In my 2017 regulatory predictions post last month, I concluded by saying that the new year would be very different for the financial services industry than 2016. This certainly didn’t take long to come to fruition. In the first two weeks of the new administration, President Trump took several steps aimed at slowing down as well as scaling back current and future regulations. Despite these aggressive actions, there remains a number of challenges related to the reach and impact of these directives.
Regulatory Reform through Memorandum and Executive Orders
Out of the gate, the Trump administration made good on its promise to curtail the pace of federal regulations. Assistant to the President and Chief of Staff Reince Priebus issued a memo on Inauguration Day that, in part, calls for the heads of executive departments and agencies to initiate a regulatory freeze until someone designated by the President has a chance to review and approve them.
The freeze was followed by an Executive Order (“1 in, 2 out rule”) issued 10 days later that required for each new regulation issued by an agency, at least two prior regulations be identified for elimination. The executive order further mandates that the financial impact of each new regulation be offset by the savings from the rescinded regulations, such that the total incremental cost not exceed zero.
Finally, on February 3, the President signed an Executive Order that details six “core principles for regulating the United States financial system.” The Executive Order directs the Secretary of the Treasury to consult with the heads of Financial Stability Oversight Council (e.g., OCC, FDIC, Federal Reserve, CFPB, FHFA and SEC) and report to the President within 120 days the extent to which current laws, regulations and oversight requirements, including those connected with the Dodd-Frank Act, help promote the six core principles.
Application Limited to Executive Branch Agencies
Since the term “department or agency” is not defined in either the memo or the first Executive Order, there was some initial confusion as to whether the requirements of these presidential directives extended only to executive agencies, or also to independent agencies such as the CFPB, OCC, FDIC, SEC and Federal Reserve. A few days after issuing the “1 in, 2 out rule,” the White House issued interim guidance explicitly stating that the order’s provisions did not apply to independent agencies. However, this was not before the Federal Reserve had challenged the reach of the regulatory freeze and the “1 in, 2 out rule” on January 30 by announcing a final rule that no longer subjected select regional banks to the quantitative portion of the annual Comprehensive Capital Analysis and Review (CCAR) stress test.
Existing Challenges and Potential Impact
Despite the swift moves taken by President Trump, it is not clear how much impact these actions themselves will have on slowing down and reducing the number of regulations. While a regulatory freeze will temporarily halt the rulemaking progress at all executive branch agencies, as previously stated, the freeze does not extend to independent agencies.
The “1 in, 2 out rule” has been critiqued as being complicated and difficult to implement. For example, many regulations are mandated by statute and cannot be repealed without an act of Congress. As a result, this may significantly narrow the pool of existing federal regulations that are eligible to be rescinded. Also, any repeal of an existing regulation must go through the extensive and deliberative process required by the Administrative Procedure Act. Already, this Executive Order is facing a legal challenge.
In addition, while the Treasury Secretary can make determinations of what regulations align with the six core principles detailed in the February 3 Executive Order, any changes to Dodd-Frank Act regulations will require congressional action. Though the Republicans control both chambers, Democrats have large enough numbers in the Senate to make it very difficult for Republicans to garner the 60 votes necessary today to get controversial legislation adopted. Not surprisingly, Republicans are actively discussing ways to clear this obstacle.
Where the Real Power Lies
The Trump administration’s largest impact on shaping the regulatory agenda in financial services may lie outside of its executive orders and memoranda. An obscure 1996 statute, the Congressional Review Act (CRA), has suddenly become a potentially powerful tool.
Under the CRA, before a new regulation takes effect, Congress can take action (through a simple majority vote) on a joint resolution disapproving the rule. If the joint resolution is approved in both chambers, the resolution is sent to the President for signature or veto. If the regulation is invalidated, the Agency that issued the regulation is prohibited from issuing a substantially similar regulation without a subsequent act of Congress.
Since its inception, only one time under the CRA had a resolution been signed into law by the President. During the first three weeks of the Trump administration, the House has passed 13 resolutions and two have already been signed into law.
It is easy to envision Republicans using the CRA to invalidate, for example, any newly issued CFPB regulation that they oppose. In addition, within the next 12 months, President Trump will be able to appoint new leaders at the OCC, Fed and FDIC. He has already nominated a new head of the SEC. New leadership can reshape the regulatory agenda of an agency, and this may be one of the most impactful tools that the administration has in ensuring that its regulatory reset is realized.
We are just a few weeks into a new administration, and already we have witnessed a dramatic shift in approach. Yet the action is just heating up as Congress prepares for the introduction of Dodd-Frank reform legislation, and President Trump continues to deliberate over the future of CFPB Director Richard Cordray. The outcome of these battles will help determine the expansiveness of Trump’s regulatory reset agenda.