Our Take: financial services regulatory update – February 21, 2025

Change remains a constant in financial services regulation. Read "our take" on the latest developments and what they mean.

• What happened? On February 18^th, President Trump issued an Executive Order (EO) stating that Article II of the Constitution subjects all executive branch officials and employees, including those at independent agencies, to Presidential supervision. On February 19^th, he issued two additional EOs concerning implementation of the Department of Government Efficiency (DOGE) de-regulation initiative and reducing the size of the Federal government.
• How do the EOs affect financial regulatory agencies? The EOs apply to “any independent regulatory agency” which includes the Fed, OCC, FDIC, CFPB, SEC, CFTC, FHFA and several regulators covering areas outside of financial services. They specifically exclude the Fed’s activities related to monetary policy. The three EOs have the following requirements for these agencies:
  • Agency accountability: Requirements include submitting draft regulations for White House review; consulting with the White House and Office of Management and Budget (OMB) on agency priorities and strategic plans; having the OMB Director set performance standards for agency heads; having their funding adjusted by the OMB; and requiring that all legal interpretation be consistent with those of the President and Attorney General.
  • De-regulation: Directs agency leaders to coordinate with their DOGE Team Leads and the OMB Director to review their regulations for “consistency with law and Administration policy.” They are to provide the Administrator of the Office of Information and Regulatory Affairs (OIRA) with a list of regulations that:
    1. Are unconstitutional or raise “serious constitutional difficulties, such as exceeding the scope of the power vested in the Federal Government by the Constitution”
    2. Are based on unlawful delegations of legislative power
    3. Are based on anything other than “the best reading” of the underlying statute
    4. That “implicate matters of social, political, or economic significance” not clearly authorized by statute
    5. That “impose significant costs upon private parties that are not outweighed by public benefits”
    6. That harm the national interest by significantly impeding technological innovation, inflation reduction, economic development, and several other Administration policy goals
    7. That “impose undue burdens on small business and impede private enterprise and entrepreneurship.”
  • The OIRA Administrator will then consult with the agency leaders to develop a “Unified Regulatory Agenda that seeks to rescind or modify these regulations, as appropriate.” The EO also adds the factors above and DOGE Team Leads to a 1993 EO directing the agencies to submit regulations for review by OIRA.
  • Enforcement: The same EO that calls for categorizing regulations directs the agencies to de-prioritize enforcement of regulations based on “anything other than the best reading of a statute” and going “beyond the powers vested in the Federal Government by the Constitution.” They are also to determine whether any ongoing enforcement is “compliant with law and Administration policy” and consult with the OMB Director and, on a case-by-case basis, direct the termination of enforcement that does not “comply with the Constitution, laws, or Administration policy.”
  • Federal government reduction: Calls for the CFPB to terminate its Academic Research Council and Credit Union Advisory Council and for the FDIC to terminate its Community Bank Advisory Council.
• What’s next? The agency leaders have 60 days to conduct the review of their regulations with “significant regulatory actions” as a priority as well as to submit regulatory actions to OIRA per the 1993 EO.

Our Take

Independent agencies independent no more. The series of EOs is an unprecedented move to reduce the regulatory agencies’ historical independence and authority. Taken together, the EOs would significantly increase Presidential control over the financial regulatory agencies and align their actions more tightly with the Administration’s priorities and preferences. This will earn support from the industry by potentially restricting the agencies’ ability to impose and enforce regulatory requirements, allowing financial institutions to redeploy resources to focus on growth and efficiency. However, the EOs could also create uncertainty by granting the President control over enforcement and subjecting regulation and supervision activities to political agendas and novel legal conclusions. The consolidation of power under the President could mean that any near-term benefits of deregulation for financial institutions would be ephemeral if a new administration were to swing the regulatory pendulum in the other direction.

In the meantime, the EOs raise a number of significant questions for both agencies and the industry, including:

Do the agencies have to comply? We expect that the constitutionality of the EOs eventually to be challenged. As challenges to the orders will take time, the agencies will have to proceed with categorizing their existing regulations despite open questions on the EOs’ terminology and standards, including those below.

What is the scope of “Administration policy”? In contrast with the other factors the agencies are expected to consider, Administration policy is not fixed and could conceivably change over time. The most immediate significance of this will likely be the ability of the Administration to direct the initiation or termination of independent agency enforcement actions.

What is “the best reading” of a statute? The EOs further diminish the agencies’ ability to interpret statutes after last year’s Supreme Court decision in Loper Bright Enterprises v. Raimondo.¹ The President and Attorney General will have considerable leeway to determine that a regulation is inconsistent with the “best reading” of a statute as many of them intentionally leave the details of implementation to specialists at the agencies. Going forward, this standard could limit an agency’s ability to adjust regulations to respond to developments unless and until they are explicitly referenced in statutes, such as digital assets and artificial intelligence.²

What does this mean for the future of independent regulation and the financial system? The EOs effectively create an obstacle course to create any new regulations and will significantly slow future rulemaking. In addition, the provisions granting OMB further control over agency budgets and standards for removal of personnel could have cascading effects on supervision. In terms of the impact to the financial system, potential risks to stability resulting from the removal of regulations and changes to enforcement will not be felt immediately but may appear during the next period of financial stress or significant event testing the resilience of the financial system.

What should financial institutions do now? Given the evolving landscape, financial institutions should stay close to their trade associations and advisers to ensure that they understand the latest developments and provide input to the regulatory process. To support their advocacy, they should develop well-supported feedback on regulations and compliance burdens without commensurate benefit. They should assess the impact of potential changes on business strategies and operations in order to determine how to best deploy their people, processes and technology.

However, until there are concrete changes to laws, regulations or supervisory requirements, firms need to maintain their current compliance and change management programs. Depending on the scale of requirements that are adjusted, institutions will have to consider which financial and operational risk management standards, practices and controls are critical to maintain the trust of customers, capital providers and the markets.

^{[1] This decision overturned “Chevron deference,” a longstanding precedent that compelled Federal courts to defer to an administrative agency’s “reasonable” interpretation of ambiguous legislative provisions which Congress directed that agency to administer.}

^{[1] The Supreme Court has recently affirmed the “major questions doctrine,” which holds that agencies cannot decide questions of “vast economic and political significance” without clear statutory language authorizing them to do so.}

• What happened? On February 17^th, Fed Governor Michelle Bowman spoke on accountability in supervision, applications and regulation. Then, on February 20^th, Fed Vice Chair for Supervision Michael Barr spoke on risks and challenges for bank regulation and supervision.
• What did Bowman say? In addition to commentary on monetary policy, her speech covered policy views concerning:
  • Standards and ratings. Bowman argues that subjective examiner judgments on non-financial risks can misrepresent the true condition of financial institutions, citing the most recent Supervision and Regulation Report’s co-existing findings that only a third of large financial institutions have satisfactory ratings across all components while most of the institutions meet capital and liquidity expectations.
  • Diagnostic accountability. She argues that the current system lacks sufficient checks on subjective regulatory judgments, which can lead to ineffective or misdirected reforms. To address this, she calls for a structured process to diagnose and address deficiencies in supervision.
  • Supervisory guidance. Bowman criticizes the lack of clarity in supervisory expectations delivered as confidential supervisory information. She emphasizes the need for regulators to respond promptly to banks' inquiries and concerns with respect to expectations and interpretations of laws, regulations and guidance.
  • De novo bank applications. She views the de novo bank application process as overly complex, contributing to the stagnation of new bank formation. Bowman calls for streamlining the process, clarifying both approval standards and capital requirements, and coordinating actions across all regulators involved in applications.
  • Mergers and acquisitions. She criticizes the slow pace of M&A approvals and advocates for more predictable approval standards and a reevaluation of competition assessments. She also highlights how adverse public comments - often lacking factual support - can needlessly escalate merger reviews, further slowing the process.

Bowman closed with recommendations for a comprehensive review of outdated banking regulations to eliminate unnecessary burdens, updates to core Fed regulations (such as those concerning loans to insiders and transactions with affiliates), and clearer standards for BSA/AML compliance to prevent excessive reporting burdens.

• What did Barr say? He covered seven near- and long-term risks:
  • Maintaining and finishing post-financial crisis reforms. Barr calls for regulators to finalize Basel III endgame and expanded long-term debt requirements as well as to propose new liquidity requirements.
  • Maintaining the credibility of the stress test. He stresses the importance of maintaining rigorous and transparent stress tests while warning against over-disclosure that could lead banks to game the system. Barr advocates for updating stress test models regularly to reflect evolving financial risks and ensure they remain dynamic.
  • Maintaining credible, consistent supervision. Barr warns against weakening supervisory oversight in the name of efficiency. He calls for improving Fed resources and expertise, particularly for supervising large and complex banks.
  • Encouraging responsible innovation. He acknowledges the benefits of financial technology but highlights risks associated with crypto-assets, including fraud, money laundering, and regulatory arbitrage. He advocates for clearer regulatory guardrails to balance innovation with financial stability.
  • Addressing cyber and third-party risk. Barr calls for increased regulatory focus on cybersecurity resilience and highlights risks stemming from reliance on third-party IT service providers.
  • Risks in the nonbank sector. He raises concerns about rising leverage and interconnectedness in nonbank financial institutions, such as hedge funds, private credit, and insurance firms that could increase systemic risk.
  • Climate risk. Barr calls for continued regulatory attention on financial risks posed by climate change.
• What’s next? Barr will step down as VCS on February 28^th but will remain a Fed Governor.

Our Take

The changing of the guard. If none of the current Governors step down, President Trump will need to select a new VCS from among them – or not name one at all, as Fed Chair Powell suggested in recent Congressional testimony. In the former case, Bowman is the likely choice as she is the Republican-appointed Governor who is most outspoken on supervision and regulation. Accordingly, these two speeches serve as a synopsis of how Fed policy is likely to change over the course of the Trump Administration. At a high level, the difference in their views can be summarized by Bowman focusing on reducing regulatory overreach and increasing transparency while Barr prioritizes risk mitigation and resilience, favoring a more cautious and interventionist approach to regulation. Regardless of Trump’s choice on the VCS position, Barr’s approach is receding. For example, in complying with the EOs and adapting to greater influence from the White House, the Fed will not pursue climate risk management rulemaking and will be much less likely to finalize Basel III endgame and long-term debt requirements in their current form. Instead, the Trump Administration will find an ally in Bowman for its quest to cut down on regulations, streamline application reviews and increase transparency around supervision to encourage innovation and growth.

These notable developments hit our radar recently:

SEC establishes new enforcement unit. On February 20^th, the SEC announced the creation of the Cyber and Emerging Technologies Unit (CETU) to replace the Crypto Assets and Cyber Unit. This new unit will focus on combatting cyber-related misconduct and protect retail investors from bad actors in the emerging technologies space.

CTA enforcement is back on. On February 18th, 2025, the U.S. District Court for the Eastern District of Texas issued a ruling which reinstated the beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA). As a result, all entities that are considered “reporting companies” under the CTA – including small businesses and community associations – will need to submit initial reports to FinCEN, including the full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable identification document or FinCEN identifier for each beneficial owner. In response to the court's decision, FinCEN extended the deadline for most companies to comply with BOI reporting requirements by 30 days to March 21st, 2025. Reporting companies with later deadlines will continue to be subject to those deadlines.

Senate Banking to consider digital asset frameworks and nominations. The Senate Banking Committee has multiple hearings scheduled for next week. On February 26^th, the committee will conduct a hearing entitled “Exploring Bipartisan Legislative Frameworks for Digital Assets.” Additionally, on February 27^th, the following nominees are scheduled to appear before the committee: Dr. Stephen Miran to be Chairman of the Council of Economic Advisors; Jeffrey Kessler to be Under Secretary of Commerce for Industry and Security; William Pulte, to be FHFA Director; and Jonathan McKernan to be CFPB Director.

Vice Chair Barr speaks on AI. On February 18^th, Vice Chair Barr spoke at the Council on Foreign Relations regarding AI and hypothetical scenarios for the future. The speech provides an in-depth analysis of the potential impact of generative AI (GenAI) on the economy and society, outlining two hypothetical scenarios and discussing implications for businesses, regulators, and society.