Just before the 2020 U.S. election, we looked at possible outcomes for financial services industry regulation, as might occur depending on how the election went, both in the presidential race and for the U.S. Senate. With the incoming Biden administration beginning to nominate choices for high level policy and regulatory posts, but the composition of the Senate still pending following the Jan. 5, 2021 run-off election for both of Georgia’s seats, has the picture changed for financial regulation?
The answer is “somewhat”, and Trump is still in a position to influence the picture at the SEC for a further 18 months if he succeeds in replacing Jay Clayton. Overall, there are more questions to be asked than answers to be had, because the Democratic party platform on which Biden ran had merely a short statement supporting enforcement of the Dodd-Frank Act and the Volcker Rule. Vice President-elect Kamala Harris has been seen as more moderate on regulating the financial industry, although some of Biden’s nominations so far have signaled a tougher stance on financial regulation. With the Senate still in limbo, Democratic legislative leaders, including Sen. Sherrod Brown, House Speaker Nancy Pelosi, and Rep. Maxine Waters (chair of the House Financial Services Committee) have been quiet about regulatory issues since the election.
The highest-ranking Biden appointee in the realm of financial industry governance, Janet Yellen, the former chair of the Federal Reserve named to be Treasury Secretary, took on big banks’ practices in the latter part of her term as Fed chair, most notably with penalties and growth restrictions assessed against a US-based G-SIB after a cross-selling and account fraud scandal that surfaced in 2016. In addition, as former chair, in April 2020 Yellen urged US regulators to ask banks to suspend dividends and stock buy-backs because of the economic crisis caused by the COVID-19 pandemic. The rationale is to use a bank’s available resources to prioritize the credit requirements of the economy, rather than bolstering share value. That is not a normal financial regulatory issue, but indicates Yellen’s expectation of social responsibility from the financial industry, at least in times of crisis.
For key regulatory agencies, including the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Consumer Financial Protection Bureau and the Options Clearing Corporation, appointees have not been named yet, but names that have been floated and analysis of their past actions and positions will make it easier to determine the Biden Administration’s regulatory intentions once those chair roles are named.
At the SEC, Republican chair Jay Clayton, appointed by President Trump in 2017, has announced he will leave at the end of 2020, 18 months before his term would have expired. This presents a brief opportunity for Trump to appoint a successor before January 20th 2021. Any attempt to get a nominee accepted will ruffle feathers and will be influenced by the outcome of the Georgia run-offs on January 5th. In the absence of a swift move from Trump, it’s more likely that the chair role will be immediately opened to a Biden appointee, which will make the SEC majority Democratic. Former CFTC Chair Gary Gensler and former U.S. Attorney for the Southern District of New York, Preet Bharara, are considered possible appointees, but Bharara’s opposition to the Trump Administration would make it tougher for him to be confirmed by a Republican Senate. Other potential appointees include former commissioners Annette Nazareth or Kara Stein, or perhaps he will elevate current commissioner Allison Lee to the post. There are distinctions between each of these choices, however. Lee is seen as favoring tougher oversight, Stein also, albeit to a lesser extent. Stein, Nazareth and potential picks with experience, like Keir Gumbs, are seen by some as more conservative choices. Other picks without previous backgrounds on the commission, like Renee Jones or Barbara Roper, would take a tougher stance on Wall Street.
Regardless of Biden’s SEC choice, current commissioners, Democrat Caroline Crenshaw and Republican Elad Roisman, are both saying the commission will likely take some action on environmental, social and governance (ESG) standards principles for investing, potentially mandating disclosures such as those required by the European Union’s Sustainable Finance Disclosure Regulation (SFDR).
In addition, there is not yet a nominee for Labor Secretary, whose Cabinet-level agency has a hand in setting standards for fiduciaries who manage investments, because of their relevance to workers’ retirement accounts. The Department of Labor’s Fiduciary Rule governing fiduciaries, established in 2016, but effectively weakened by the SEC’s Regulation Best Interest in 2019 and reversed in June 2020 by a reissuance of the Fiduciary Rule, may not be so quickly restored, because of Biden’s previous moderate positions – unless the choice for Labor Secretary signals an intent to respond to or rethink the rule and/or Regulation BI.
Their Stance on Financial Regulation
Neither the potential nominees for Labor Secretary nor the incoming Biden Administration itself have made any statements about the Fiduciary Rule or Regulation BI. So looking at the records of the names being floated for this post can only give a generalized take on their philosophies about financial regulation. Some candidates, such as Boston mayor Marty Walsh and U.S. Rep. Andy Levin of Michigan, have strong union support. Other names come directly from the world of labor unions, including Patrick Gaspard, Sara Nelson and Bill Spriggs. Sen. Bernie Sanders has also been talked about for this Cabinet post, but likely would meet resistance from a Republican-controlled Senate, or even an almost evenly divided Senate. Spriggs also has the credential of formerly serving as an assistant labor secretary in the Obama Administration. Another candidate whose experience is as a government labor department official is Julie Su, currently secretary of the California state Labor & Workforce Development Agency.
As The Hill points out in this analysis, there is a deep political split among unions, depending on the industry whose workers they represent. So the choice of a union leader for Labor Secretary might be more fraught than a prior government labor official. The incoming Labor Secretary will likely have more pressing issues related more directly to labor concerns than financial regulation concerning pensions, so a change in the regulatory philosophy of government may not be one of the things the Biden Administration acts on right away.
Still, other hands on deck in the new administration may put Regulation BI on the chopping block, according to an analysis by attorneys from New York-based global law firm Cleary Gottlieb Steen & Hamilton. Some Trump Administration CFTC rules could also be reversed, according to their analysis. However, bank regulatory reforms that have had bipartisan support, such as the Federal Reserve’s tailoring framework and Volcker Rule modifications, are likely to remain intact, the attorneys wrote.
To date, what the financial services industry can glean from Biden’s appointments and policy positions is a mixed bag. Some appointees or prospective appointees have signaled a stricter approach to Wall Street, often with the stated aim of protecting “Main Street” investors. Others, whether hemmed in by the composition of the Senate – in order to be confirmed in the first place or for legislative support for their initiatives – or out of their own policy tendencies and temperament, may allow more latitude for financial firms’ regulatory compliance. That still would be far from the extent that the Trump Administration allowed. The bottom line, at present, is that firms should expect changes, but it remains unknown what those may be, or how far any changes will go.