Washington settles into 2021
As the calendar turns to spring, Washington seems to be finally catching its breath after a frantic first quarter of 2021, which began with riots at the US Capitol and continued through the inauguration of a new president, the impeachment of the previous president, and the remarkably quick passage of a $1.9 trillion economic stimulus bill—the second-largest stimulus package ever signed into law.
With President Joe Biden settled in the White House and majorities in both the House of Representatives and the Senate, Democrats have laid out an ambitious agenda. But razor-thin majorities in both chambers—a single-digit margin in the House and a 50-50 tie in the Senate, where Vice President Kamala Harris's tie-breaking vote gives Democrats the narrowest possible majority—mean that nothing will come easily over the next two years. With little hope of bipartisanship on key issues, Democrats will focus on keeping their ideologically diverse members on the same page to have legislative successes.
Here's a look at some of the key issues on the agenda in 2021 that could impact investors.
Tax increases in play
Perhaps the biggest question on the minds of investors right now is whether and when taxes might increase. There's no question that tax increases are on the table this year. When President Biden outlined his infrastructure and green energy plan in late March, he proposed paying for the package by increasing the corporate tax rate from 21% to 28%. No individual tax increases were proposed, but it is widely expected that the White House will include some in forthcoming proposals, with returning the top individual income tax rate to 39.6% seen as the most likely candidate. Ultimately, it will be Congress that will have to draft the legislation and determine what tax code changes can pass through the narrow divides in both chambers. Here are the prospects for some tax changes that investors will undoubtedly be keeping an eye on:
- Capital gains and dividends: During the presidential campaign in 2020, then-candidate Biden called for taxing capital gains and dividends as ordinary income for individuals with more than $1 million in income.
- Estate taxes: Two proposals are in the mix. One is lowering the exemption amount, an idea that has strong backing from many Democrats, but does not yet have unanimity within the party. A more controversial approach under consideration is either eliminating or reducing the step-up in basis, but it is far from clear that all 50 Democrats in the Senate would support it.
- Financial transaction tax: The idea of a small tax (0.1% has been proposed in both chambers of Congress) on stock, bond, and derivatives trades has floated around Washington for a decade or more without gathering much traction. In 2021, though, the idea has received more attention. As a result of the social media-fed retail trading frenzy that sparked extraordinary volatility in so-called "meme stocks" like GameStop Corp. earlier this year, some lawmakers have said that a financial transaction tax would curb overly speculative trading. It's also long been known that such a tax would raise an enormous amount of revenue—an attractive feature to an administration with big spending plans and facing a large budget deficit. But the Biden White House has not endorsed the plan and other tax increases seem to be higher on the priority list.
- Wealth tax: Senators Elizabeth Warren (D-MA), Bernie Sanders (I-VT) and several colleagues have proposed a bill that would levy a 2% tax on households and trusts above $50 million, with an additional 1% surtax on billionaires. At this point, such an idea does not seem likely to move forward in Congress.
Over at the SEC, Gary Gensler was confirmed as the new chairman on April 14. Fallout from the GameStop retail trading saga is near the top of a long list of issues he'll be facing at the agency. The SEC is expected to complete a study of the situation in the coming months and then is likely to consider what regulatory changes to propose. Among the issues garnering attention in Washington is the so-called "gamification" of stock trading, the concern being that it has become too easy for inexperienced investors to make risky trades. The SEC may consider whether additional disclosures and education should be required to help unsophisticated traders better understand the risks they are taking. Expect the SEC to also look at whether there are conflicts of interest in the market plumbing that could negatively impact the execution quality of retail trades.
Another area of focus for the SEC is improving public company disclosure in areas like climate change risk, diversity and inclusion, corporate political contributions, and executive compensation. With the rapid growth of ESG investing, the agency is looking to update the decade-old disclosure requirements for companies on climate change. The SEC issued a request for comment in March on how best to update the rules to give investors better information about public companies' policies regarding their environmental impact and climate change-related policies. That's likely to lead to a rulemaking effort later in 2021.
Cryptocurrency is expected to be another area that gets attention from the SEC this year. Incoming Chair Gensler comes to the agency for a stint at MIT's Sloan School of Management, where a focus area of his teaching and research was digital currencies and blockchain. While the SEC has been quite hostile to cryptocurrency in the past, the pressure on the agency to put down some regulatory guideposts continues to grow. One possible avenue: There are multiple proposals for the first Bitcoin exchange-traded fund in the SEC's approval queue. Regulators have never approved such applications in the past, but with Canada approving its first Bitcoin ETF earlier this year, some asset managers believe the time has come for the SEC to do the same.
Finally, the agency is taking a closer look at the sudden rise in the use of Special Purpose Acquisition Companies, or SPACs, which are being used in record numbers to bring companies public. The SEC issued an Investor Alert in March reminding investors that the involvement of celebrities, including athletes and pop stars, in a SPAC does not mean that the investment is a good one for ordinary investors. With SPACs in the spotlight, it would not be surprising to see new regulations be proposed by the agency this year.
SEC examination priorities
Late last year, the SEC officially rebranded the Office of Compliance Inspections and Examinations as the Division of Examinations, simultaneously simplifying the name and elevating the group's importance at the agency, where "division" is reserved for the most important sections. The new division immediately becomes the agency's second largest, and it recently issued its annual examination priorities.
Compliance with Regulation Best Interest, Form CRS and whether registered investment advisors are fulfilling their fiduciary duties of care and loyalty are near the top of the list of priorities. The SEC indicated it would be focusing on whether RIAs are reducing and disclosing any conflicts of interest. And the agency said it would be looking at the "appropriateness of recommendations and advice provided to retail investors, with a particular emphasis on: (1) seniors, including recommendations and advice made by entities and individuals targeting retirement communities; (2) teachers; (3) military personnel; and (4) individuals saving for retirement."
Other priorities include assessing advisors' compliance programs, information security and resiliency, anti-money laundering programs, and disclosures and recommendations to investors about ESG investing opportunities. On that point, the SEC said it would "review the consistency and adequacy of the disclosures RIAs … provide to clients regarding these strategies."
This report is current as of 04/16/21. Look for another roundup next quarter from Schwab's D.C. insider Michael Townsend.