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6 Presidential Moves That Could Shake Up the Regulatory Environment

  • by Amber Goodrich
  • Mar 08, 2017

Examining the potential regulatory impact of President Trump’s first 25 days in office

Candidate Trump campaigned on a pro-business, deregulation platform. In his first days in office, President Trump has swiftly set that agenda in motion. And while deregulatory moves are welcome news to the financial services industry, it’s important to keep the full picture in perspective. Some proposed changes, by their very nature, will take time to realize, and some may even yield regrettable consequences for financial institutions.

We’re examining six regulatory-related moves initiated by the Trump administration in its first weeks–and dissecting what they actually mean today and what they might mean in the future.

Day 1: A Regulatory Freeze

Right out of the gate, the new administration issued a presidential memorandum calling for a regulatory freeze; such a move, it is important to note, is customary when a different political party takes control of the White House. This Jan. 20 memo placed the following restrictions on new and pending regulation:

  • New regulation not yet sent to the Federal Register must be reviewed and approved by the president’s appointed department or agency head.
  • Regulation previously sent to the Federal Register but not yet published also must be reviewed and approved by the president’s appointee.
  • Regulation already published in the Federal Register but not yet effective must be postponed for 60 days for the new administration to review.

FinRegReform, the blog of Davis Polk, a law firm serving financial institutions, cautioned that this freeze had little meaning for the financial sector because it “only applies to executive departments and agencies and therefore does not apply to most financial regulatory agencies,” which, it notes, are treated as independent agencies. This includes the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), Consumer Financial Protection Bureau (CFPB) and others.

There is one exception to this caveat, and that is related to the Bureau of Industry and Security (BIS) Entity List, which will affect financial institutions’ watch list screening in the short term. WorldECR, which reports on export controls and sanctions, explains that, unlike the Office of Foreign Assets Control (OFAC) SDN list, the BIS list requires regulation to add or remove anyone from it. Financial institutions need to be aware that removals that were in motion at the time of this memorandum were effectively stopped due to the regulatory freeze in order to explain the situation to any impacted customers.

Day 11: A Two-for-One Proposition

On Jan. 30, the White House issued a Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs, a move much likelier to bring relief to financial institutions than the regulatory freeze. This order stated that, “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.” This signals the new administration’s awareness of the significant monetary burden on financial institutions to comply with regulatory requirements.

To alleviate some of that burden, this memo makes good on one of President Trump’s oft repeated campaign promises: It indicates that “for every 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 order also calls for “processes for standardizing the measurement and estimation of regulatory costs.” That standardization could reduce the amount of costly regulation imposed on financial institutions by potentially giving them a stronger platform through which to state their case about the cost-benefit analysis of proposed regulations.

Day 14: An OFAC Adjustment

On Feb. 2, the acting director of OFAC signed Cyber-related General License (GL) 1: Authorizing Certain Transactions with the Federal Security Service (FSB). There is a misperception that this action eased sanctions against Russia. In fact, it did not; it simply provided relief to U.S. companies that export IT-related products to that country.

LawFare, a blog devoted to legal aspects of national security, explains that, “in Russia, the FSB is the regulatory agency responsible for authorizing the importation of IT products that incorporate encryption technology. That means in order to export items like cell phones or computers to Russia, U.S. companies must seek and pay for a license from the FSB.” An executive order issued in early January by the Obama administration banned such transactions, “leaving U.S. exporters in a bind.”

The article further notes that, “the export of goods and services to the FSB remains prohibited and any FSB assets subject to U.S. jurisdiction remain blocked. However, adverse impacts on U.S. companies’ IT exports to Russia was an unintended consequence of the sanctions which the general license now seeks to remedy.”

Day 15: A Glancing Blow to Dodd-Frank

Opponents of the Dodd-Frank Act celebrated the Presidential Executive Order on Core Principles for Regulating the United States Financial System signed on Feb. 3. The first part of the order identified the seven core principles through which this administration plans to shape regulatory policy. The ABA Banking Journal summarized them as follows:

  1. Promote independent consumer choices
  2. Prevent bailouts
  3. Foster economic growth
  4. Promote international competitiveness
  5. Advance U.S. interests in international negotiations
  6. Issue efficient, effective and tailored regulations
  7. Ensure regulatory accountability

The second part of the order calls on the treasury secretary “to consult with the heads of the member agencies of the Financial Stability Oversight Council” in order to review existing regulations to ensure they align with those principles. Dodd-Frank will clearly come under this review’s scrutiny, but to be clear, the order does not repeal the act. That is a task that will require congressional action.

ABA president and CEO Rob Nichols told Bloomberg Markets that he doubted a full Dodd-Frank repeal would result from the review, instead suggesting that, “there’s a whole host of areas that require focus and attention to help the financial markets get the economy going.” Members of the Republican-led Congress appear to be working on such ideas. In particular, Rep. Jeb Hensarling of Texas, House Financial Services Committee Chairman, has introduced the Financial CHOICE Act, an alternative to Dodd-Frank, which, among other things, would change the structure of the CFPB.

The president expects the treasury secretary to report back on this review within 120 days. So, financial institutions could know more about the eventual fate of Dodd-Frank by summer, but remember the process of repeal would take time. And while institutions may want to celebrate a full or partial repeal of Dodd-Frank, they must also consider the cost to dismantle the processes and systems they implemented to comply with it, which is one possible negative consequence of the act’s repeal.

Day 21: A Call to Arms Against Criminal Organizations

In addition to running on a deregulation platform, candidate Trump vowed to restore law and order. The February 9th Presidential Order on Enforcing Federal Law with Respect to Transnational Criminal Organizations and Preventing International Trafficking fulfills one aspect of that campaign promise. It reads in part: “It shall be the policy of the executive branch to strengthen enforcement of Federal law in order to thwart transnational criminal organizations and subsidiary organizations, including criminal gangs, cartels, racketeering organizations, and other groups engaged in illicit activities that present a threat to public safety and national security that are related to,” among other things, fraud, financial crime and cybercrime.

The second part of the statement calls on federal law enforcement agencies to “give a high priority and devote sufficient resources” toward that end.  This could lead to heightened enforcement of the Bank Secrecy Act (BSA) and cybersecurity-related regulations. To prepare for this possibility, financial institutions should take current stock of their BSA and information security compliance programs.

Day 25: A New Treasury Secretary

Nichols of the ABA praised the presidential appointment of former banker Steven Mnuchin as treasury secretary, whom Congress confirmed on Feb. 13. Mnuchin’s banking career includes time at Goldman Sachs, various hedge funds and IndyMac (now OneWest Bank). It is likely that this real-world banking experience will inform his tenure leading the Department of the Treasury. The ABA, according to Nichols, is “eager to work with Mnuchin on strengthening financial recovery and economic progress.”

The Days Ahead

With more than 1,400 days remaining in this administration’s first term, President Trump has only just begun to fulfill his goals. This year and the next will perhaps be the most conducive to the Trump agenda, because the 2018 mid-term elections could be a spoiler, as Democrats hope to take back some control just as Republicans did in 2010. Either way, CSI will continue to cover this administration’s regulatory actions and analyze the anticipated impact they may have on financial institutions.

Amber Goodrich, compliance strategist for CSI Regulatory Compliance, has more than 10 years of financial industry experience. She is a Certified Regulatory Compliance Manager (CRCM) and Certified Bank Secrecy Act (BSA) Professional (CBAP).

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