The new Administration and Congress are pursuing a multi-pronged approach to regulatory relief for financial services firms, with stated goals of reducing administrative burdens and complexity as a means to spur economic growth. This includes a series of Executive Orders and Presidential Memoranda aimed at establishing new principles for financial regulation, temporarily staying and reconsidering recently-adopted regulations that have not yet gone into full effect and are deemed to be overly costly or inconsistent with the emerging regulatory priorities of the Trump Administration, and a directive to the new Treasury Secretary to review the existing financial regulatory framework and propose legislation to realign that framework with new priorities. The priorities and policies set out by the President are intended to inform future legislative action for reform of the financial regulatory system. For its part, Congress has commenced a review under the Congressional Review Act of recently-adopted rules and is considering new legislation to roll back portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The House Financial Services Committee under the leadership of its Chair Jeb Hensarling (R-TX) has an early start with the Financial CHOICE Act, which the Committee reported out in September 2016 and is actively revising for consideration in the new session.
This Advisory summarizes the recent Presidential actions affecting the regulation of the US financial system, how they relate to the parallel efforts of Congress, and discusses certain considerations regarding the implementation and potential impact of these directives.
Executive Order on the Regulation of the US Financial System
On February 3rd, the President signed an Executive Order establishing the Administration's policy to regulate the US financial system according to the following principles:
- Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
- Prevent taxpayer-funded bailouts;
- Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
- Enable American companies to be competitive with foreign firms in domestic and foreign markets;
- Advance American interests in international financial regulatory negotiations and meetings; and
- Restore public accountability within federal financial regulatory agencies and rationalize the federal financial regulatory framework.
The Executive Order also requires the Treasury Secretary, after consulting with the member agencies of the Financial Stability Oversight Council (FSOC), to report to the President on the extent to which any existing laws, treaties, regulations, guidance, reporting, and recordkeeping requirements promote or inhibit the principles described above. The Treasury Secretary's report must be issued within 120 days of the date of the Executive Order. We note that the President's nominee for Treasury Secretary, Steven Mnuchin, has not yet been confirmed by the Senate, although action is anticipated soon on that nomination.
The Executive Order is not self-effecting, in that it does not achieve any direct change in law, regulation or regulatory guidance. Rather, as a set of principles it is intended to serve as a signal to the financial services industry and as guidance for Congress of the Administration's agenda for financial regulation. The principles established by the Administration are, in many respects, similar to those advanced by the financial regulatory reform proposal released by House Republicans in 2016. That proposal—the Financial CHOICE Act—would, among other things, roll back many parts of the Dodd-Frank Act by repealing or amending a number of existing lending authorities and emergency programs, require comprehensive cost-benefit analysis to be conducted by all regulatory agencies prior to the issuance of any new rule, reform the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) by installing multi-member boards, amend various consumer financial or investor protection laws for the stated purpose of promoting consumer choice, and subject regulatory agencies—in particular, the CFPB and the FSOC—to greater congressional oversight (including by subjecting the CFPB to the congressional appropriations process, which would give Congress much more control over the operations of the agency).1
Indeed, House Financial Services Committee Chair Jeb Hensarling endorsed the Executive Order, stating "I'm very pleased that President Trump signed this executive action, which closely mirrors provisions that are found in the Financial CHOICE Act to end Wall Street bailouts, end 'too big to fail,' and end top-down regulations that make it harder for our economy to grow and for hardworking Americans to achieve financial independence." As noted, House Republicans are expected to reintroduce a revised reform proposal in the coming months.
We note that, in connection with the Executive Order, the President also issued a memorandum for the Secretary of Labor requiring further review of the Labor Department's final rule regarding fiduciary investment advice. A separate Advisory providing analysis of the implications of this memorandum is forthcoming.
Presidential Memorandum Freezing Regulations Pending Further Review
Within hours of his swearing-in ceremony on January 20th, the President issued a memorandum for federal executive departments and agencies instituting a temporary freeze of regulations that have not yet become effective in order to allow for review of such regulations by a department or agency head appointed or designated by the President (the January 20 Memorandum or the Memorandum).2 The January 20 Memorandum provides an exception for "emergency situations or other urgent circumstances relating to health, safety, financial or national security matters." The Memorandum is similar to orders issued under previous new administrations. Notably, however, it also appears to apply to interpretive guidance documents and other non-rulemaking means used by agencies to signal a new policy or change in direction without the use of a formal rulemaking. If this approach is carried forward into legislative or other binding action, reining in these non-rule issuances and subjecting them to a formal administrative process would reduce the ability of agencies to act on issues of broad applicability without a cost-benefit analysis, public comment, and review by court or Congress.
The January 20 Memorandum is, however, somewhat unclear as to its applicability to independent regulatory agencies, such as the Board of Governors of the Federal Reserve System (Federal Reserve), the OCC, the FDIC, the CFPB, and the Securities and Exchange Commission (SEC). The Memorandum applies to any "regulatory action" as the term is defined in long-standing Executive Order 12866 (EO 12866)—that is "any substantive action by an agency (normally published in the Federal Register) that promulgates or is expected to lead to the promulgation of a final rule or regulation, including notices of inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking," and to any "guidance document," meaning any "agency statement of general applicability and future effect, other than a regulatory action, that sets forth a policy on a statutory, regulatory, or technical issue or an interpretation of a statutory or regulatory issue."3 The Memorandum does not state explicitly whether the term "agency" includes independent regulatory agencies.
An Executive Order of January 30th on "Reducing Regulation and Controlling Regulatory Costs" (the January 30 Executive Order or the Order), which is described further below, is more clear in its limited application to independent agencies, particularly in light of a supplemental memorandum issued by the Office of Management and Budget (OMB) late on February 2nd which answered certain questions, and specifically states that Section Two of the Order, which imposes a "regulatory cap" for Fiscal Year 2017, does not apply to independent agencies, although they are encouraged at their own discretion to follow these provisions of the Order.
We anticipate that the federal banking agencies and other independent financial regulators will take the position that their rulemaking activities are not subject to the requirements of the January 20 Memorandum. First, prior Administrations that have implemented a similar regulatory freeze have generally excluded any regulations issued by independent regulatory agencies. Second, EO 12866, which is incorporated in part into the Memorandum, excludes from the term "agency" any agency that is considered to be an independent regulatory agency under 44 USC. § 3502(5), including the Federal Reserve, OCC, FDIC, CFPB, and the SEC, among others. Although independent agencies, such as the CFPB, indicate that they are evaluating the impact of the Memorandum on their activities, we anticipate this direct impact to be limited.4
Executive Order on Reducing Regulation and Controlling Regulatory Costs: "One In, Two Out"
The President's January 30 Executive Order establishes a "regulatory cap" for Fiscal Year 2017 pursuant to which executive departments and federal agencies that publicly propose a new regulation must identify two existing regulations for repeal. Accordingly, the Order requires that the incremental cost of all new regulations, including repealed regulations, be no greater than zero for Fiscal Year 2017. For Fiscal Year 2018 and beyond, the Order requires agencies to estimate the total costs and savings associated with new and repealed regulations, identifying any net increase in incremental costs. Agencies will be granted an incremental cost allowance for each fiscal year, to be determined by the OMB. Any regulation(s) exceeding such allowance will be required to be approved by the OMB. Moreover, the Order prohibits the issuance of any regulation that was not published in an agency's annual Unified Regulatory Agenda pursuant to EO 12866. As noted, supplemental OMB guidance on the January 30 Executive Order states that the Fiscal Year 2017 regulatory cap requirements are not directly applicable to independent agencies.
The Order defines the terms "regulation" or "rule" to mean "any agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or to describe the procedure or practice requirements of an agency."5 However, for purposes of the Fiscal Year 2017 regulatory cap, the supplemental OMB guidance clarifies that the Order applies to "significant regulatory actions" as the term is defined under EO 12866, meaning "any regulatory action likely to result in a rule that may: (1) have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local or tribal governments or communities, (2) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency, (3) materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof, or (4) raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in [EO 12866]."6 OMB also indicates that any new significant guidance or interpretive documents will be examined on a case-by-case basis and may therefore be subject to the Fiscal Year 2017 regulatory cap requirements.7
As noted, the Fiscal Year 2017 regulatory cap requirements do not apply to independent regulatory agencies, although such agencies are encouraged to identify existing regulations that, if repealed or revised, would achieve savings that would offset the cost of any new "significant regulatory actions."8 OMB has not issued guidance with respect to any other aspect of the Order, and the applicability of those provisions to independent regulatory agencies therefore remains unclear.
Certain specific elements of the Order may also require further guidance. The Order's definition of "regulation" or "rule" is very broad, and the calculation of costs or savings stemming from the implementation of a new regulation or the repeal of an existing one may be difficult to determine based on the text of the Order alone. For example, it is unclear whether the costs or savings related to an agency's amendment of select provisions within a Part or Subpart of its regulations are to be calculated narrowly based on the specific actions undertaken or more broadly within the context of other regulations within such Part or Subpart that may be affected, nor is it clear what constitutes a "regulation" or "rule" for purposes of eliminating two when adopting one. In addition, the Order generally exempts regulations that are "required by law," but the intended scope of this exemption is uncertain. Many regulations are implemented solely to carry out specific statutory mandates. It is unlikely that the Administration intended to exempt all such regulations, however, absent further clarification, this outcome is possible based on a reasonable reading of the Order. OMB is expected to issue implementation guidance to address a number of outstanding questions raised by the Order.
Whether or not directly applicable to independent agencies, however, the guidance issued by the OMB sets a tone that will inform the actions of the independent financial regulatory agencies. Through the filling of existing leadership vacancies, the SEC and Commodities Futures Trading Commission (CFTC) will quickly be controlled by appointees of the new Administration who will presumably approach regulatory reform from the same philosophical direction as the Administration. Over the next 11 months, a majority of the board members of the FSOC, FDIC, CFPB, as well as the Comptroller of the Currency and at least three members of the Federal Reserve, including the Chair and the Vice Chair for Supervision, will similarly be replaced by Administration appointees. Cabinet officers of the new Administration who play key roles in shaping regulatory policy over financial institutions, including the Secretary of Treasury and Secretary of Labor, will also presumably advance the policy objectives of the new Administration.
In addition, legislative and budgeting actions of Congress, as well as review of any new regulations under the Congressional Review Act, will also influence prospectively any new initiatives of the independent financial regulatory agencies.
It should be noted, however, that many states key to the financial services industry, including for example, California, Illinois, and New York, may pursue a very different agenda and step in through rulemaking, legislation or enforcement activity, to seek to shape elements of financial regulation within the roles reserved for states in the dual regulatory system.
These early-term Presidential actions and parallel congressional initiatives represent initial steps towards reform of the financial regulatory system in the United States, which will likely include within the next year the repeal or amendment of many of the more burdensome and costly portions of the Dodd-Frank Act and regulations implemented thereunder. In practical terms, although certain of the President's actions will limit the adoption or implementation of new regulations, much of the existing regulatory framework applicable to financial institutions will remain unchanged pending further action, to be conducted under formal notice-and-comment rulemakings under the Administrative Procedure Act, or through the adoption of new legislation by Congress. The Treasury Secretary's report on regulations that promote or inhibit the Administration's core principles for financial regulation should serve as a more specific indicator of the Administration's priorities for reform. In addition, as noted, House Republicans are expected to propose a revised reform plan in the months ahead. Although a concerted effort to rollback at least a significant portion of the Dodd-Frank Act's most burdensome provisions and related regulations is highly likely, the extent to which the priorities of the Administration and Congress align, and the effectiveness of Senate Democrats in winning concessions in the final bill, may determine the scale of any comprehensive reform effort given the limited window within which Congress will be able to enact significant legislation.
1. As reported out of Committee in September 2016, the Financial CHOICE Act would also, among other changes, remove the authority of the FSOC to designate non-bank systemically important financial institutions (SIFIs) and systemically important financial markets utilities, exempt strongly capitalized banking organizations from many of the new Dodd-Frank Act and Basel III requirements, repeal the Title II authority for Federal Deposit Insurance Corporation (FDIC) receivership of nonbank SIFIs, repeal the Volcker Rule, amend the credit risk retention rule, broaden the exemption for private fund managers from Investment Advisers Act registration, exempt M&A brokers from broker-dealer registration, repeal the Labor Department's fiduciary rule for IRAs, roll back on a proposal to impose fiduciary duties on broker-dealers, simplify small business capital access and reporting, private placements and crowdfunding, impose more extensive cost-benefit considerations and congressional review on rulemakings, impose procedural requirements on issuance of administrative guidance, and reverse the "Chevron deference" accorded by courts in their review of decisions of the financial regulatory agencies. The Act would not eliminate the FSOC or the CFPB, nor would it repeal the Title VII regulatory framework for swaps regulation.
2. Specifically, the January 20 Memorandum requires the withdrawal of any regulations that have not yet been published in the Federal Register. With respect to final regulations that have been published in the Federal Register, but have not yet become effective, the January 20 Memorandum requires postponement of the effective date for a period of 60 days from the date of the Memorandum and encourages departments and agencies to consider further notice and comment rulemaking for such regulations beyond this 60-day period to allow for further input on questions of fact, law, or policy.
3. See Exec. Order No. 12,866, 58 Fed. Reg. 190 (Oct. 4, 1993); Exec. Order No. 13,422, 72 Fed. Reg. 14 (Jan. 23, 2007).
4. We note that while the CFPB is statutorily designated as an independent regulatory agency, its status as such is, at present, somewhat unsettled as a result of a recent decision by a panel of the D.C. Circuit Court of Appeals holding that the CFPB should operate as an executive agency. The panel decision is not yet final and effective as a petition for rehearing en banc is pending. See PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1 (D.C. Cir. 2016).
5. Regulations issued with respect to a military, national security or foreign affairs function and those related to agency organization, management and personnel are excluded from the definition. The OMB may also exempt certain categories of regulations.
6. See OMB, Office of Information and Regulatory Affairs, Interim Guidance Implementing Section 2 of the Executive Order of January 30, 2017 Titled "Reducing Regulation and Controlling Regulatory Costs (Feb. 2, 2017).
7. See id.
8. See id.
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