The 2024 election campaign has been fiery but mostly peaceful, to borrow a much-maligned phrase from CNN. But with polling day upon us and with the potential not only for a lengthy drawn-out counting process but for violence, protest and unrest all too real, the rest of this week is almost certainly going to bring shocks and anxieties regardless of where loyalties lie.
Of course, the country’s asset managers and institutional investors have paid close attention to this election and how its two potential outcomes could shape the industry and alter market dynamics across the next four years. Elections always have the potential to reshape industry regulatory and enforcement practices, but rarely has a vote seen such polarity or potential for divergent pathways for the way the financial sector is governed. So, with both regulatory and asset management lenses on, here is a look at how the success of either candidate could shape the industry during the next presidential term.
A Trump presidency would likely bring a transformative shift towards deregulation in line with his first term, with a defanging of government agencies and a pullback from sustainability priorities. With more control over the Federal Reserve, interest rates would decline. A Harris presidency on the other hand would likely spell a continuation or bolstering of existing policies and direction, albeit with a different tint to the lens, as well as more emphasis on environmental, social, and governance factors, and a slower approach to interest rate reduction as directed by a Federal Reserve that maintains its independence.
“We have never in my memory, and I have been at this for a lot of cycles, had a leadership moment like this,” said Russell Sacks, financial services regulatory partner at law firm King & Spalding. “One where the outcome of the election will so massively affect the financial industry more generally, and the asset management industry specifically.”
Given the high stakes and potential for divergence, the industry needs to brace itself for both possibilities regardless of political affiliation. The head of regulatory affairs at one large asset manager told Institutional Investor this week that the firm is currently interacting with agencies as they are set up and will continue to do so.
“We are regulated today, and we are going to be regulated tomorrow,” the executive said. “We always have an open-door engagement with our regulators, and we are always looking for the best outcomes for our clients and the markets.”
The Meaning of Regulation Divides the Candidates
The rules of the game are likely to change drastically or not at all depending on the result, and sources suggest that asset managers must takes steps to prepare for both eventualities. Trump’s deregulatory approach would be welcome in some sectors, Harris’ in others.
Dan Zwirn, CEO of Arena Investors, believes “deregulation is only a positive for everybody,” although he says regulations on insurance companies make sense. “... Within the insurance business the regulatory evolution and what folks have been looking at has been reasonable and trying to get rid of bad risk in a right way. But in many other areas of regulation it has been overdone and you’ve seen excesses at the securities, bank, and antitrust regulators where new and novel positions have been rejected by the courts and created a lot of friction and ultimately raised the cost of capital right in the economy.”
One sweeping change would be Trump’s intentions to move from the core principles and alter operations at the Federal Reserve to bring about a low or zero interest environment, by removing the current leadership and bringing control of interest rates under the White House. This would create an environment beneficial to certain sectors like investment banking and real estate.
“That would spell a sea change for financial markets in the U.S.; not only are we talking about a low or zero interest rate policy for the foreseeable future under a second Trump administration, but we’re also talking about an alteration to how financial regulation works if the Fed is less independent,” added Sacks. “We have, for the first time in memory, a situation where principles that one party thinks should be mandatory and absolutely part of the financial fabric of the country, such as ESG disclosures, would be prohibited by the other party.”
This was not the case in previous electoral contests, he added.
With the performance of investments highly dependent on interest rates, a fundamental change in the independence of the Fed would dramatically alter the business mix of asset managers. A low-interest rate environment would prompt some investors to move more money into stocks and private equity. At the same, corporate pension plans, mutual funds designed for retirees, and insurance companies, would struggle in the face of low yields on the conservative fixed income investments that make up the bulk of their portfolios.
“It is great for the equities industry, and far less so for fixed income,” added Sacks. “But asset managers know how to pivot.”
Harris, on the other hand has shown no intent to undermine the regulatory system and is likely to adhere to recognized protocols, appointing people to leadership positions on schedule, and upholding the independence of the Fed that has long been embraced by the financial industry. Global stability is arguably reliant on an independent Federal Reserve that keeps the dollar in check and seeks to balance healthy employment and economic growth with inflation.
Despite supporting a deregulatory agenda, Zwirn suggested that losing Fed independence would be a “bad thing.”
“It it’s already viewed as questionably independent in the first place, for that to be reduced from where it is now would be unfortunate,” he added. “Presidents like to have low interest rates, but when you are incinerating the fiat currency through terrible fiscal policy, it’s very hard to reduce the compensation available to investors who are willing to expose themselves to that currency.”
The Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) would similarly be targets for Trump. The SEC tends to have two commissioners from each party and a chair from the president’s party, but this arrangement is only tradition and there is no guarantee that Trump would adhere to protocol. A fully stacked SEC would have few checks and balances and would essentially be under the control of the White House. FINRA closely mirrors the SEC, so this situation would also have a profound impact on its own agenda.
One of the key markers of the Biden administration has been strict enforcement. Chair Gary Gensler has been a particular advocate of this, and his SEC has seen record breaking fines. The asset management industry is likely to want the SEC to back off, given the ‘regulation by enforcement’ approach has been met with a steely response.
“The asset management industry and the banking industry want the same thing, which is for regulation to be a noun, with focus on policy and rulemaking and less focus on the action of enforcement,” said Sacks.
Sustainability Is on the Ballot
When it comes to the financial sector, perhaps the most polarizing topic between the two candidates is the future of ESG standards. During the Biden administration there was a push towards enhanced standards, disclosures, and transparency and Harris would likely keep this enforcement driven approach. Although she may replace Gensler. The SEC adopted climate-related disclosure rules in 2024 that solidified demands for consistent, comparable, and reliable information related to climate. However, the rules were hotly disputed and rejected by large parts of the industry.
Trump, however, has taken a strong anti-ESG stance and would look to unwind these rules, potentially going as far as to make ESG disclosures of this nature illegal, according to one source, who suggested that the two camps are 180 degrees apart on this topic.
ESG-aligned portfolios have been a point of contention, with Blackrock CEO Larry fink distancing the firm from the term earlier in the year amid an industry wide redefining of the way the concept is framed.
Tom Kuh, head of ESG strategy at Morningstar Indexes, agreed that a second consecutive Democratic administration would mean the SEC’s ESG rules would remain in place, but doubts they will survive a Trump presidency.
“The anti-ESG campaign itself is, in many ways, the new form of climate denialism,” he said. “In the sense that climate denial succeeded in confusing the debate and policy in the U.S. for a couple of decades. But now climate change is indisputable, everyone talks about it, even weathermen in Florida.
“But anything that is not strictly focused on finance can be considered a violation of fiduciary duty, even if it can conversely be considered as a material issue,” said Kuh.
This drive away from ESG could reignite tensions between those in favor and those who simply consider it to be good business. Trump may also pull the Inflation Reduction Act that has had a profound impact on sustainability goals globally and has contributed to economic growth in many parts of the country.
Regulations May Change, But not the Markets
The rules governing investors and asset managers would be set to change under a Trump administration, but there is little suggestion that the market itself or investment behavior would be greatly impacted.
Matt Benkendorf, CIO of Vontobel Asset Management’s quality growth equity investment strategy, believes that the biggest way that the election outcome is going to affect the markets is in consumer sentiment.
“The main issue we face is not as much policy, but that we have such a polarized population in the U.S. right now that the election outcome is going to leave by effect half of the population fairly unhappy,” he said. “Though the economy structurally is in fairly good shape, consumer sentiment is generally the issue that can throw an economy off balance. We want to look at feelings and emotions following the election and how do we as consumers and business leaders operate or change behavior post the election.”
He added that investors should be generally cautious and be aware that there has been a strong and buoyant market environment this year. Whether regulatory issues are a consideration or not, there is a high likelihood that a second Trump administration would bring profound changes and have a significant impact on the market and investments.
