Investors ready for change as Democrats take control

While the COVID-19 pandemic and its economic impact present the most pressing challenges, Democratic control of Congress and the White House could also spur action on issues ranging from climate change to scrutiny of private equity practices.

President Joe Biden has already unveiled a $1.9 trillion emergency rescue plan focused on delivering financial aid directly to individuals and businesses, plus enhanced testing and vaccination, to boost the economy and jobs. Later this year, Mr. Biden will lay out a plan for a longer-term economic recovery package that is expected to address infrastructure, green energy and other job-creating initiatives.

Paying for these bold actions could revive talk of tax increases for corporations and high-income earners. "Later this decade, if interest costs on the national debt start to become unmanageable, higher taxes may be inevitable," said David Kelly, chief global strategist for J.P. Morgan Asset Management in New York.

During her Jan. 19 confirmation hearing before the Senate Finance Committee to serve as Treasury secretary, Janet Yellen said that she and Mr. Biden are mindful of the country's debt burden, "but right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time."

Ms. Yellen also pledged to work with Congress to help more workers save for retirement by increasing access to workplace retirement plans. That goal is supported by the president and House and Senate legislators from both parties, including House Ways and Means Committee Chairman Richard Neal, who is optimistic that a retirement security package can be passed in 2021. Labor organizations like the International Brotherhood of Teamsters, who stumped for Mr. Biden, are seeing renewed chances for multiemployer pension reform and have pledged to keep drawing the White House's attention to it.

Mr. Neal's first bill introduced in the new 117th Congress addresses the multiemployer pension crisis that he said "has only worsened" in the COVID-19 economic downturn. A similar proposal was introduced by members of the House Education and Labor Committee, whose chairman, Robert C. "Bobby" Scott, D-Va., said the pandemic could cause as many as 180 more multiemployer plans to become insolvent, adding up to 300 plans facing failure. Both leaders are urging that the proposed Emergency Pension Plan Relief Act of 2021 be attached to a COVID-19 relief measure now before Congress.

The proposal would give the Pension Benefit Guaranty Corp. more resources to help troubled plans through partitions, double multiemployer PBGC guarantees, and end benefit reductions currently allowed under the Multiemployer Pension Reform Act. It also has some pension funding relief for single-employer plans.

Climate change is another priority for Mr. Biden and his cabinet. He made that clear on inauguration day, signing more than a dozen executive orders that included one for re-entering the Paris Agreement, which goes into effect within one month.

One sweeping order, "Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis," directs all executive departments and agencies to immediately review regulations and other actions taken in the last four years "and to immediately commence work to confront the climate crisis," including a controversial Department of Labor rule.

The Biden administration is also expected to push regulatory agencies to consider the social and environmental costs of climate change when doing cost-benefit analyses, an important step in creating regulations that hold up in court.

In addition to forming the White House Office of Domestic Climate Policy, Mr. Biden is addressing climate change throughout his government, including the State Department, the National Security Council, the Department of Transportation and the office of Vice President Kamala Harris.

The vice president, whose tiebreaking vote in the evenly split Senate could be crucial for passing any climate change legislation, will oversee the new executive order on federal climate change priorities.

At the Treasury Department, Ms. Yellen appointed a senior-level climate expert and a team that will focus on climate change as a financial systemic risk.

In the 117th Congress, "ambitious climate legislation" can be expected, said Rep. Kathy Castor, D-Fla., chairwoman of the House Select Committee on the Climate Crisis, who said that Mr. Biden "has assembled the most climate-forward cabinet in history."

Potential legislation is expected to build on the panel's climate action plan calling for clean energy tax credits and jobs initiatives, investments in water infrastructure and research into land and ocean climate solutions, among other ideas.

ESG advocates are hopeful the Biden administration will also reverse rules finalized by the Department of Labor in the last few months of 2020 after brief comment periods, including ones preventing ERISA plan fiduciaries from investing in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk, or from casting proxy votes without an economic impact on the retirement plan. Mr. Biden fueled that expectation by ordering review of the "pecuniary" rule on his first day in office as part of the climate crisis executive order.

Another controversial DOL action in 2020 finalized a prohibited transaction exemption allowing investment advice fiduciaries to receive compensation for more types of advice, including rollovers. With an effective date of Feb. 16, the Biden administration could halt that rule-making effort, opening yet another chapter in the history of a fiduciary rule expanded in 2016 under the Obama administration before being struck down in federal court in 2018.

More required corporate disclosure of climate risk and other ESG factors with material impact for investors is considered likely with Gary Gensler leading the Securities and Exchange Commission. The former Commodities Future Trading Commission chairman brings a reputation as a tough enforcer who used a Democrat majority at the CFTC to push through an impressive number of rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Groups like the Council of Institutional Investors in Washington, representing asset owners with a collective $4 trillion, also want the SEC to get tougher with stock exchanges and allow market participants to have a say on data distribution, an issue currently being challenged by the exchanges in court. In May, the SEC ordered exchanges and the Financial Industry Regulatory Authority to come up with a single new national market system for producing core market data, with new governance that allocates one-third voting power to investors and others.

Institutional investors would also like the SEC to push for more transparency into private equity practices, including fees and expenses. Private equity could also be scrutinized in the Senate, where the new chairman of the Senate Banking Committee, Sherrod Brown of Ohio, supports reforms proposed by outspoken critic Sen. Elizabeth Warren and has promised to hold hearings, for starters.

Mr. Brown supports many of the reform ideas, including protecting workers' pensions and other benefits. Other reforms proposed would require more disclosure of fees and expenses, limit dividends for two years when a portfolio company is acquired, curb tax subsidies for excessive leverage and end carried interest.

Despite that scrutiny, as the White House and congressional leaders primarily focus on economic recovery and jobs for the foreseeable future, "I think they are going to be very hesitant to do anything that would inhibit the flow of capital," said Drew Maloney, president and CEO of the American Investment Council, the private equity advocacy organization.