How will President Donald J. Trump's recent executive order—(i) the "one-in-two-out" cap on new regulations and (ii) the mandated review of existing financial regulations—impact financial regulation, including regulations promulgated by the Consumer Financial Protection Bureau (CFPB)? It depends.
There are at least two executive orders making waves throughout the financial industry, with more to come.
The first, issued January 30, the "Reducing Regulation and Controlling Regulatory Costs" executive order establishes a regulatory cap for fiscal year 2017 on executive departments and agencies: for every new regulation promulgated, the agency must identify at least two existing regulations to be repealed.
"It is the policy of the executive branch to be prudent and financially responsible in the expenditure of funds, from both public and private sources," according to the executive order. "In addition to the management of the direct expenditure of taxpayer dollars through the budgeting process, it is essential to manage the costs associated with the governmental imposition of private expenditures required to comply with Federal regulations. Toward that end, it is important that, for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process."
The repeal of old regulations requires the same process as the adoption of new regulations under the Administrative Procedures Act (including agency analysis, legal review, and public notice and comment), and with the order linked to the fiscal year, agencies would need to repeal old regulations by September 30 in order to adopt any new regulations.
"If you have a regulation you want, number one, we're probably not going to approve it," Trump said prior to signing the order.
However, the order leaves many questions unanswered, as it contained exemptions for most financial regulators as well as regulations that were mandated by law.
One of the listed exemptions effectively excludes the actions of the CFPB, as the Bureau was created as an independent agency by the Dodd-Frank Wall Street Reform and Consumer Protection Act. But that conclusion could change as a result of pending litigation against the CFPB and/or a bill recently introduced in Congress that would change the Bureau's structure to a five-person commission and an executive agency subject to the executive order.
The second order was issued just a few days later, this time specifically focused on financial regulations. Having promised to "do a big number" on Dodd-Frank, a law that he has characterized as a "disaster," the "Core Principles for Regulating the United States Financial System" executive order set forth seven "key principles" to guide financial regulators.
The principles include "prevent[ing] taxpayer-funded bailouts," "advanc[ing] American interests in international financial regulatory negotiations and meetings," and "restor[ing] public accountability within Federal financial regulatory agencies and rationaliz[ing] the Federal financial regulatory framework." The heads of the relevant regulatory agencies were given 120 days to report back with suggestions on how to change the existing state of financial regulation.
Activity is not limited to the two executive orders. For example:
Other efforts are also underway to block some of the CFPB's rules and regulations. Legislators have already initiated the process to nullify the Bureau's Prepaid Rule (affecting prepaid cards), set to take effect in October (see story above) via a little-used procedure established by the Congressional Review Act (CRA). Only used once before, the procedure permits Congress to nullify a covered rule adopted by a federal agency if Congress acts within a sixty "session" days—that is, days during which Congress is in session). Further, if Congress nullifies the rule, the CRA prohibits reissuing the nullified rule "in substantially the same form" or issuing a "new rule that is substantially the same" as the disapproved rule "unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule."
The CRA process begins with submitting to the U.S. House of Representatives, the Senate and the Comptroller General a report including a copy of the rule, a general statement about the rule, and the proposed effective date. Congress then reviews the rule and has the power to submit and act upon a joint resolution to disapprove it. Both Houses of Congress must sign off on a joint resolution of disapproval under the CRA, but it cannot be filibustered and only requires a simple majority to pass. The joint resolution of disapproval is then passed on to the President for veto or approval.
The Prepaid Rule report was issued in December 2016 and Senator David Perdue (R-Ga.) launched the nullification process on February 1, introducing a joint resolution of disapproval. S.J. Res. 19 was referred to the Senate Committee on Banking, Housing and Urban Affairs. If enacted, the joint resolution of disapproval would not only nullify the Prepaid Rule, it would prohibit the CFPB from taking another stab at it.
In another potential reversal, President Trump signed the "Presidential Memorandum on Fiduciary Duty Rule," directing the Department of Labor (DOL) to examine the rule promulgated last April. The DOL rule broadened the circumstances under which an individual will be considered a fiduciary under Section 4975 of the Internal Revenue Code and the Employee Retirement Income Security Act by reason of providing investment advice to retirement plans and IRAs.
But the rule "may significantly alter the manner in which Americans can receive financial advice, and may not be consistent with the policies of my Administration," Trump's memorandum stated. The DOL should consider whether the anticipated applicability of the Fiduciary Duty Rule "has harmed or is likely to harm investors due to a reduction of American's access to certain retirement savings offering[s], retirement product structures, retirement savings information, or related financial advice"; "has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees"; and "is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services," the memorandum instructed.
Should the Secretary of Labor answer in the affirmative—or decide that the rule is inconsistent with the priority "to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses … and to withstand unexpected financial emergencies"—the memorandum directs the Secretary to publish a proposed rule rescinding or revising the Fiduciary Duty Rule.
Although compliance with the Fiduciary Duty Rule is currently scheduled for April 10, 2017, the DOL announced that it "will now consider its legal options to delay the applicability date as we comply with the President's memorandum."
To read the "one-in-two-out" executive order, click here.
To read the financial system regulation executive order, click here.
To read S.J. Res. 19, click here.
To read the fiduciary duty rule memorandum, click here.
Why it matters
The Trump administration orders are bringing uncertainty to the financial industry, in large part because banks and other affected parties have spent months updating systems and training personnel to comply with new regulations. Moreover, moves to reduce the powers of the CFPB are problematic because the financial industry generally favors a single regulator, and there is fear that deregulation could again lead to (1) fragmented and inconsistent regulation by other federal agencies, and (2) inconsistent enforcement by state agencies that step in to fill the gap.
Should the litigation or legislation seeking to change the CFPB's structure and turn it into an executive agency have the intended effect, then the one-in-two-out executive order could have a significant impact on the Bureau. With a relatively short lifespan, the CFPB has fewer regulations to eliminate in order to enact new ones, such as pending rules on payday lenders and the use of consumer arbitration clauses. The Bureau may also face legislative challenges to rules that have yet to take effect thanks to the CRA and one already proposed joint resolution of disapproval. The DOL's Fiduciary Duty Rule is also on the chopping block, with the joint resolution of disapproval beginning to work its way through Congress.