The winds of change surge
Another economic stimulus/coronavirus relief package: Expect this to be the new administration's top priority.
Retirement savings legislation: A bill introduced in late 2020 has attracted high-profile bipartisan support from leaders in both chambers.
Labor Dept. finalizes fiduciary rule: The DOL rule, which was finalized on December 15, is intended to align with the SEC's Regulation Best Interest.
DOL rules on ESG: The Labor Department also finalized a pair of rules last fall that effectively discourage the use of socially responsible funds in retirement plans.
Long-awaited marketing rule for advisers unveiled: On December 22, the SEC issued the much-anticipated overhaul of the advertising and solicitation rules for registered investment advisors.
While the new year may only be days old, it feels like we've already seen enough drama for a full year—or five. The unprecedented scenes of a mob overrunning the U.S. Capitol building and interrupting the counting of the electoral votes were shocking, to say the least. Yet our democracy endured, with members of Congress fulfilling their constitutional duty to certify President-Elect Joe Biden in the wee hours of January 7.
Meanwhile, victories by both Democratic Senate candidates in Georgia's twin run-off elections on January 5 meant that Democrats have forged a 50-50 tie in the Senate. Ties in the Senate are broken by the vice president, so once Vice President-Elect Kamala Harris takes the oath of office on January 20, Democrats will have the narrowest of majorities in the chamber. Coupled with their narrow majority (222-211, with two vacancies) in the House of Representatives, Democrats will have full control of Washington after Inauguration Day.
The results bring the 2021 policy agenda into clearer focus. The incoming Biden administration will have more freedom to pursue its policy priorities than it would if it was facing a split Congress. But the razor-thin margins in both chambers and the lack of Democratic unanimity on a wide variety of issues will act as a brake on the party's most ambitious goals. Markets will likely take comfort that the administration may need to scale back its plans in areas like climate change, health care, and tax increases. And major structural reforms—such as ending the filibuster in the Senate, expanding the Supreme Court, and changing the Electoral College—will be much harder to achieve in the narrowly divided Congress, where some Senate Democrats have already publicly opposed such changes.
That said, there are areas where Democrats believe they can have success. Among the likely candidates for action in 2021 are:
- Another economic stimulus/coronavirus relief package. Expect this to be the new administration's top priority. There was already growing bipartisan support for increasing stimulus payments to $2,000; that could be a core feature of the next package. Democratic priorities, including aid to state and local governments, more funding for vaccine distribution, a further extension of enhanced unemployment benefits (currently due to expire March 14), an extension of the moratorium on evictions (currently due to expire at the end of January), and further student loan relief are among the contenders for inclusion in another round of stimulus.
- Infrastructure spending. Both parties support more spending on roads, bridges, and other infrastructure needs, but have been stymied by how to pay for it. While that issue will still need to be sorted out, infrastructure spending is likely to be a top priority for the incoming administration.
- Retirement savings legislation. A bill introduced in late 2020 has attracted high-profile, bipartisan support from leaders in both chambers. While the bill will have to be re-introduced in 2021, the 2020 version included provisions that would increase the required minimum distribution age to 75; add a second tier of catch-up contributions at age 60; increase the annual cap on Qualified Charitable Distributions to $130,000; and numerous provisions to encourage more savings, make it easier for small businesses to start a retirement plan for their employees, and simplify automatic enrollment. While these provisions are likely to change as the bill is negotiated, there appears to be real momentum for moving a bill forward in 2021.
Key question for investors: Are tax increases coming?
One of the most common questions from investors is whether taxes will increase in 2021. The Democratic majorities in both chambers of Congress certainly put that possibility squarely on the table. But again, the narrow margins in the House and Senate will make tax increase more difficult to pass.
During the campaign, President-Elect Biden proposed a host of tax increases, mostly on wealthier filers, that could be used to offset the cost of the new administration's spending plans. But there is far from Democratic unanimity on many of his proposals. Given the wide spectrum of political ideologies within the party, getting tax increases approved won't be a slam dunk.
The most likely candidates for tax code changes are ideas like a modest increase in the corporate tax rate and returning the top individual tax rate to 39.6%, both of which have broad support within the party. But there is far less agreement among Democrats on other ideas, such as making changes to the estate tax, increasing taxes on capital gains and dividends for wealthier filers, or imposing broad taxes on wealth. We expect those kinds of proposals will be much tougher to get through Congress, even with Democrats in control of both chambers.
New leaders at key regulators
One immediate effect of Democrats winning the Senate majority is that it should smooth the confirmation process for Biden's nominees for Cabinet positions and heads of regulatory agencies. Barring something unforeseen happening, the new president should have his cabinet in place relatively soon after inauguration.
Among key regulators of the RIA industry, President Biden's choice for Secretary of Labor, Boston Mayor Marty Walsh, will have jurisdiction over retirement accounts, but it is not clear where retirement savings issues will be on the priority list. Turnover is also underway at the SEC, where Chair Jay Clayton stepped down in late December. President-Elect Biden has reportedly tapped Gary Gensler, who chaired the Commodity Futures Trading Commission during the Obama administration, to be the new SEC chair. Gensler has a reputation as being tough on enforcement. In addition, Dalia Blass, who headed the SEC's Division of Investment Management since 2017, will step down later this month. So once Gensler is confirmed, he'll need to find a replacement for that key position.
End-of-the-year regulatory frenzy
As is typical in the final weeks of a presidential administration, a flurry of regulations were finalized in recent months. Some are likely to be targets for the incoming Biden administration, which could utilize rules that allow a new administration to delay, block, or revisit so-called "midnight regulations" by the previous administration. Of particular note for advisors:
- Labor Dept. finalizes fiduciary rule. The DOL rule, which was finalized on December 15, is intended to align with the SEC's Regulation Best Interest. Advisors who make recommendations to retirement account holders would have flexibility in how they are compensated as long as they act in the best interest of their clients, charge reasonable rates and do not make any misleading statements. The rule applies to rollovers. However, because the rule will not be effective until after the Biden administration takes office, it's widely believed that the rule will be delayed and eventually could be rewritten.
- DOL rules on ESG. The Labor Department also finalized a pair of rules last fall that effectively discourage the use of socially responsible funds in retirement plans. One rule requires retirement plan fiduciaries to focus only on "pecuniary" factors when choosing fund options for a plan, while the second requires plans to only vote on proxy questions when there is an economic impact on the plan. Both rules are seen as steering plans away from the use of "ESG" (environmental, social, and governance) funds as investment options. These rules are also candidates to be overhauled by either the Biden administration or the Democratic-controlled Congress.
- Long-awaited marketing rule for advisors unveiled. On December 22, the SEC issued the much-anticipated overhaul of the advertising and solicitation rules for registered investment advisors. The advertising rule had been in place since 1961 and the solicitation rule since 1979; both were in desperate need of modernization to reflect changes in the way people communicate these days. In something of a surprise, the SEC combined the two rules into one overall rule that broadly covers the marketing practices of advisors. The new rule broadens the definition of advertising to cover the use of the internet and social media, and also allows advisors to use testimonials, endorsements, and third-party ratings in their marketing materials, subject to certain conditions and disclosures. The rules will take effect 60 days after publication in the Federal Register (which has not happened yet) and firms must come into compliance within 18 months of that date. At Schwab, we are in the early stages of reviewing the rule, which runs to more than 400 pages. Keep an eye out for additional resources from the Schwab team in the months ahead.
Name change: SEC Division of Examinations
Finally, a minor but interesting item from the SEC, which announced in December that its enforcement arm, formerly known as the Office of Compliance Inspections and Examinations (OCIE) would henceforth be known as the Division of Examinations. In addition to simplifying the name, the switch to "division" indicates an elevation in importance for the function. There are now six divisions at the SEC, with the newest division now at least symbolically on part with long-standing divisions like the Division of Investment Management and the Division of Trading & Markets. Practically speaking, there's no impact on RIAs: No matter their name, those SEC examiners will still come knocking on your door eventually.
This report is current as of 01/18/21. Look for another roundup next quarter from Schwab's D.C. insider Michael Townsend.