allies in Congress.
Most of the Biden agenda will be initiated with key administration appointments. In particular, four departments/agencies stand to reshape rules governing financial services.
The Federal Reserve
As this issue went to press, the Senate was expected to vote to confirm Christopher Waller to fill one of two open seats on the Federal Reserve Board of Governors.
Director of research at the Federal Reserve Bank of St. Louis, Waller is largely uncontroversial and is likely to support keeping interest rates low. Democrats succeeded in blocking Judy Shelton, who Trump nominated along with Waller. Shelton’s criticism of the Fed and past advocacy for a return to the gold standard made her too controversial even for some Republicans.
But seating Waller will complicate Biden’s regulatory agenda. In interest rate decisions, the Fed board shares votes with the presidents of regional banks that are part of the Open Market Committee. But only governors vote on the execution of banking rules, merger approvals, or supervisory decisions.
So while Biden can probably install Democrats at the head of other financial regulatory agencies, the Fed might veto some issues, such as another reform of the Volcker Act, which restricts banks to certain brokerage activities.
Peeking ahead, Jerome Powell’s tenure as Fed president and Richard Clarida’s term of vice president come to an end in 2022.
Biden’s likely impact: 5/10
The Department of Labor
The DOL is fertile ground for financial services’ rule-making. Specifically, two rules have the attention of the industry: an investment advice rule and a rule on ESG investing. Both were finalized this fall, but timing is everything.
The investment advice rule replaces the universally hated Obama-era fiduciary rule. But the Trump administration waited too long to start the rule-making process. Its investment advice rule was published Nov. 25, or within the 60-day “midnight regulation” period that accompanies the end of an administration. The Biden team will be able to withdraw the rule upon taking power — and is expected to do just that.
The Trump replacement has two main parts: a new exemption allowing advisors to provide “conflicted” advice for commissions; and a reinstatement of the “five-part test” from 1975 to determine what constitutes investment advice.
Among other things, the guidance reverses the long-standing DOL definition of “regular basis” in the context of providing financial advice, legal analysts have said. In striving to make rules consistent for brokers, agents and advisors, the DOL might have created other problems with just who is considered a fiduciary, analysts added.
As of press time, Biden had not revealed a nominee for labor secretary, but his platform is unambiguous about reversing Trump regulations and committing to fiduciary-like rules. His eventual DOL nominee can be expected to support the same. Filling undersecretary slots will have a big impact on rule details. For the investment advice rule, the assistant secretary for the Employee Benefits Security Administration will be a key appointment.
On Oct. 30, the DOL published a rule regulating the use of environmental, social and governance funds in retirement plan investing choices. This rule is of high concern to financial services and was completed well ahead of the “midnight regulation” period. The Biden DOL will have to initiate a lengthy rule-making process to replace it.
The DOL rule states that “when making decisions on investments and investment courses of action, plan fiduciaries must be focused solely on the plan’s financial returns, and the interests of plan participants and beneficiaries in their benefits must be paramount.”
The department maintains that ESG investing runs afoul of fiduciary duty because it goes beyond the financial and seeks out “nonpecuniary” benefits.
Industry groups are leery of the Trump ESG rule. While the Insured Retirement Institute praised aspects of it, the group also called on the administration to withdraw it over the summer.
“We remain concerned that the final rule could make the investment selection process for plan sponsors much more complicated and burdensome than is necessary,” said Jason Berkowitz, IRI chief legal and regulatory affairs officer after the rule was finalized.
Biden’s likely impact: 8/10
Janet Yellen, Biden’s nominee for treasury secretary, is a familiar face to financial services, having served as chair of the Federal Reserve from 2014 to 2018. In that role, she placed a greater emphasis than previous Fed chairs on maximizing employment and less focus on price inflation.
At a time of extreme partisan bickering, Yellen won praise from both sides of the aisle and appears headed for a quick confirmation in the Senate. Treasury Secretary Steven Mnuchin will be leaving plenty for her to do.
Mnuchin announced in November that over the objections of the Fed that he would not grant extensions for five lending programs being operated jointly by the Fed and the Treasury Department that are scheduled to expire on Dec. 31, including backstops for corporate and municipal debt and the purchase of loans for small businesses and nonprofits.
Yellen, if confirmed by the Senate, would be the first woman to serve as treasury secretary, after breaking ground as the first woman to chair the Fed.
Biden’s likely impact: 7/10
Securities and Exchange Commission
Chairman Jay Clayton made his departure from the SEC official in November. It is a tradition for the SEC chair to resign upon the change of administration. The opening gives Biden a variety of directions to go with his nominee.
Progressives favor former SEC Commissioner Kara Stein, while moderates would like former SEC Commissioner Robert Jackson. Among others under consideration, former U.S. Attorney Preet Bharara would likely ramp up enforcement, while Chris Brummer, Georgetown University law professor, would be the first African American SEC chair.
Regardless of who Biden nominates, the agency’s Regulation Best Interest is probably not going anywhere. The SEC rule took effect June 30 and, so far, with little fanfare or disruption to the brokerage industry.
Reg BI requires the following factors be considered in developing a recommendation for a retail customer: the customer’s investment profile, potential risks and rewards, and costs. It also includes a new “customer relationship summary” disclosure between broker and customer.
It is less likely that Biden would want an SEC chair from a hardline regulatory or prosecutorial background, said Tom O. Gorman, partner at the Dorsey & Whitney law firm.
“I would think that you would want to find someone who is much more familiar with regulatory agencies,” he explained. “Now, that being said, it doesn’t mean that you’re not going to change philosophy.”
Biden’s likely impact: 5/10