The 2024 elections are less than two weeks away, and the national races are too close to call. Polling indicates a virtual dead heat in the presidential race, with control of both houses of Congress equally up in the air and very different views on economic policy and the role of regulation from both presidential candidates.
Our current view is that whatever the election outcome, neither party is likely to win the White House and have a working majority in Congress. This has been true for most of the last 20 years, and we see no reason to believe it will change. Passing any substantive legislation on financial services and wealth management is unlikely, and adopting administrative regulations will be the only way for the president to pursue their policy goals.
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 this trend is likely to persist and even intensify. Recent examples in our industry include the DOL Fiduciary Rule and SEC Regulation Best Interest, which fundamentally altered the standards applicable to the delivery of investment advice.
So, where does this leave us? Let’s consider the impact of the elections 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 invalidated by the courts in 2018, the Trump DOL elected 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 cut personal and corporate tax rates, raised the estate tax exemption, and applied limits on the deduction of state and local taxes, known as the SALT limitation. Remember, however, that almost all the tax cuts in the TCJA expire at the end of 2025. Unless Congress passes legislation extending them, the prior law will be reinstated and both corporate and individual tax rates will go up.
Tax increases are rarely popular, but the SALT deduction presents an interesting political dynamic. For the most part, the highest state income tax levels are in so-called “blue” states, where support for former President Donald Trump and Republicans is limited. Trump may want to reduce taxes in general, but the government needs revenue, and it has to come from somewhere. Republican legislators may not be concerned about helping taxpayers in states that did not vote for them, so the SALT limitation may stay in place even if the rest of the TCJA cuts are extended.
Control of both the White House and Congress would make the adoption of tax legislation easier, but every constituency has its own wish list. Getting Republican legislators from states like New York and California to extend other tax cuts without repealing the SALT limitation may be difficult. We see many obstacles to any agreement on tax legislation, and without legislative action, the old rates will return.
Democratic President and Congress
Vice President Kamala Harris does not have an extensive track record on financial services regulation, but she was part of the Biden administration, and it would be reasonable to assume that her agenda would be similar. The DOL and SEC have both been very aggressive during the Biden administration, including the adoption of the Retirement Security Rule and the SEC proposals on Digital Engagement Practices and Predictive Data Analytics. It would be logical to assume that this trend will continue.
The tax issues become even more complicated with the Democrats in control. A Democratic president would likely prefer to raise taxes on high-earning individuals and corporations. Still, Democratic presidential candidates usually receive big electoral majorities in states like California and New York, where state income tax rates are high. The pressure on a Democratic president and legislators from those states to repeal the SALT limitation would be intense. To do that without increasing the federal budget deficit, raising other taxes to offset the revenue loss would be necessary. The estate tax exemption is viewed as primarily benefiting very wealthy people, not traditionally a Democratic constituency. Assembling a coalition to extend the 2025 tax cuts would be difficult at best.
Divided Government
Republican White House. Without a congressional majority, extending the 2025 tax cuts looks unlikely. Trump could be expected to continue his hands-off view of the financial services industry. The Retirement Security Rule would likely be abandoned.
Democratic White House. Legislative consensus on extending the 2017 tax cuts will be difficult. Harris could be expected to maintain the activist bent on regulation of the financial services industry, likely including both the DOL and the SEC.
The States
NASAA, the organization of state securities administrators, has been very active over the past few years, particularly in pursuing model regulations for adoption by the states. Proposed amendments to the NASAA Model Business Practices Rule would impose radical changes on the standards applicable to the provision of investment advice to individual customers. During the Trump administration, many securities administrators in blue states took the position that the federal government was not sufficiently focused on protecting investors and that they needed to fill the void. If Trump is elected, it is natural to assume that those states will become more active in the regulation of the wealth management industry.
A lot of things will happen in the next four years, and the outcome of the elections will not necessarily determine the entire course of legislative and regulatory policy. That being said, who controls the White House and Congress will have a huge impact on regulation of our industry.
Mark Quinn is Director of Regulatory Affairs for Cetera Financial Group
