What to Expect From the Biden Administration

Matthew Solomon, Francesca L. Odell, and James Langston are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Solomon, Ms. Odell, Mr. Langston, Michael Albano, Helena Grannis, and Mary Alcock.

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.

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).

Corporate Governance

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.

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.

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.

The complete publication is available here.

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