Two days after Democratic President-elect Joe Biden surpassed the 270 electoral votes needed to win the presidency, capital markets attorneys returned to work with the specter of prolonged political uncertainty diminished, though not eliminated. Republican President Donald Trump has not conceded the race and is vowing to pursue legal challenges and seek recounts.
And while control of Congress still hangs in the balance — the outcome of runoff elections in Georgia may determine which party has a Senate majority — attorneys said the likely resolution atop the ticket removes a key element of political and economic unpredictability.
"It certainly opens up the opportunity to raise capital on a firmer basis," said Dechert LLP partner Thomas Friedmann, though he noted that the undecided Senate races can still complicate matters.
For their part, the markets have indicated optimism on the part of investors. Stocks, which rose last week as Biden edged ahead, largely continued to rally on Monday. While the tech-heavy Nasdaq fell 181 points, the Dow Jones industrial average soared 844 points, partly aided by Pfizer Inc.'s announcement of positive early results from its coronavirus vaccine trial.
The prospect of a divided government could be boosting market confidence by easing concerns that a Biden administration would enact large tax increases or increased regulation, which are likely to be met with resistance by a GOP Senate if Republicans retain control.
Another potential boon is that Biden has promised to revive plans for pandemic-related economic relief, which have stalled in recent months amid soaring infection rates. Biden is calling for more relief checks and unemployment insurance, plus other measures that could reassure markets.
"More money in the system and more opportunities for private enterprise to utilize recovery programs means potentially more capital markets activity and [mergers and acquisitions]," said Debevoise & Plimpton LLP Chief Financial Officer and partner Matthew Kaplan.
Any additional relief would build on market conditions that have remained resilient throughout the pandemic, aided by Federal Reserve rescue programs and historically low interest rates. Companies have been raising large amounts of equity and debt since spring, a pattern that has continued through the present except for a brief pause around Election Day.
"The markets have been remarkably robust in the fall," said Paul Hastings LLP partner Christopher Austin, who steers initial public offerings. "We are certainly seeing many signs of activity into early 2021. There are quite a few deals in process or getting started."
Yet several variables remain. Friedmann noted that if Democrats were to take the Senate — the party has secured 48 seats not including the Georgia races, and a 50-50 tie would mean Vice President-elect Kamala Harris would cast tie-breaking votes — certain industries like fossil fuel energy may not fare well under a Biden administration and a Democratic Congress.
Democrats already control the House despite losing seats on Election Day, and Biden has vowed to transition away from fuels like gas and oil and embrace renewable energy.
In terms of regulatory policy, the U.S. Securities and Exchange Commission will now swing to Democratic control, as the president's party seats three of the agency's five commissioners. Lawyers expect a change in the agency's priorities, though to what extent remains to be seen.
Under the leadership of Chairman Jay Clayton since 2017, the SEC's enforcement program has focused on protecting "Main Street," or mom-and-pop investors. Some attorneys expect a Biden administration will step up enforcement actions against larger institutions, potentially turning up the heat on the financial industry and Wall Street.
"From an enforcement aspect, that is where you will see a more muscular approach from the regulatory side," said Cleary Gottlieb Steen & Hamilton LLP partner Francesca Odell.
The SEC could also force companies to disclose more environmental, social and governance matters such as climate risk and workplace diversity. SEC Democrats have called for more robust ESG disclosures, arguing that investors demand such information, while the current Republican majority has cautioned against expanding disclosure mandates in ways that go beyond material information and raise costs on companies.
"We think there is going to be a large focus on ESG-related issues," Odell said.
Democrats could also move beyond the current SEC's policy of encouraging principles-based disclosure — which allows companies some discretion to determine what is material in order to allow flexibility for different industries — and require more standardized disclosures, lawyers said.
That said, capital markets lawyers don't expect the deal-making climate to suffer even if Democrats bring more regulatory scrutiny. Debevoise's Kaplan noted that the SEC began efforts to streamline disclosures under the Obama administration and that the agency's recent efforts to improve capital formation have been well received.
"There is a bipartisan interest in ensuring that the registration and capital-raising process is not unnecessarily burdensome and complicated," Kaplan said.
Paul Hastings' Austin noted that political distinctions are often less important in terms of capital markets regulations than they are for other issues.
For instance, a Biden administration is expected to increase support for the Consumer Financial Protection Bureau, a consumer watchdog created by the Dodd-Frank Act that took an industry friendly-approach under Trump. A revived CFPB could affect several industries, including banking, auto lending and consumer privacy.
"It's fair to say under a Democratic administration you are going to see a reinvigoration of consumer protection generally," Kaplan said.
One area where more regulatory clarity would be welcome is cryptocurrency and digital assets, Austin said. The current SEC has repeatedly cracked down on crypto-based capital raises such as initial coin offerings, viewing them as unregistered securities offerings. But with no legislation or comprehensive rulemaking to date, lawyers say cryptocurrency industry clients are unsure how to proceed on transactions and would benefit from a clearer road map.
"The digital currency and cryptocurrency space is going to continue to be important," Austin said. "It really will be interesting to see how that evolves."
--Editing by Alanna Weissman and Emily Kokoll.
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