As the country enters the final countdown to the election, interest in the outcome seems to have hit an all-time high. The intense election atmosphere, combined with the ongoing coronavirus pandemic, a controversial Supreme Court confirmation process, high unemployment, and a worrisome economic outlook, is feeding investor anxiety and elevating the prospect for market volatility.

The possibility of increased taxes and other policy initiatives in 2021 if Democrats gain control of the White House and both chambers of Congress only adds to investors' concerns. Here's what investment advisors need to be paying attention to.

No stimulus before election

When the last of four bipartisan coronavirus aid and economic stimulus bills was signed into law in late April, it was widely expected that another round of stimulus would be approved over the summer or in September. But that did not happen. Gaps between the two parties on issues like the total size of the package, how much aid should be given to state and local governments, enhanced unemployment benefits, and special liability protections for businesses, among other disputes, have thus far proved too much to overcome in the pre-election atmosphere. Lawmakers could take up an aid bill during the lame-duck session of Congress after the election, but it's possible that another stimulus bill won't be approved until early 2021.

A failure to deliver another round of stimulus before a new Congress is sworn in on Jan. 3 certainly has implications for Main Street, which could curb momentum and add to market volatility.

Keep clients from overreacting to potential election outcomes

For many investors, a key question leading up to the election is whether they should make changes to their portfolios or their financial plans in anticipation of a particular outcome. Our view is that investors should not overreact to possible outcomes. There are far too many unknowns. Even after the election, there are no certainties about what the incoming Congress or administration will do, what the priorities will be, or how the timing of policy initiatives will play out. This is a good time to remind clients of the big picture. Investors should remain confident that their long-term plan can help them weather a variety of potential outcomes.

In particular, investors have focused on the potential for tax-law changes in a so-called "blue sweep" scenario, in which Joe Biden wins the White House and Democrats capture the majority in the Senate while retaining their majority in the House of Representatives. In general, investor anxieties are stemming from potential tax increases for businesses and wealthy individuals, which could weigh on production, earnings and, ultimately, returns. Biden has outlined a series of tax proposals, including:

• Increasing the corporate tax rate to 28%
• Returning the top individual tax rate to 39.6%
• Treating capital gains and dividends as ordinary income for filers earning over $1 million
• Imposing payroll taxes on income over $400,000
• Making changes to the estate tax
• "Equalizing" the tax benefit for contributing to a retirement savings plan

But details on all of these ideas are sparse, and there is almost no chance they would be enacted as one large package.

It's important for investors to understand that the road from campaign proposal to actual legislation is a long one. Notably, there isn't unanimous agreement among Democrats on all of Biden's tax proposals. Progressives would like to go much further. Others may not want to go as far as Biden on some ideas. Virtually all of the proposals will be part of broader negotiations. They are also almost certain to change along the way. And much will depend on the political and economic circumstances of 2021. Again, investors should be wary of making decisions based on so many unknowns.

Regulatory update

The final months of a presidential term are always frantic for regulatory agencies, as they scramble to finalize new rules before a potential switch in administrations. Rules finalized right before a changeover are sometimes called "midnight regulations." And they can be more easily frozen or overturned by the incoming administration. Investment advisors should be aware of several key rule proposals that fall under this category:

• DOL fiduciary rule: The Department of Labor's proposed best-interest advice exemption is on the fast track to be finalized this fall. The proposal is intended to harmonize with the SEC's new best-interest standard by reinstating the 1975 definition of fiduciary under a five-part test. It proposes a new prohibited transaction exemption that allows investment advisors to provide non-discretionary advice to retirement investors and receive compensation if they satisfy "impartial conduct standards" and other requirements. The agency's unusually short 30-day comment period over the summer, followed by its hastily arranged public hearing in early September, underscores the regulation's speed as it moves to the final stages. While the proposal generally aligns with the new SEC standard, investment advisors should familiarize themselves with the details around issues such as required documentation for rollover conversations.
   
• Lifetime income disclosure: A key element of the SECURE Act that went into effect at the beginning of 2020 is the required disclosure on retirement savers' statements, detailing how their savings would translate into a monthly income in retirement. Unveiled by the DOL in September, the details of the disclosure are designed to be a progress report to help savers understand how well they are preparing for retirement. While some of the details could be tweaked after a public comment period that ended in mid-October, the disclosure will be required by September 2021.
   
• DOL proposals seem to discourage ESG investing in retirement plans. Two recent proposals have caused concern that the Labor Department is actively undermining the use of sustainable investing strategies in retirement plans. One rule would permit fiduciaries to focus only on "pecuniary factors" when evaluating investment options for a plan. A second would prohibit fiduciaries from voting on "non-pecuniary" issues on corporate proxies. Both are expected to be finalized this fall.
   
• SEC expands definition of "accredited investor." In August, a divided SEC approved a rule expanding eligibility for investing in hedge funds and other private securities under the accredited investor designation. The definition used to be based solely on wealth—income or net worth—but the new rule allows individuals with certain professional qualifications or designations or other ways of demonstrating "financial sophistication" to qualify. The new standard takes effect December 8.
   
• SEC investment advisor advertising rule: Proposed in November 2019, the rule modernizes a rule that has been in place since the 1960s, allowing the use of testimonials, endorsements, performance results, and third-party ratings in client solicitations. There has been little word out of the agency about the timing of a final rule, though it is widely expected the SEC will adopt some form of the proposed amendments before the end of the year.

Could a new administration or Congress overturn these and other regulations in 2021? It's possible, depending on the makeup of the new Congress, its willingness to use a set of arcane rules to reverse regulations from a previous administration, and the new administration's own priorities.

Finally, investment advisors should be aware of an August Risk Alert from the SEC's Office of Compliance Inspections and Examinations, which outlines several pandemic-related risks and challenges. Key topics in the alert include:

• Potential for investment fraud
• Protection of assets and sensitive information
• Supervision of personnel in the remote working situation that so many of us have been experiencing over the past several months

We expect the SEC to focus on pandemic-related risk areas in future exams, so investment advisors would be wise to review their policies and procedures to ensure compliance with all relevant rules.

This report is current as of 10/21/20. Look for another roundup next quarter from Schwab's D.C. insider Michael Townsend.