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Policy snapshot: Capital markets

INSIGHT ARTICLE  | 

Joe Biden is the projected winner of the presidential election; control of the Senate will be won by a slim margin following runoff elections for Georgia’s two seats in January. What does a divided government mean for the middle market? RSM is looking at the policy implications and key issues for various industries. This is one in our series of industry-focused outlooks for a Biden administration.

According to Joe Biden’s plan:

Biden’s victory will inevitably lead to changes at the top of key regulatory agencies, which will help him push his regulatory agenda. Although the president appoints the heads of these agencies for prescribed terms, there is no guarantee that current agency leaders will serve out the full term under a new administration. For example, Jay Clayton, chairman of the Securities and Exchange Commission, recently announced that he would step down at the end of the year. Moreover, a Republican-controlled Senate would most likely act as a restraint on nominees who have more ambitious regulatory agendas.

What a closely divided Senate means for capital markets:

Biden has pushed for more investor protections, which may lead to a tougher fiduciary rule. Additionally, Biden has indicated his support for increased disclosures in public filings surrounding diversity and climate change. Other possible regulatory changes may include empowering the Financial Stability Oversight Council to review market activity with more scrutiny or investigate how companies access capital in private markets.

But a Republican-controlled Senate would temper some of the more ambitious goals that require legislative approval, including the enactment of a financial transaction tax as well as a tax on derivatives on a mark-to-market basis at ordinary income tax rates.

Consider the tax on financial transactions: As proposed in the Wall Street Tax Act, a 0.1% tax on trades of stocks, bonds and futures would generate roughly $800 billion over 10 years, according to the Congressional Budget Office. Although Democrats debate the specifics, they broadly support the idea of a financial transaction tax. Multiple bills seeking some form of this tax are pending in the House; their passage, though, would face a significant roadblock if Republicans retain control of the Senate.

What room for growth or evolution exists in capital markets?

In the capital markets, which are already heavily regulated, increasing regulations under a blue wave scenario would have likely proven more restrictive to growth. But under a divided government, capital markets organizations will continue to be able to view growth through M&A, the creation of strategic partnerships, and investments in new technologies and automation. These investments increase top-line revenues while reducing operational and administrative expenses that may result from incremental changes to the current regulatory environment.

Questions that frame the path forward:

  • How will a tighter regulatory framework affect the operations of your organization?
  • Does your organization possess sufficient resources in the appropriate areas should regulations change?
  • Are there investments in technology or strategic acquisitions that can be made to support growth?

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