The 2024 election is less than two weeks away and national races are too close to call. Polls show a virtual dead heat in the presidential race, with control of both houses of Congress evenly up in the air and very different views on economic policy and the role of regulation from the two presidential candidates.
Our current view is that whatever the outcome of the election, neither party is likely to win the White House and have a working majority in Congress. This has been true for most of the past 20 years, and we see no reason to believe it will change. The passage of any substantive legislation on financial services and wealth management is unlikely, and the adoption of administrative regulations will be the only way for the president to pursue his policy objectives.
This is not unusual. In recent years, presidents have felt justified in pursuing more aggressive regulatory agendas, believing they had no other choice. We believe that this trend is likely to continue and even intensify. Recent examples in our industry include the DOL Fiduciary Rule and the SEC Best Interest Rule, which fundamentally changed the standards applicable to giving investment advice.
So where does that leave us? Let's examine the impact of the election on two specific issues: Regulation of the wealth management industry and tax legislation.
Republican President and Congress
The previous Trump administration was not particularly aggressive in pursuing new regulations applicable to the wealth management industry. After the DOL Fiduciary Rule was struck down by the courts in 2018, the Trump DOL chose not to pursue an appeal. Regulation of banks and financial advisers was generally minimal.
The Trump administration was active in pursuing tax reform and was able to pass the Tax Cuts and Jobs Act of 2017. It lowered personal and corporate tax rates, increased the estate tax exemption, and applied limits on the deduction state and local taxes, known as the SALT cap. However, remember that almost all of the tax cuts in the TCJA expire at the end of 2025. Unless Congress passes legislation that extends them, the previous law will be reinstated and corporate and individual tax rates will increase.
Tax increases are rarely popular, but the SALT deduction presents an interesting political dynamic. For the most part, the highest state income tax rates are in so-called “blue” states, where support for former President Donald Trump and Republicans is limited. Trump may want to cut taxes across the board, but the government needs revenue and it has to come from somewhere. Republican lawmakers may not be concerned about helping taxpayers in states that didn't vote for them, so the SALT cap could stay in place even if the rest of the TCJA cuts are extended.
Control of the White House and Congress would make it easier to pass tax legislation, but each constituency has its own wish list. Getting Republican lawmakers from states like New York and California to extend other tax cuts without repealing the SALT cap could be difficult. We see many obstacles to any deal on tax legislation, and without legislative action, the old rates will return.
The President and the Democratic Congress
Vice President Kamala Harris doesn't have an extensive track record in financial services regulation, but she was part of the Biden administration and it would be reasonable to assume her agenda would be similar. The DOL and SEC have both been very aggressive during the Biden administration, including the passage of the Retirement Security Rule and the SEC's proposals on Digital Engagement Practices and Predictive Data Analytics. It would be logical to assume that this trend will continue.
Tax issues become even more complicated with Democrats in control. A Democratic president would likely prefer to raise taxes on high-income individuals and corporations. However, Democratic candidates for president typically receive large electoral majorities in states like California and New York, where state income tax rates are high. Pressure on a Democratic president and lawmakers from those states to repeal the SALT cap would be intense. To do this without increasing the federal budget deficit, it would be necessary to raise other taxes to compensate for the loss of revenue. The wealth tax exemption is seen as benefiting mostly the very wealthy, not traditionally a Democratic constituency. Assembling a coalition to extend the tax cuts into 2025 would be difficult at best.
Divided government
Republican White House. Without a congressional majority, extending the tax cuts through 2025 seems unlikely. Trump can be expected to continue his muted view of the financial services industry. The retirement insurance rule is likely to be abandoned.
Democratic White House. Legislative consensus on extending the tax cuts for 2017 will be difficult. Harris can be expected to keep up with activists' push for regulation of the financial services industry, likely including the DOL and SEC.
United
NASAA, the organization of state securities administrators, has been very active in recent years, particularly in pursuing model regulations for adoption by states. The proposed changes to the NASAA Model Business Practices Rule would impose fundamental changes to the standards applicable to the provision of investment advice to individual clients. During the Trump administration, many securities administrators in blue states took the view that the federal government was not focused enough on investor protection and that they needed to fill the void. If Trump is elected, it's natural to assume that those states will become more active in regulating the wealth management industry.
Much will happen in the next four years, and the outcome of the election will not necessarily determine the entire course of legislative and regulatory policy. That said, who controls the White House and Congress will have a major impact on the regulation of our industry.
Mark Quinn is Director of Regulatory Affairs for Cetera Financial Group