As American businesses struggle to comprehend the implications of the November election earthquake, one consistent theme has been an expectation that federal regulatory action, at least over time, will decrease across the board. But as the political tectonic plates force federal regulatory agencies to retreat, they also create a void of power that certain state regulators and attorneys general are likely to fill.
The impending transition from the Obama administration to the Trump White House is widely expected to result in an easing up of regulatory and enforcement action by federal agencies. Since the financial crisis, federal regulators, largely under Democratic control, have taken an increasingly hard line policing financial markets, consumer financial products, environmental matters and more. The rise of the Consumer Financial Protection Bureau, and the Securities and Exchange Commission's and Justice Department's focus on holding individuals accountable for financial wrongdoing, are prime examples of this movement.
Federal regulators have used rulemaking and enforcement to advance the Obama administration's policy goals, ranging from the legalistic (e.g., fiduciary obligations for investment advisers) to the complex (e.g., oversight of dark pools) to the dramatic (e.g., regulation of carbon dioxide as a pollutant), all accomplished without relying on new legislation.
With the executive branch and both houses of Congress under Republican control, federal regulators will almost certainly return to a role of far less activism. While part of this shift will be attributable to differences on substantive policies, much of it owes to a difference in the philosophy of governing. Progressives and Democrats historically have viewed federal agencies as effective tools to implement policy goals through both rulemaking and enforcement, particularly if new legislation is not feasible. By contrast, conservatives and Republicans regard the federal regulatory state with a healthy dose of suspicion.
While this era of activism by federal agencies may be waning, at least for now, in its place certain state regulators and attorneys general are poised to rise up and fill any void. New York, as a prime example, commands a veritable armada of regulatory agencies dedicated to financial services, health care, insurance, antitrust, the environment, labor, consumer affairs — you name it. The New York State Department of Financial Services, in particular, has fashioned itself as a mini-version of the CFPB. Each agency has the power to shape businesses through policy, rules and regulations, and enforcement, either on its own or in concert with the state attorney general's office and other state agencies.
The New York attorney general's office itself boasts a fleet of divisions and bureaus covering financial crimes, Medicaid fraud, civil rights, environmental protection, health care, antitrust, consumer frauds and investor protection, to name a few. Over the past eight years, these bureaus' efforts — while impressive — have often been overlooked compared with the more high-profile federal agencies.
While the primary impact of state regulatory and enforcement actions is felt by businesses operating within their state's jurisdiction, the effects ultimately can ripple far beyond the state's territory. Complying with regulatory requirements of large states like New York and California often leads to enterprisewide compliance, given economies of scale in many industries. Also, many foreign companies — particularly financial services and technology companies — call either New York or California home.
This return to state-centric regulation would be a reprise of roles played during the prior Republican administration. In the 2000s, former New York Attorney General (and then Gov.) Eliot Spitzer rose to prominence — most famously using New York state's Martin Act to prosecute securities fraud, but in other areas as well.
Spitzer's aggressive prosecution stood out: advancing Democratic policy objectives through enforcement and regulatory tools rather than legislation. As other states may pursue similar initiatives simultaneously, an obvious downside could be a 50-state patchwork of inconsistent rules in certain areas of the law.
The pendulum is likely to swing once again in the direction of state regulation and enforcement, and away from active federal prosecution. Mary Jo White's recent announcement that she will step down as chair of the SEC is just the beginning of what will be a sea change across federal agencies. Just as Spitzer did in his day, many state regulators and enforcement officials are eagerly waiting to fill the void.
Eric Dinallo is a former superintendent of insurance for New York State and currently a partner in the financial institutions group for Debevoise & Plimpton. From 1999 to 2003, he worked in the state's Office of the Attorney General under Eliot Spitzer.
