The Impact of a Joe Biden Presidency on the Securities Market

The 2020 presidential election between President Donald Trump and former Vice-President Joe Biden marked a highly contentious race with a record-setting $14 billion in election spending between the two candidates. (Brian Schwartz, CNBC). After days of ballot-counting, former Vice-President Joe Biden was declared the president-elect of the United States (“U.S.”). (Scott Detrow and Asma Khalid, NPR). This article will address how a Biden Presidency may change financial regulations and the resulting impact these changes will have on the securities market.

Under President Trump, the securities market saw many of its key financial regulations that originated from the 2008 Financial Crisis eliminated, including Dodd-Frank regulations relating to banks, capital requirements, risk-taking, and more. (GOBankingRates, Nasdaq; Mayra Valladares, Forbes). Additionally, the Securities and Exchange Commission (“SEC”) filed fewer legal actions against public companies, with a 33 percent decrease between 2016 and 2017 and a 66 percent decrease between 2017 and 2018. (Mark Lebovitch and Jacob Spaid, Harvard Law School). While legal actions were low, the stock market was high. On November 24, 2020, the Dow Jones exceeded 30,000 points for the first time. (Wall Street Journal). The future of the securities market will be impacted by altering three different mechanisms that govern it.

First, President-Elect Biden is expected to reverse the Regulation Best Interest Rule (“Regulation BI”), a move heavily supported by many Democrats. (Patrick Donachie, Wealth Management). Regulation BI is intended to amplify transparency in the relationship between investment advisers and broker-dealers by “requiring brokers to act in the best interest of their retail customers” by providing a relationship summary to retail investors. (Aaron Nicodemus, Compliance Week; FINRA). The regulation also clarifies that “brokers may not put their financial interests ahead of the interests of a retail customer when making recommendations.” (Aaron Nicodemus, Compliance Week). Democrats argue that the regulation puts brokers first and ahead of investors. Id. Because Regulation BI places more importance on the relationship between brokers and retail investors, the argument is that Regulation BI places the interests of average workers who invest behind the interests of the brokers and retail investors, which may affect passive and non-informed investors who do not actively follow their interests. Id.

Second, another area of potential change for President-Elect Biden is the private securities market. (Patrick Donachie, Wealth Management). Accredited investors may purchase securities that are not registered with the SEC via private placements, which saves companies money by avoiding registration expenses. (Investopedia). Unregistered securities bring higher levels of risk. Id. The SEC thus wants to ensure that investors buying these unregistered securities have the means and knowledge to invest in these types of securities. Id. Until recently, the primary way for an individual to be deemed accredited was to have an “income exceeding $200,000 and/or a net worth of more than $1 million.” (Patrick Donachie, Wealth Management). The SEC under President Trump approved a new definition that includes new factors that establish an individual as an accredited investor, including a minimum amount of investment experience, professional credentials, education, and job experience. (Id; SEC). Senator Michael Crapo (Republican-Idaho) explained that the previous definition was “binary” and based exclusively on wealth. (Patrick Donachie, Wealth Management). SEC Chairman Jay Clayton further argued that there are “people who have the sophisticated ability to assess investments who do not meet those [current] wealth thresholds...” Id.

President-Elect Biden may halt this effort to include more individuals as accredited investors if his SEC appointees are confirmed by the U.S. Senate. (Tom Zanki, Law 360). Congresswoman Maxine Waters (Democrat-California), the House of Representatives Financial Services Committee Chairwoman, has echoed this position by advocating for the removal of the new accredited investor definition. (Mark Schoeff Jr., Investment News).

Third, President-Elect Biden is expected to advocate for raising the long-term capital gains tax for the highest earners (those with income above $1 million) from 23.8 percent to 39.6 percent, potentially resulting in the largest increase in the long-term capital gains tax in U.S. history. (Robert Frank, CNBC; Garret Watson, Taylor LaJoie, and Haqgun Li, Tax Foundation). This may compel stockholders to sell their holdings prior to the increase in an attempt to secure the lower tax rate. (Darla Mercado, CNBC). Tax Foundation predicts this proposed tax increase will result in a long-run change in economic output of -0.02 percent. (Garret Watson, Taylor LaJoie, and Haqgun Li, Tax Foundation).

Tim Dowd, an economist employed with the U.S. Congress Joint Committee on Taxation, and Robert McClelland, a senior fellow at the Urban-Brookings Tax Policy Center, note that the two previous capital gains tax increases in 1986 and 2012 led to a large increase in selling. (Robert Frank, CNBC). They further note that the proposed 66 percent effective tax increase could potentially cause a 45 percent to 55 percent increase in capital gains sales, creating a “downward force in the market.” Id. President-Elect Biden is supported by Roger Altman, a senior chairman of Evercore (an investment banking advisory firm), who notes that “the long-term effects are not historically negative . . . Those long-term effects depend on broad macroeconomic factors, not just the capital gains rate.” Id.

While full policy proposals are not always released before a president-elect officially takes office, who the president-elect appoints as advisors during the campaign or to the transition team can often be a sign of what is to come. Ted Kaufman, who assists in leading the Biden presidential transition, has previously advocated for the breakup of big banks. (Zachary Warmbrodt, Politico). Gary Gensler, a regulator under President Obama who is now also assisting the Biden transition team, enacted new regulations on the financial derivatives market when he was the Commodity Futures Trading Commission Chairman. Id. From the advisement of these individuals, the U.S. can expect a presidential administration that is serious about enacting new financial regulations on the securities market.

New presidents with limited power struggle with turning initiatives into legislation. With Biden-appointed executive agency leaders, President-Elect Biden may be able to modify Regulation BI and restrict who may invest in unregistered private security offerings by reversing the new definition of an accredited investor. However, if Congressional Democrats attempt to raise the long-term capital gains tax, President-Elect Biden will not be able to sign off and approve unless it first passes both the House of Representatives and the Senate, an achievement not commonly seen.