How the Recent Executive Actions May Affect Banks

The new administration has been issuing a flurry of executive orders and memoranda, several of which are aimed at freezing, limiting and reducing business regulations. While these first executive actions do not apply directly to the federal banking regulators or the CFPB, some of them very well may affect financial institutions. Whether these actions will result in the repeal of any banking laws or regulations, much less “do a big number on Dodd-Frank,” remains to be seen.

Presidential Memorandum of April 21, 2017 (Reviewing Dodd-Frank’s Orderly Liquidation Authority)

President Trump’s most recent memorandum directs the U.S. Treasury Secretary to review and report on its Orderly Liquidation Authority (OLA) under the Dodd-Frank Act. Using the OLA, the Treasury Secretary may determine that a financial company is in default (or in danger of default) and that its failure would have a serious adverse effect on financial stability in the United States. After making that determination, the Treasury may place a financial company in receivership and initiate liquidation.

The OLA memo orders the Treasury to consider the potential adverse effects of failing financial companies on the financial stability of the United States and to review whether the OLA framework is consistent with the president’s “core principles” for regulating the financial system, whether invoking the OLA could cause losses to taxpayers, whether it leads to excessive risk-taking, and whether adding a new chapter to the Bankruptcy Code would be a superior method of resolving a failing financial firm. The memo also orders the Treasury Secretary to refrain from making any OLA determinations until after completing its report, which is due in 180 days. 

Presidential Memorandum of April 21, 2017 (Reviewing Dodd-Frank’s SIFI Designation Process)

In a separate memorandum, President Trump has directed the Treasury Secretary to review and report on the Financial Stability Oversight Council’s process for designating nonbanks as systemically important financial institutions (SIFIs). Nonbank companies with a SIFI designation are subject to supervision by the Federal Reserve Board and certain prudential standards.

In the SIFI memo, the President orders the Treasury Secretary to review and report on whether the designation process comports with the president’s “core principles” for regulating the financial system, whether it is sufficiently transparent, whether it affords entities with adequate due process, and whether it sufficiently considers the costs of a designation on the regulated entity, among other considerations. The memo directs the Treasury Secretary to temporarily pause any non-emergency designations until after completing its report, which also is due in 180 days. 

Executive Order of February 24, 2017 (Enforcing the Regulatory Reform Agenda)

President Trump’s most recent Executive Order directs federal agencies to establish a regulatory reform task force chaired by a regulatory reform officer. The task forces are charged with identifying regulations that should be modified or repealed because they inhibit job creation, are outdated, unnecessary, or ineffective, impose costs that exceed benefits, interfere with regulatory reform initiatives and policies, rely on information that is not publicly available, or that implement executive orders that have been rescinded or substantially modified. Task forces established under the order must issue a progress report within 90 days.

The order addresses “each agency,” so it is not immediately clear whether the independent banking agencies will be covered by this mandate. However, banking regulators already are required to conduct periodic regulatory reviews every ten years under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). That law requires the regulators to identify outdated, unnecessary, or unduly burdensome regulations and consider how to reduce regulatory burden on insured depository institutions while ensuring the safety and soundness of the financial system. The banking regulators just released their latest, 440-page EGRPRA review, which they began in 2014, on March 21st.

Executive Order of February 3, 2017 (Treasury Report on U.S. Financial Regulations)

President Trump previously issued an Executive Order directing the Secretary of the Treasury to review and report on existing laws, regulations and other government actions for consistency with seven “Core Principles.” The Core Principles are generic and broad, covering concepts such as “mak[ing] regulation efficient, effective, and appropriately tailored” and “restor[ing] public accountability within the Federal financial regulatory agencies and rationaliz[ing] the Federal financial regulatory framework.”

This Executive Order’s significance will become evident only after the Treasury Secretary completes its review, in consultation with the Financial Stability Oversight Council agencies (the OCC, FDIC, Federal Reserve, CFPB, FHFA, SEC and other financial regulators). The report is meant to be a significant undertaking to “identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.” The final report is due by June 3, 2017 (120 days after the date of the order).

Presidential Memorandum of February 3, 2017 (Rescinding or Revising the Fiduciary Rule)

Another President Trump memorandum is more specific. It directs the Department of Labor (DOL) to review and possibly rescind or revise its final Fiduciary Rule, which is set to become effective on April 10, 2017. The Fiduciary Rule would substantially expand the definition of “investment advisors” who have a fiduciary duty to their customers, and there are concerns it will sweep frontline bank employees into its strict requirements.

The memorandum directs the Secretary of Labor to rescind or revise the Fiduciary Rule, provided that the Secretary finds “any reason” that the rule “may adversely affect the ability of Americans to gain access to retirement information and financial advice.” In response to this memorandum, the DOL proposed a rule to delay the Fiduciary Rule’s effective date for 60 days, until June 9, 2017. The DOL has submitted a final version of its proposed delay to the Office of Management and Budget (OMB) for review. If the OMB approves the delay, the final rule will be published in the Federal Register, and the 60-day delay will take effect. 

Executive Order of January 30, 2017 (Reducing Regulations and Controlling Regulatory Costs)

Another Executive Order attempts to control regulations by requiring executive agencies to repeal two existing regulations before implementing any new regulation, and by requiring that “the total incremental cost of all new regulations, including repealed regulations, to be finalized this year shall be no greater than zero . . . .” But this Executive Order does not apply to independent regulatory agencies (as has been confirmed by an administration spokesperson), a category that includes nearly all of the federal financial regulators, such as the OCC, FDIC, Federal Reserve, FHA, CFPB, NCUA, SEC, and others. Consequently, this much cited Executive Order’s effect on banking regulations likely will be limited. 

Presidential Memorandum of January 20, 2017 (Regulatory Freeze Pending Reviews)

President Trump’s very first memorandum orders the “Heads of Executive Departments and Agencies” to freeze pending regulations and postpone the effective dates of new regulations for sixty days, until March 21, 2017. (Notably, the past three administrations implemented similar freezes soon after taking office.) However, this memorandum does not apply to independent regulatory agencies (again, this includes the OCC, FDIC, Federal Reserve, FHA, and CFPB, among others).

So far, just a handful of rules have been delayed under the memorandum. For example, the Small Business Administration (SBA) has issued a final rule postponing an earlier final rule that had an effective date of January 27, 2017. The postponed final rule would have clarified aspects of the SBA’s Small Business Investment Company Program.

Even if this memorandum were to apply to the CFPB’s regulations, it would not provide much relief. The memorandum postpones pending rules for just sixty days, until March 21st. For rules like the CFPB’s upcoming HMDA overhaul, this postponement would have little effect; the bulk of the HMDA changes do not become effective until January 1, 2018, long after the March 21 postponement date has passed. The memorandum also instructs agency heads to “consider proposing” further delays, but it appears unlikely that the CFPB’s Director Cordray or the prudential regulators will take up that suggestion.

Potential Legislative Action

While we wait to see whether these recent executive actions result in the repeal of major banking regulations, there are other viable efforts underway to strike portions of the Dodd-Frank Act and related regulations, both through legislation and by other means. For example, in addition to the deregulation bills that already have been or are expected to be introduced, some have theorized that Congress can repeal many of the banking regulations and guidances issued under several previous administrations based on an expansive reading of the Congressional Review Act. This law was enacted in 1996 and authorizes Congress to strike down regulations finalized within sixty days after they have been submitted to Congress. Apparently many of the regulations adopted in the past two decades never were submitted to Congress pursuant to this law, arguably leaving a broad swath of banking regulations vulnerable to congressional repeal.

One notable regulation recently subjected to repeal under the Congressional Review Act is the Obama Administration's Department of Labor's rule declaring that state-sponsored Secure Choice retirement programs do not trigger ERISA regulations. On March 30, 2017, Congress passed a joint resolution disapproving of the DOL rule, which President Trump signed on April 13, 2017. The rule’s repeal could expose businesses that participate in Secure Choice programs to liability under ERISA if employees find fault with their retirement plans. Undoubtedly, this exposure will have a significant chilling effect on the Illinois Secure Choice program. 

Stay tuned! We will update this Featured Development as more events unfold.