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Post-Election Financial Services Regulatory Outlook

By Christopher Allen, Amber Hay and Paul Howard · Dec 2, 2020, 12:56 PM EST

Christopher Allen
Christopher Allen
Amber Hay
Amber Hay
Paul Howard
Paul Howard
The Biden-Harris victory in the 2020 presidential election, together with the Democrats' continued hold on the U.S. House of Representatives, provides the incoming administration with a possible pathway forward on a number of progressive and pro-consumer legislative goals.

However, if Republicans are able to retain control of the U.S. Senate,[1] that control will be a limiting factor on the ambitions of progressives in Congress and the Biden-Harris administration.

Nonetheless, control of the White House and one chamber of Congress gives Democrats the ability to set the agenda, and progressives in Congress may use the next two years to lay the groundwork on their more ambitious agenda in the hopes that they flip the Senate in 2022, when Republicans will again be defending many more seats.

In addition, the power to begin installing like-minded individuals in senior positions at the various federal agencies will allow the incoming administration to refocus regulatory priorities on areas of importance to Democrats.

While the financial services sector remains a frequent target of criticism from many progressive lawmakers, it remains unclear whether Democratic control of the House and the White House would result in any major regulatory reform measures.

To be sure, action can be expected on a variety of financial services issues, including some that have stalled in recent years,[2] but the clamor for major structural reforms to financial regulation has largely subsided since the enactment of the Economic Growth, Regulatory Relief and Consumer Protection Act in 2018.

The Economic Growth Act provided some regulatory relief to banking organizations by making certain amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act, including by raising the mandatory applicability threshold for enhanced prudential standards from $50 billion to $250 billion.

However, the Economic Growth Act did not significantly roll back the authority of federal financial regulators to adopt regulations as needed to address risks to the financial stability of the banking industry and the U.S. financial system generally.

Additionally, the Financial Stability Oversight Council, which was less active under the Trump-Pence administration, still has the authority under the Dodd-Frank Act to identify and monitor excessive risks to the U.S. financial system, including the authority to designate nonbank financial companies as systemically important financial institutions.

The following discusses the post-election financial services outlook, with a focus on the potential leadership of the federal financial regulatory agencies, outlook for regulations and actions by the federal banking agencies, renewed focus on consumer protection, and predictions for fintech.

Also below is a brief discussion of the prospects for a new financial transaction tax, which would result in additional fees associated with purchases and trades of stocks, bonds, derivative contracts and debt obligations. Progressives have advocated for a financial transaction tax that would increase revenue to be used to fund social needs such as health care.

Agency Leadership

Agency leadership under the Trump-Pence administration has included supporters of deregulation, or at least lighter regulation, and much of the current leadership of the various federal financial agencies have terms that extend beyond 2021. However, some of the current agency leaders may decide to depart early from their positions — which is always a possibility, especially with a change in administration.

Some leaders have already announced plans to step down by the end of 2020, including Jay Clayton, chairman of the U.S. Securities and Exchange Commission,[3] while some have stated that they would like to stay in their roles until the end of their appointed terms.

In a peculiar twist, the outgoing Trump administration has indicated its intent to try to confirm current Acting Comptroller of the Currency Brian Brooks as the next comptroller, which, if successful, would put the incoming president in the position of having to dismiss Brooks from the post if he wanted to install his own pick to the important office.

Notwithstanding those regulators on fixed terms, the Biden-Harris administration will be able to fill numerous vacancies at the financial regulatory agencies, and such individuals will be more focused on rulemakings and enforcement activities aligned with Democratic priorities, such as emphasizing consumer protection and data privacy, improving the safety and soundness of financial institutions, and protecting the financial stability of the economy and banking system.

A GOP-controlled Senate, however, would complicate efforts to have certain nominees confirmed. Whoever is in leadership, the Biden-Harris administration will expect leadership to steer away from the current focus on business-friendly deregulation and toward preserving the intent of the Dodd-Frank Act. Such a focus would likely include ensuring consumer financial protection and other initiatives integral to Biden's platform, including racial economic justice, funding for small and main street businesses, and ensuring oversight of Wall Street firms and executives.

New leadership at the agencies may result in additional rulemakings and oversight of large nonbank financial institutions, and greater investor protections as well.

In filling the agency leadership vacancies, the Biden-Harris administration will likely consider those who previously served as leaders or advisers under the Obama-Biden administration. For example, among the nominees for cabinet posts of the Biden-Harris administration that have already been announced is Janet Yellen, former chair of the Board of Governors of the Federal Reserve System, as the nominee for the secretary of the U.S. Department of the Treasury.[4]

With certainty, it is expected that the Biden-Harris administration will continue to nominate a diverse slate of individuals to fill vacancies at the federal financial agencies.

Regulatory Outlook

With a split Congress and divergent interests, it is unlikely that any major financial services related legislation will be passed, unless there is an urgent issue that requires an act of Congress.

Legislation related to one-off issues, such as cannabis banking and data privacy, may be considered, but a large package similar in size to the Economic Growth Act is not expected. Otherwise, we expect to see most efforts at change focused on the administrative agencies and their rulemaking, supervisory, and enforcement authority.

Various issues that have been addressed by Trump-Pence administration appointees to the federal banking agencies may be revisited under the new administration, either though legislative or regulatory action.

These include the valid-when-made rules adopted by the U.S. Office of the Comptroller of the Currency and Federal Deposit Insurance Corp., which reaffirm banks' ability to sell validly originated loans to third parties notwithstanding state usury laws, as well as the OCC's recently finalized true lender rule, which determines who treated as the lender in bank partnership lending arrangements.

Other items that may see action are the Consumer Financial Protection Bureau's small-dollar lending rule, assessments under the Community Reinvestment Act, and the OCC's special purpose national bank charter. Depending upon the extent to which the Republican Senate obstructs Biden administration appointments and legislative initiatives, it may come to pass that President-elect Joe Biden pursues more expansive use of executive orders and more centralized rulemaking, similar to the path taken by President Donald Trump in recent years.

Consumer Protection

The Biden-Harris administration should be able to fill vacancies at the banking agencies and install individuals that share Democrats' focus on consumer protection, which has not been a particular priority of the Trump-Pence administration. The new administration's ability to do so, however, will in part depend on the rate of turnover at the agencies.

Nevertheless, we will see a refocusing of priorities under a Democratic White House, with possible new rulemakings and oversight initiatives targeting perceived weaknesses in the current consumer protection regime. With a split Congress, however, we do not expect to see significant federal legislation in this space.

Still, with the U.S. Supreme Court's 2020 decision overruling the for-cause restriction on the president's authority to remove the CFPB director, we expect the CFPB to remain a highly politicized agency.

Many congressional Democrats have been vocal critics of recent efforts, championed by the OCC and the FDIC, to promote access to bank charters and bank partnerships for financial technology, or fintech companies.

Billed by supporters as a mechanism to streamline the otherwise burdensome state regulatory framework and enhance access to innovative financial services and products, Democrats and numerous states have criticized the efforts as undermining consumer protections and the states' ability to protect their citizens from high-cost loans and other potentially predatory activities.

With Democrats in control of the executive branch, several recent rulemakings and regulatory initiatives, including the above-mentioned OCC and FDIC valid-when-made rules and the OCC true lender rule, will be revisited and potentially altered or rescinded by the bank regulatory agencies.

We also anticipate a reassessment of special-purpose bank charters, such as the OCC's fintech charter and state industrial loan company charters and whether to grant them deposit insurance, as well as an assessment of the availability of such charters to fintech companies and similar entities that do not fit the traditional bank holding company model.

While legislative change is not feasible under a GOP-controlled Senate, the banking agencies can do much to reverse or slow down the fintech initiatives advanced under the Trump-Pence administration. We would expect traditional bank charters to continue to be an option for FinTech companies, although perhaps with greater scrutiny than during the past four years.

Financial Transaction Tax

With a Biden-Harris administration, and Democrats controlling the House, there is a possibility Congress may consider implementing a financial transaction tax, which has been a frequent suggestion of the progressive left.

While there is currently a small fee imposed by the SEC on stock trades, referred to as Section 31 Transaction Fees — currently set at 0.0021% or approximately two cents per $1,000 traded — the suggested transaction tax would be intended to raise substantially more revenue than the current fees, which are aimed at funding SEC operations.

State-level financial transaction taxes have also received consideration recently, including in New Jersey and New York.

The size of a federal financial transaction tax would certainly be the subject of much debate. The tax was one of the leading talking points for Vice President-elect Kamala Harris, as well as Sens. Bernie Sanders, I-Vt., and Elizabeth Warren, D-Mass., during their presidential campaigns.

Sanders proposed a tax of 0.5% on stocks, 0.1% on bonds and 0.05% on derivatives, while Warren proposed a 0.1% tax on most stocks, bonds, debt obligations and derivative contracts. Harris proposed a 0.2% tax on stock trades, 0.1% on bond trades, and 0.002% tax on derivative trades during her presidential campaign.

Regardless, as has been the case with numerous Democratic initiatives in the previous two years, the Republican Senate will remain a check on Democratic ambitions in this space. It is also worth noting that support for a financial transaction tax is hardly unanimous among Democrats, and there is no guarantee that it would move even if there were unified Democratic control.

As it stands, the likelihood of legislation in this area actually getting enacted remains small, but there may be action on the issue intended to lay the groundwork for future enactment should Democrats flip the Senate in two years.

Conclusion

Whether or not the Republicans hold the Senate after the Georgia runoffs, expect to see the new Biden-Harris administration use all the levers of government at their disposal to advance Democratic priorities in the financial services sector that have either languished or been set back under the Trump administration.

While sweeping legislation may not be feasible, administrative and executive action in this area can prove potent, as the last four years have witnessed. We expect to see the new administration take swift action to start implementing its agenda.



Christopher Allen is a partner, Amber Hay is a senior associate and Paul Howard is a managing director at Arnold & Porter.

Arnold & Porter partners Charles Yi and David F. Freeman Jr. contributed to this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] As of Nov. 25, 2020, the U.S. Senate sits at 50 Republicans and 48 Democrats. Party control of the Senate will be decided after the two Georgia runoffs. Georgia has scheduled a run-off election for Jan. 5, 2021.

[2] For example, the Secure and Fair Enforcement (SAFE) Banking Act of 2019 (H.R. 1595/S. 1200) would have created a safe harbor for providing financial services to cannabis businesses in states where such businesses have been legalized. With near unanimous support among Democrats, the bill also garnered substantial support among Republicans, with 91 Republicans voting in favor of the measure as it passed the House of Representatives in September 2019. Republican support in the Senate was less pronounced, and the measure stalled in that chamber due in no small part to concerns raised by Senate Banking Committee Chairman Mike Crapo (R-ID). However, it is possible that supporters of the bill in the House will set their sights higher (such as on full legalization of marijuana at the federal level), causing the SAFE Banking Act to stall as part of a heavier lift.

[3] Press Release, "SEC Chairman Jay Clayton Confirms Plans to Conclude Tenure at Year End" (Nov. 16, 2020), U.S. Securities and Exchange Commission, available at: https://www.sec.gov/news/press-release/2020-284.

[4] With Janet Yellen as the Secretary of the Treasury, it is likely that FSOC will be more active in monitoring systemic risks posed by nonbank financial institutions, especially with current observations by the Financial Stability Board that certain nonbank financial intermediaries may have exacerbated the financial strain caused by the COVID-19 pandemic, requiring greater and more expedient intervention by the Board of Governors of the Federal Reserve System.

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