I thought long and hard about adding to the litany of “What Does Joe Biden mean for…” articles before writing this, but since the conclusion of the fractious U.S. election, it has been an important topic of discussion with asset managers globally. While it’s still early days and the usual caveats apply on the degree of certainty, there are plenty of indicators already to take a punt on how the Biden administration is likely to affect asset management regulation.
1. Revisit and Revise – No Regulatory Revolution
The first, and possibly most important point is that the new administration is unlikely to usher in a dawn of lots of new regulations. What is more likely is areas of recent rulemaking will be revisited. In terms of the SEC, under the Trump-appointed chair Jay Clayton, it proved to be one of the most productive rulemaking periods in living memory when measured by volume, with more than 90 new rules being approved on Clayton’s watch and many rules were modernized, some of which had not been touched since the 1960’s! However, dissenting voices within the SEC and beyond often suggested that the rules were often “principles based” and slightly obtuse, leaving too wide a berth for interpretation which in turn made their supervisor and enforcement more difficult. Dare I say it? Final rules were at times said to be too industry friendly.
A new Democrat-led SEC will undoubtedly look to revisit and revise certain recent policy decisions across a range of issues. It is interesting to note that several important investor protection and advocacy issues under the Clayton chairmanship, ended in a 3-2 Commissioner votes with the result split along partisan lines. This highlights that SEC policymaking is directly linked to presidential policy goals and why the SEC Chair Nominee is often an indicator of the direction of travel the Commission will take.
I expect an initial period of “reflect, review and revise” at the SEC. As suggested, there has been a flurry of recent SEC rulemaking across a wide spectrum and even with a new Chair installed, you cannot change everything. So targeted reviews seem likely and will need to be balanced with issues not yet addressed and an increased focus on enforcement.
There is plenty of areas for the new Commission to choose from ranging from proxy voting, fund advertising, accredited investors and access to private market investments, derivatives rules and, the big one: Regulation Best Interest. Also, heavy withdrawals last year from money market funds triggered by the pandemic might see the SEC and Treasury revisit those regulations too.
Suffice to say, we are likely to see debate and review of prior rulemaking initially rather than a raft of new rules and regulations for the most part.
2. Agency Appointments – Back to the Future
This is not President Biden’s first White House rodeo, having previously served two terms as Vice President to President Barack Obama. Biden’s nominations to the various financial regulatory arms and agencies are strong indicators of his administration’s points of emphasis. Judging on the touted appointees, it appears that tried-and-tested appointees with prior experience will be the order of the day. These agencies appointments are subject to Senate approval but given the slim Democrat majority are likely to proceed.
The Federal Reserve
President Biden has asked the former chair of the Federal Reserve, Janet Yellen, to be his Treasury Secretary. It is widely expected that the Fed and Ms. Yellen will be broadly on the same page fiscally and that the prevailing low-interest-rate environment will continue for the bulk of Biden’s first term at least.
The other main policy point will be preparation of the $1.9 trillion relief and stimulus plan. Biden and Yellen will want to draw on as much bi-partisan support for the package.
On financial regulation, two years ago, Ms. Yellen co-signed a letter to the then Treasury Secretary, Steve Mnuchin requesting that he not relax oversight on large nonbank financial institutions, but that urge went unheeded. Although the Trump Administration did not ultimately “do a number” on Dodd-Frank, it does seem likely that on Ms. Yellen’s watch the Financial Stability Oversight Council (FSOC) will revisit many of the initial oversight goals of the Dodd-Frank Act, focusing on large and systemically important entities and the so called “shadow banking” sector. This sector directly impacts asset managers and provision of products ranging from money market funds, syndicated loan funds, securitizations to direct lending, a very vibrant area of the market but one which might come under further scrutiny.
Securities and Exchange Commission
It is widely reported that Gary Gensler will be nominated to the Chair of the SEC. Anyone familiar with Mr. Gensler from his time in the Commodities Futures Trade Commission (CFTC) will know he has a reputation for being an aggressive regulator. Once more, Biden is leaning on someone who already has a raft of policy experience. In his time at the CFTC, Gensler played a significant role in post Global Financial Crisis reforms, including mega regulations such as Volcker Rule, Dodd-Frank, and LIBOR manipulation investigations. Many see the appointment as an indicator of a stricter approach to supervision at the SEC.
It is expected that under Mr. Gensler’s watch, review of prior rulemaking will likely look to enshrine more detailed and prescriptive rules than currently exist. The additional rule clarity is likely to come in the form of ancillary industry guidance rather than new or revised rules. From his prior stint at the CFTC, Gensler is assuredly known as a derivatives expert so the very recent SEC Derivatives rule could be a likely candidate for an initial once over.
With standardized ESG rules, cybersecurity, and uniform fiduciary standards all still red-hot topics, these will need to be addressed too. One interesting quirk is that Gensler is said to be very knowledgeable about cryptocurrency and lectures on the subject at MIT. So, that’s another area where we could see some action and has not been adequately addressed at the SEC to date. Finally, Gensler is likely to see funding and resources increase for the SEC on his watch also to ensure both the rulemaking and enforcement is visibly increased.
Consumer Financial Protection Bureau
Rohit Chopra currently works at the Federal Trade Commission, but previously helped set up the Consumer Financial Protection Bureau (CFPB) under Elizabeth Warren, so once again Biden has tapped up a known quantity and someone who can hit the ground running due to prior experience. The role of the CFPB is primarily retail consumer protection by curbing unfair or abusive practices by sellers of financial products. The CFPB was largely defunded and some of its most important rules rowed back in the prior administration through the Congressional Review Act process, which meant it wasn’t as visible or effective as maybe it wished to be. The agency’s role is likely to be revitalized under the Biden Administration as they generally focus more closely on enforcement and retail investor protection. Biden has already stated that his administration wishes to investigate private lenders and the student loan area. The CFPB would be tasked with leading such an investigation. While CFPB will not be of great direct interest to asset managers, it will be an indicator of the broader focus of the new administration compared to the prior one.
Overall, we don’t expect to see many new faces nor lots of new rules in the US financial regulation space in the near term, rather some veteran policymakers will look to have their agencies add more specificity to rulesets and push a more enforcement and prosecutorial stance generally. Check back on the blog tomorrow as we will focus on some of the specific policy areas that could be affected at the Securities and Exchange Commission.