Over the weekend, former Vice President Joseph R. Biden, Jr. was declared the winner of the U.S. presidential election. Although President Trump has yet to concede and press reports suggest he will continue to make his case in court, thoughts have turned to what the Biden administration will mean for federal regulation of business and finance.
In many ways, the future will depend on whether the centrist, coalition-building Biden of yesteryear will show up, or if he will embrace the more progressive wing of the Democratic party that has since grown in influence. Below we lay out our initial reactions on how the Biden presidency is likely to reshape the corporate landscape.
If you have any questions, please feel free to contact the authors listed below or your regular contacts at the firm.
The SEC’s Regulatory and Enforcement Focus
Who Will Chair the Commission? With, at best, a 50/50 Senate, it may be challenging for President-elect Biden to appoint a Securities and Exchange Commission Chair from the far left wing of the Democratic Party. Nevertheless, the important role of anti-Wall Street Senators, such as Elizabeth Warren, in the campaign will likely be felt in making the appointment and in the operation and funding of the agency going forward.
Main Street or Wall Street (or both)? The Clayton-led SEC maintained a robust enforcement program, with a particular focus on so-called “Main Street” fraud, with identifiable investor-victims. The Biden administration can be expected to continue to make enforcement a priority, but likely will make efforts to turn up the heat on financial institutions and Wall Street more generally, especially if the markets drop in the coming months. Former Commodity Futures Trading Commission chair Gary Gensler’s reported role in financial regulatory aspects of the transition may well be a harbinger of a more muscular enforcement approach for all regulatory agencies.
Capital Raising Versus Social Policy. Chairman Clayton undertook substantial efforts to improve access to capital markets, both by reforming the public offering process and by expanding the availability of private offerings. The new administration is likely to shift its focus to implementing broad social policy goals through regulation of public companies and new disclosure requirements.
Increased Regulation? Past Democratic administrations have tended to identify areas for increased regulatory oversight of market participants and intermediaries, in areas ranging from enhanced disclosures and process changes, including a universal proxy ballot, to higher capital and customer suitability requirements. It would not be surprising to see those efforts renewed in the new administration, including in areas where over the last few years the SEC has adopted rules that Democratic commissioners viewed as insufficiently rigorous (e.g., Regulation BI).
Stakeholder Capitalism Finds Another Friend. As a candidate, President-elect Biden called for “an end to the era of shareholder capitalism — the idea [that] the only responsibility a corporation has is to its shareholders.” This posture would align with his past alliances with labor unions and campaign promises to support middle- and lower-class Americans. We expect the Biden administration to champion many progressive causes, but we don’t expect that to result in stakeholder activists giving corporate America a break – they will continue to push corporations to embrace stakeholderism and are likely to find an ally in the Biden administration. Companies should be mindful of this growing development when engaging with shareholders and developing their broader corporate agenda.
SEC Embraces ESG? Current Democratic SEC Commissioners have already signaled an interest in using the SEC to enhance climate change reporting and other ESG reporting. At the same time, calls from influential investors for greater uniformity in ESG reporting standards and scoring have increased. Look for a majority Democratic Commission to be more willing to move beyond principles-based disclosure and embrace more standardized, prescriptive line item requirements for disclosure on key areas such as diversity and human capital management, climate change and sustainability. Also expect the SEC to feel pressure to engage on the challenging topic of comprehensive sustainability disclosure standards, including those developed by private entities such as SASB and CDSB, among others.
DOL ERISA Investment Rule. A Biden administration will likely seek to unwind or repeal the October Department of Labor rule that makes it difficult for ERISA plan fiduciaries to invest in ESG vehicles even where the fiduciary determines that such an investment does not “sacrifice investment returns or take additional risk.” The October DOL rule is at odds with broader sustainable investment trends and mandates from some state pensions that proactively consider ESG factors in investment activities. The Clinton and Obama DOL policy was more receptive to ESG investing, and we expect the Biden DOL to take a similar approach. Bottom line – Biden DOL policy will likely be a tailwind for ESG investing.
Renewed Calls for Federalizing Corporate Governance? In late October a group of four Democratic senators announced a “working group to develop legislative proposals and conduct oversight on fundamentally reforming corporate governance.” Although the group of four will find it challenging to enact their proposals so long as control of the Senate remains in Republican hands, they will have a voice through influence and oversight of agencies. This influence could push the Biden administration further left on ESG and governance initiatives.
Shifting Priorities with New Leadership. New leadership at the Department of Justice and at key U.S. Attorney’s Offices will lead to shifts in priorities toward those traditionally associated with Democratic administrations, including more aggressive enforcement on financial and corporate frauds.
Pandemic and Recession-Related Financial Crimes. The increased focus on financial crimes accompanying shifts in priorities will be reinforced by pandemic and recession-related enforcement trends, including accounting frauds and CARES Act-related False Claims Act investigations, as well as a greater focus on consumer frauds driven by what is expected to be a more muscular Consumer Financial Protection Bureau.
Continued Enforcement in Currently Active Areas. Expect continued robust enforcement levels in areas that had remained active in the prior administration, including FCPA, sanctions, AML and cyber, as well as of the tech and pharma industries.
Environment and Climate. President-elect Biden announced during the campaign an intent to create an Environmental and Climate Justice Division within the DOJ to more aggressively address climate change and other environmental issues.
Criminal Justice and Civil Rights. The new administration will look to pursue criminal justice and sentencing reform, as well as broader civil rights initiatives.
Antitrust Regulatory Change. Expect stepped-up merger and conduct enforcement from the DOJ, while the current aggressive levels of Federal Trade Commission enforcement will likely continue, with perhaps a slight uptick and a particular focus on pharmaceutical mergers. However, unless Democrats gain control of the Senate, a major swing toward progressive antitrust enforcement is unlikely.
Similarly, legislative changes will likely be incremental rather than radical, even if Democrats capture the Senate, since they will not have a filibuster-proof majority. Legislation that is more likely to pass includes increasing agency funding, addressing recent adverse court decisions involving the FTC’s jurisdiction and remedial authority, and other marginal changes. Sweeping proposals such as those considered in the House Judiciary Majority Staff Report on the technology industry are not likely to advance.
DOJ (Antitrust Division). By historical standards, DOJ merger enforcement levels have been relatively low under Assistant Attorney General Delrahim, with the notable exception of a set of high-profile cases. That will likely change. Without control of the Senate, or even with marginal control, any Biden nominee for AAG will probably have to come from the mainstream antitrust tradition of the Democratic party, but that still leaves room for more aggressive merger enforcement. Expect current cases to continue, and mergers to receive more probing scrutiny, with enforcement levels possibly similar to those of the recent FTC. Criminal enforcement may also increase, though the decline in cartel cases we have observed is not limited to the U.S., and so may not result from administration policy. It is also reasonably likely that the Biden DOJ will reverse or step back from the strongly pro-IP “New Madison” approach to IP/antitrust issues advanced by AAG Delrahim, including perhaps altering the positions the DOJ took in the Qualcomm case and in recent business review letters and other statements relating to standard-setting. DOJ may continue the aggressive “statement of interest/amicus” program AAG Delrahim developed, which resulted in historically high levels of DOJ court filings (though probably with somewhat different content).
FTC. The FTC has been very aggressive in recent years, including just this year breaking a record for merger enforcement actions that had stood since 2000. While there will be pressure to be even more aggressive, the FTC’s current activity levels do not leave huge amounts of room (or resources) for drastic increases. Also, as with the DOJ, unless Democrats succeed in taking control of the Senate, any Chairman President Biden might appoint, and the Bureau Directors that Chairman will select, will likely come from the mainstream of Democratic antitrust, which also suggests that FTC enforcement will not change radically. We do expect increasing scrutiny of pharmaceutical transactions, as the current Democratic Commissioners’ objections to FTC merger decisions have disproportionately focused on that industry. There’s an open question as to how long it will take the FTC to switch to Democratic control. However, even if Republicans remain in control of the FTC for a transition period, the FTC’s independence and existing policy priorities should mean that the FTC will sustain its high level of antitrust enforcement. And we do expect Democratic control of the FTC within 2021 (even though technically Republicans could retain control until 2023).
Mergers & Acquisitions
Fertile Ground for M&A. Divided U.S. government (assuming Republican control of the Senate) should temper the Biden administration policies that might otherwise create headwinds for M&A. Expect the environment to remain fertile for M&A and strategic transactions to continue in sectors that have thrived amidst the pandemic. Private equity dry powder also continues to amass and will need to be deployed. If the low interest rate environment continues in the near term under the Biden administration, that will also continue to be supportive of M&A.
More Cross-Border M&A? If the U.S. political environment is perceived as being more predictable and less politicized, levels of cross-border M&A into the U.S. could normalize. Once the COVID-19 virus is tamed, expect to see more foreign acquirors look to the U.S. for M&A.
CFIUS / Sanctions
CFIUS Will Continue to Shape Foreign Investment. We generally expect continuity in the staff-led CFIUS process, as there has been from Bush to Obama to Trump. While the TikTok matter was a politicized aberration, the concerns of the professional national security community will remain the same and drive most reviews.
Sanctions Focus Shifts. There could be significant changes in sanctions policy under a Biden administration, most notably the possibility of a new nuclear deal with Iran. Russia and Venezuela policy have also been paralyzed under Trump, and new initiatives are possible. Cuba policy may well revert to the slightly more liberal approach under Obama, but statutory restrictions limit the possibility of meaningful change. Finally, China sanctions have been and will likely remain fairly limited, but watch for a focus on forced labor and human rights violations.
Executive Compensation / Employee Rights
Executive Compensation Actions & Plan Design. Companies will begin to consider the potential impact of President-elect Biden’s proposed tax increases on executive compensation plan design, including the timing of incentive compensation payouts (e.g., accelerating the payment of 2020 annual bonuses from the 1st quarter of 2021 into the 4th quarter of 2020). Other considerations may include the design of long-term incentive programs and whether stock options, due to their longer term relative to full-value awards and the ability of executives to control year of exercise, may regain prevalence and the potential benefits of implementing or enhancing non-qualified deferred compensation programs.
Outstanding Dodd-Frank Executive Compensation Rules. A Democratic-led Commission may be more likely to adopt the clawback and pay-versus-performance rules that were mandated by the Dodd-Frank Act. A divided Commission under Chairman Mary Jo White released proposals for both rules in 2015 that have been on the SEC’s agenda for the last five years.
Employee Rights. The DOL under Biden will likely prioritize health and safety as the pandemic shows no signs of abating, although its first areas of focus could take multiple directions. A couple of potential areas of focus are likely to include: an Occupational Safety and Health Administration emergency temporary standard on infectious diseases; enhanced paid leave protections; equal pay legislation; and a rethinking of the DOC’s recent proposed rule that arguably makes it easier for employers to avoid independent contractor misclassification suits under the FLSA.
Executive Branch Changes. Political appointees at the Treasury Department and the Internal Revenue Service will be replaced, resulting in likely changes in the focus and content of tax regulations, enforcement activities, and the U.S.’s international tax efforts (e.g., treaties and OECD-led digital economy tax).
Congressional (lack of) Change. Significant tax law changes require legislation and so depend on who will control the Senate. Two run-off elections in Georgia in early January will be decisive. If Republicans control the Senate, significant tax law changes are unlikely including Biden proposals to increase tax rates and change (once again) the treatment of foreign business income and Republican favorites that the Democrats and the new President do not support such as indexing capital gains to inflation or expanding Opportunity Zone rules.
But, if Democrats Gain Control of Congress. A flip in the Senate would make it more likely that there would be significant tax legislation, potentially retroactive to January 1, 2021. Taxpayers may consider the benefit of executing gain-generating transactions in 2020, or deferring tax-deductible expenses to 2021, but given current uncertainty probably only to the extent such transactions were already going to occur. Many taxpayers understandably will be reluctant to incur significant current costs in the hope of realizing uncertain future benefits. Strategies may be available in limited circumstances to effect transactions in 2020 and determine their tax treatment in a later year. Accelerating planned gifts into 2020 might make sense for those worrying about a reduction in the gift tax exemption.
Sunsets and Adjustments. Under the TCJA, a number of provisions are scheduled to sunset or adjust to cost taxpayers more. With a lot of tax at stake (e.g., expensing tangible business investment, limits on deductions of business interest, and higher GILTI and BEAT rates), it will be more likely the sunsets and adjustments will go into effect with a divided government that stops the Biden administration from implementing more sweeping changes.
Impact of COVID-19 Stimulus. COVID-related revenue raisers may be necessary and may target specific taxpayers (and have significant consequences). We are likely to see state and local tax changes to address deficits.