An election that appears to have resulted in status quo with a twist in Congress likely will keep issues affecting financial advisers on hold.
The anticipated Republican wave did not crash into Capitol Hill. Instead, the GOP likely will take over the House with a majority of fewer than 10 seats. The Senate remains a tossup, as races in Nevada and Arizona are yet to be decided and the contest in Georgia is heading to a December runoff.
When the new Congress is sworn in in January, Republicans will barely control the House, and Democrats could maintain their Senate majority thanks to the tie-breaking vote of Vice President Kamala Harris.
That makeup is similar to the current Congress but with the important difference that Republicans rather than Democrats will control the House with a razor-thin margin.
Power sharing on Capitol Hill will limit the scope of legislation that can get through both chambers. Whether Republicans or Democrats prevail in the Senate, the minority party will have more than enough members to sustain a filibuster.
Any legislation that passes will have to have bipartisan support, something that has been in short supply for the last two years.
“We’re going to see business as usual, much like it was before the election,” said Duane Thompson, owner of Potomac Strategies, a government relations consulting firm.
If Congress can’t get much done, that could be a positive outcome for advisers and their clients, said Paul Auslander, director of financial planning at ProVise Management Group.
“This is the ultimate gridlock,” Auslander said. “For the good of the country and the good of investors, I think that’s OK.”
Advisers probably won’t see progress on restoring and expanding a tax deduction for investment advice.
“I don’t think anything like that is going to happen,” Thompson said. “I don’t see tax reform being a battleground over the next two years.”
Smaller-scale tax policy that is “less ideological and less involved in debates about distributional effects” has a chance of getting through Congress, said Phil English, a former Republican House member from Pennsylvania.
“If they focus on certain changes in the tax code to increase efficiency, to simplify, there’s an opportunity to find common ground,” said English, co-chair of government relations at ArentFox Schiff. “Tax reform is going to be a challenge in this environment.”
Even with just slight control of the House, Republicans will be able to put pressure on SEC Chairman Gary Gensler to curb an agenda that they — and many financial industry trade associations — see as too broad and aggressive.
The Republican chairman of the House Financial Services Committee can haul Gensler up to Capitol Hill to be grilled before the panel. Committee Republicans also can subpoena SEC documents.
Weak control of the House does limit the leverage Republicans can exert during budget negotiations to insert riders in appropriations bills that would prevent the SEC from implementing rules, such as those for environmental, social and governance investing.
“When you have a razor-thin margin on both sides, it’s going to be difficult to put in a controversial rider to defund a rule that is important to one party or the other,” Thompson said.
Republicans have threatened to use negotiations over the debt ceiling to obtain substantial federal spending cuts and other policy priorities.
A slim House majority gives the far right of the party more leverage to pursue the debt ceiling tactic, assuming the issue is not resolved in the lame-duck session of Congress in the next couple weeks. But Republicans have to consider the risk of roiling the financial markets, Thompson said.
“Usually, the party that initiates [a debt-ceiling standoff] gets a very big black eye,” he said.
As the speculation continues about what a new political mix on Capitol Hill will bring, one thing is certain. Democrats didn’t suffer the heavy losses in the midterm elections usually seen by the party that's in the White House.
“My Democratic friends are feeling good because they thought it would be a wipeout,” said Auslander, who's involved in Florida Democratic politics.
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