New Administration Outlook: A New and Demanding Process of Regulatory Analysis and Reduction – Asserting the Unitary Executive (Part II)

Key Takeaways

• Trump Administration continues aggressive use of Executive Orders to assert Article II powers.
• Latest EO will require one of the most extensive regulatory reviews ever.
• Significant numbers of regulations are likely to be modified or rescinded.

As discussed in Part I of this post, the Trump Administration has crafted a dispute regarding separation of powers that likely will be resolved in the U.S. Supreme Court. The latest Executive Order in this sphere, "Ensuring Lawful Governance And Implementing The President's 'Department of Government Efficiency' Initiative" (the "Lawful Governance EO"),[1] advances its position by requiring all government agencies (including those formerly considered to be "independent") to undertake an extensive analysis of the regulations they administer to classify those which may have legal or constitutional flaws so they may be considered for modification or rescission. Besides the gathering of valuable information, which is likely protected by the Opinions Clause,[2] this also is an example of the exercise of broad Presidential power over the federal bureaucracy. By requiring such a substantial undertaking, the Administration apparently hopes to commence one of the most significant deregulatory actions ever or possibly set the stage for a legal confrontation in which it believes it will have the advantage.

As we discuss below, this confrontation is an issue that, while attracting headlines, will ultimately be resolved in the courts. It implicates an issue that goes to the heart of how the federal government has operated at least since the New Deal and some would contend since the Jefferson Administration, that is, agency independence. Thus, we begin with a brief recap of the shape and scope of the constitutional issue at hand as most recently debated in the Supreme Court.

Background and Constitutional Context

The ability of the President to fulfill his duties under the "Take Care" clause through the power to remove Executive Branch personnel is a strategic issue that has been debated since the Founding. The issue is whether, as part of his Article II powers, the President holds unlimited power to dismiss subordinate members of the Executive Branch at will, or whether Congress (to whom the Constitution gave the power of creating departments within the Executive Branch) has the power to limit the ability of the President to remove subordinate officials and to insulate some of those officials from removal, thus providing them with a degree of independence.[3]

As we noted in our earlier post, this debate can be framed by considering two Supreme Court cases, Myers v. United States [4] from 1926 and Humphrey's Executor v. United States [5] from 1935. Both sides have passionate and persuasive proponents. The issues at hand go to a fundamental question with respect to our constitutional structure and the types of freedom and the quality of governance which flow from that structure.

Two of the most powerful advocates on opposite sides of this issue are Justices Clarence Thomas and Elena Kagan. In 2020, both wrote with eloquence in Seila Law LLC v. Consumer Financial Protection Bureau,[6] with Justice Thomas concurring with the majority and Justice Kagan writing the dissent. Because these new EOs can only be fully understood in light of that debate, we include below highlights of their reasoning:

Justice Thomas

• "[Independent] agencies wield considerable executive power without Presidential oversight. They are led by officers who are insulated from the President by removal restrictions 'reducing the Chief Magistrate to [the role of] cajoler-in-chief.' But '[t]he people do not vote for the Officers of the United States. They instead look to the President to guide the assistants or deputies subject to his superintendence.'"[7]
• "Reiterating the position of James Madison and other members of the First Congress, the [Myers] Court noted that allowing limits on the President's removal authority would grant Congress 'the means of thwarting the Executive in the exercise of his great powers, and in the bearing of his great responsibility, by fastening upon him, as subordinate executive officers, men who by their inefficient service under him, by their lack of loyalty to the service, or by their different views of policy might make his taking care that the laws be faithfully executed most difficult or impossible.'"[8]
• "The Constitution does not permit the creation of officers exercising 'quasi-legislative' and 'quasi-judicial agencies.' No such powers or agencies exist. Congress lacks the authority to delegate its legislative power … and it cannot authorize the use of judicial power by officers acting outside the bounds of Article III.… Free-floating agencies simply do not comport with this constitutional structure."[9]

Justice Kagan

• "Throughout the Nation's history, this Court has left most decisions about how to structure the Executive Branch to Congress and the President, acting through legislation they both agree to. In particular, the Court has commonly allowed those two branches to create zones of administrative independence by limiting the President's power to remove agency heads.… Statute after statute establishing such entities instructs the President that he may not discharge their directors except for cause—most often phrased as inefficiency, neglect of duty, or malfeasance in office."[10]
• "Our Constitution … grants Congress authority to organize all the institutions of American governance, provided only that those arrangements allow the President to perform his own constitutionally assigned duties.… [And] the Constitution—both as originally drafted and as practiced—leaves most disagreements about administrative structure to the Congress and the President, who have the knowledge and experience needed to address them. Within broad bounds, it keeps the courts—who do not—out of the picture."[11]
• "The problem lies in treating the beginning as an ending too—in failing to recognize that the separation of powers is, by design, neither rigid nor complete.… Instead, the branches have—as they must for the whole arrangement to work—'common link[s] of connexion [and] dependence.'"[12]
• "A for-cause standard gives [the President] 'ample authority to assure that [an official] is competently performing his statutory responsibilities in a manner that comports with the [relevant legislation's] provisions.' … [Indeed, n]owhere does the [constitutional] text say anything about the President's power to remove subordinate officials at will.… [This silence] supports wide latitude for Congress to create spheres of administrative independence."[13]

This is the debate which the Trump Administration has intensified but seeks to resolve in favor of Justice Thomas' view. Thus, the newest Executive Orders not only have their own immediate effect but will act as instruments central to the resolution of this debate. How it is decided will have profound effect on financial services regulation and examination, which depends heavily on the expertise (not fealty) of agency managers and staff.

The Lawful Governance Executive Order

The Lawful Governance EO is a "fast follower" to the "Accountability EO" in which the Administration asserted its control over and ability to remove the heads of all independent agencies.[14] This avowed power extends to all prudential, supervisory, and consumer protection banking agencies and to the supervisory and regulatory functions of the Federal Reserve. It also covers the SEC and the CFTC. Accordingly, all financial services agencies will be subject to the Lawful Governance EO.

Antidote to Questionable Regulation

While the Accountability EO was a statement of principles, the Lawful Governance EO can be seen as a qualitative identification exercise. One of the features that makes the federal bureaucracy as resilient and resistant to change as it has been from one administration to the next is its sheer size and its enormous body of work. By some estimates, the government consists of over 400 agencies, boards, etc. Others believe there is no way to really know.[15] The Competitive Enterprise Institute notes that there were 3,018 rules approved in 2023, comprising 89,368 pages in the Federal Register. On average over the last 10 years, 23 rules have been enacted for every law passed by Congress and signed by the President. Since 1976, when the Federal Register began to itemize final rules (not guidance, interpretations, or the like) 217,565 have been issued.[16]

Moreover, much of the work of administrative agencies can be fairly described as "regulatory dark matter" that is non-public and sometimes even includes unpublished interpretations, letters, memoranda, bulletins, circulars, FAQs, alerts, manuals, speeches, etc., which become converted, for all practical purposes, into the law of the land.[17] This was succinctly described in Appalachian Power v. EPA:[18]

The phenomenon we see in this case is familiar. Congress passes a broadly worded statute. The agency follows with regulations containing broad language, open-ended phrases, ambiguous standards and the like. Then as years pass, the agency issues circulars or guidance or memoranda, explaining, interpreting, defining and often expanding the commands in the regulations. One guidance document may yield another and then another and so on. Several words in a regulation may spawn hundreds of pages of text as the agency offers more and more detail regarding what its regulations demand of regulated entities. Law is made, without notice and comment, without public participation, and without publication in the Federal Register or the Code of Federal Regulations.... An agency operating in this way gains a large advantage. 'It can issue or amend its real rules, i.e., its interpretive rules and policy statements, quickly and inexpensively without following any statutorily prescribed procedures.'[19]

The stated intent of the Lawful Governance EO is to short circuit this process. By identifying "bad" regulations (as classified by the agencies themselves) the Administration seeks to shrink the regulatory perimeter while at the same time providing management and oversight tools to ensure that it does not expand in an uncontrolled manner.

The Precedential Effect of EO 12866 [20]

In theory, Executive Order 12866 was intended to stop or curb such excesses. However, it has been only partially effective at that task, probably because of the sheer volume of regulatory material of all types, most of which it never sees. However, that is not to say that it has not created basic processes which have resulted in helpful information. For example, under Section 4(b) of EO 12866, each agency, including the independent agencies, is required to submit on an annual basis a "Unified Regulatory Agenda" to the Office of Information and Regulatory Affairs ("OIRA") within the Office of Management and Budget ("OMB"). As part of that submission, the agencies are to describe all regulations under development or review and that description "shall contain, at a minimum, a regulatory identification number, a brief summary of the action, [and] the legal authority for the action…." Thus, there should be a substantial baseline record regarding each regulation, both those that have been passed and those that currently are under development or review. Section 4(c) of EO 12866 imposes similar requirements on the preparation of each year's Regulatory Plan. If a bureaucratic issuance or proclamation is not in the OIRA database, then its enforceability may be subject to question.[21]

Thus, the basic concept of a regulatory review as contemplated in the Lawful Governance EO is not that unusual. Under Section 4(c)(5) of EO 12866 the Administrator of OIRA is required to provide notice if he or she believes that a planned regulatory action of an agency "may be inconsistent with the President's priorities, or the principles set forth in this executive order…." Moreover, under Section 5 of 12866, "in order to reduce the regulatory burden on the American people … to determine whether regulations … have become unjustified or unnecessary as a result of changed circumstances, to confirm that regulations are both compatible with each other and not duplicative or inappropriately burdensome in the aggregate," agencies were required to submit to OIRA a program under which each agency will periodically review its existing significant regulations to determine whether they should be modified or eliminated to make its programs:

• More effective,
• Less burdensome,
• In greater alignment with the President's priorities and the principles of EO 12866, and
• Properly aligned with legislative mandates and identify those that may be appropriate for reconsideration by Congress.

Finally, much like the body of work contemplated in the Lawful Governance EO, the Clinton Administration contemplated (in Section 6 of EO 12866) a "Centralized Review of Regulations." Thus, many of the concepts of the Lawful Governance EO have been in place for more than 30 years. Accordingly, assuming that work has been done as prescribed, there should be a body of regulatory analysis already in place which may form a starting point for this newest effort.

A Massive Homework Assignment: Requirements of the Lawful Governance EO

The text of the Lawful Governance EO itself requires a comprehensive review of agency regulation that will be more extensive, more detailed, and more public than any previously undertaken. It can be seen as a massive homework assignment for each agency. In this sense, it fulfills the promise of EO 12866 but at a much more granular level and with a much more aggressive timeline. The process itself has a deadline of 60 days, that is by April 20, 2025, regardless of the mass layoffs and forced early retirement of federal administrative personnel. The new EO mandates a two-step process.

In the first step, the agency heads, in consultation with the Attorney General (one assumes to assist in resolution of legal questions) are required to identify the following classes of regulations, listed below with some editorial commentary:

• Those which are unconstitutional, and which raise serious constitutional difficulties, such as exceeding the scope of power vested in the federal government by the Constitution.
  • This goes directly to the separation of powers debate referenced above
• Those which are based on an unlawful delegation of legislative power
  • Id.
• Those which are based on "anything other than the best reading of underlying statutory authority or prohibition."
  • See below.
• Those that "implicate matters of social, political, or economic significance that are not authorized by clear statutory authority."
  • We assume these two are ones the Attorney General's office is likely to weigh in on to resolve questions such as what is the "best reading" of a statute and what is "clear statutory authority."
• Those that "impose significant costs upon private parties that are not outweighed by public benefits."
  • This is merely a recasting of the requirements of EO 12866.
• Those that "harm the national interest by significantly and unjustifiably impeding technological innovation, infrastructure development, disaster response, inflation reduction, research and development, economic development, energy production, land use, and foreign policy objectives."
  • This is almost entirely related to policy and the President's priorities. It is relatively easy to predict that regulations that stand in the way of innovation (such as those which have blocked crypto development), those that have blocked infrastructure development (such as energy pipelines and LNG terminals), and those that may slow down the often repeated desire to expand domestic energy resources, will be identified as part of this process.
• Those that impose undue burdens on small business and impede private enterprise and entrepreneurship.
  • Securities regulations that may impede the raising of capital by small businesses could fall into this classification.
• The review also is to prioritize those rules that satisfy the definition of "significant regulatory action" found in EO 12866.
• The monetary threshold for significant regulatory action in EO 12866 is $100 million.

Step Two of the Lawful Governance EO relates to implementation of those findings by the agency heads. It requires that the Administrator of OIRA "consult with agency heads to develop a Unified Regulatory Agenda that seeks to rescind or modify these regulations, as appropriate." Section 5 of the Lawful Governance EO also requires that OMB "issue implementation guidance, as appropriate."

Two other provisions of the EO require that agency heads deprioritize "actions to enforce regulations that are based on anything other than the best reading of a statute"[22] and which may "go beyond the power is vested in the Federal Government by the Constitution." And it also requires that agency heads determine whether ongoing enforcement of any regulations identified in Step One of the review is compliant with law and the Administration's policies. Agency heads are then, in consultation with the Director of OMB "on a case by case basis as appropriate and consistent with applicable law … [to] direct the termination of such proceedings that do not comply with the Constitution, laws or Administration policy."

Notably, there also is a direction that agencies shall continue to follow Executive Order 12866 in submitting new regulations. However, it notes that in evaluating potential new regulations, agency heads, DOGE Team Leads, and the Administrator of OIRA shall consider "the factors set out in Section 2 (a) of this order." In effect, this converts EO 12866 into an even more potent instrument of regulatory planning and control.

What Are the Likely Interim Outcomes?

Without question, this is the most ambitious regulatory review undertaken by the Executive Branch in history. It will be comprehensive because it impacts independent agencies as well as those typically thought to be under direct Presidential authority. Moreover, just as we noted regarding the Accountability EO, the Lawful Governance EO should be viewed as part of a comprehensive whole, the goal of which is the most aggressive deregulatory effort by the Executive Branch within living memory. It also likely is part of a process that has been thought through for some time prior to this Administration taking office, and it will be staffed by competent professionals from DOJ, OMB, OIRA, and the agencies, many (or all) of whom are in full agreement with the concept of a unitary executive.

One can expect that the agency heads will comply with the Lawful Governance EO and, in light of the tight timeline, begin the review process immediately. While we expect that Step One will be challenged from the outside, we think it has protection from attack because it arguably is based on the Opinions Clause,[23] which allows the President to seek opinions and information from any of the agencies of the Executive Branch. However, once the process of rescission and modification begins, we can expect further challenges in federal courts.

Perhaps most importantly, however, is how these orders are likely to change conduct. It is yet another clear signal that this Administration is quite serious about a major deregulatory effort and one that goes far deeper than the first Trump Administration's mandate of "one in/two out." It is unlikely that those within the agencies that are now being run by the President's appointees would fail to cooperate with the classification process.[24] And, once that process is complete, the decision-making as to the fate of each classified regulation shifts to the agency heads and the Administrator of OIRA (one assumes with the consultation of the Attorney General) to develop a Unified Regulatory Agenda that will determine whether the classified regulations will be modified or rescinded. The development of that document may be one of the most important milestones in the ebb and flow of the administrative state.

Four Details To Look For

First, the "Lawful Governance Process" is to an extent insulated by the fact that it relies on processes (in EO 12866) that have been in place since 1993, except that this Administration takes those processes seriously and expands upon them. They will not be used as guidelines for good management but, rather, as levers for change. The Lawful Governance Process also may be insulated by the fact that its first step, to identify and classify regulations that are not consistent with Administration priorities or that may be unconstitutional, is supported by the Opinions Clause. Finally, it also is "protected" by the practical fact that no one likes out-of-date, burdensome, unnecessary, or potentially unauthorized regulations.

Second, while the Lawful Governance EO focuses on "regulations," it is reasonable to expect that its reach will encompass the "regulatory dark matter" mentioned above and will classify as regulations those things that meet the test of "legislative rules" under the Administrative Procedure Act ("APA") and the Congressional Review Act ("CRA"). In fact, it may discover that there are many regulatory announcements and similar issuances that qualify as regulations but were never scrutinized under the CRA and therefore never actually took effect. Those should be easy to dispose of in a rescission process. Moreover, the newly revived Executive Order 13891 ("Promoting the Rule of Law Through Improved Agency Guidance Documents") requires agencies to publish guidance documents in centralized portals and mandates that agencies write "rules-for-rule-makers" to protect the public from guidance document abuse. While it was not fully implemented before its reversal, EO 13891 uncovered tens of thousands of guidance documents, and at least 32 departments and agencies issued final rules to establish guidance practices. That is a solid foundation on which to build, perhaps starting with one centralized federal repository for all guidance documents across the government.

Third, if the Administration wishes to further limit the ability of such rules to be revived, it will submit them to Congress under the CRA, which can then pass Joint Resolutions of Disapproval, which will be signed by the President. Under the CRA, that means that agencies cannot regulate in that space again without the express permission of Congress.[25]

Fourth, it will be impossible to complete the Lawful Governance Process in a timely manner without the use of sophisticated technology tools, including artificial intelligence and large language models. Once a significant percentage of regulatory work has been captured within those models, there will be no going back as it is expected to usher in an era of both transparency, accessibility, and evaluation of regulatory actions and effectiveness. Once in an AI database, it will be possible to track the results and outcomes of a particular regulation as it goes "live." Thus, it may become possible early in a program's lifecycle to curb or terminate funding for those that have not produced their intended effects. Put another way, should any given program not deliver its intended results, the public should know that before investing any more of their money in an exercise of "reinforcing failure." Jamie Dimon, the Chair and CEO of JP Morgan Chase described the general concept this way in a February 24 interview: "It's not just waste and fraud, it's outcomes.… Why are we spending money on these things? Are we getting what we deserve? What should we change?"

If done correctly, the Lawful Governance Process should be able to answer some of those questions. And in that sense, participatory democracy should benefit from the exercise.

What This Means for Financial Services Regulations

Because of the complex and evolving nature of the financial services industry, regulators have often relied on less formal regulation to oversee and monitor the actions of financial services companies. For example, the well-known CAMELS ratings are used by the regulators as a somewhat rigid framework; however, they have not been submitted for any kind of notice in comment through the APA.[26] There are numerous instances of similar guidance, which, while technically unenforceable, is used by regulators to pressure banks and other financial institutions to submit to the regulators' preferred course of action. For example, all of the Federal Reserve's Supervision and Regulation Letters are unenforceable guidance as a technical matter but are applied day-to-day as if they were regulations.

Thus, one can expect that the power dynamic with respect to bank examination may experience a significant—even seismic—shift. It is likely that examiners will be challenged more frequently on whether their findings and suggestions are based on regulations that will pass muster in connection with this review. Until this process is finished, there is likely to be significant uncertainty in the examination process with respect to what is and what isn't enforceable and maintainable.

However, in our view, this is no time for banks or other financial institutions to be "declaring independence" from regulatory oversight. To the contrary, now is the time to be steady and rock solid with respect to complying with basic and well-accepted principles of internal controls and compliance. Good disclosure, fairness to customers, new investments in technology (particularly around anti-money, laundering and sanctions), ongoing education, responsible innovation, sober risk management, focus on reputational management—all should go forward with seriousness and growing strength. The industry has complained for too long that it is "over-regulated." Now is the time to prove that—with actions, not words. Regulatory pendulums have a tendency to swing in both directions, and while this arc appears to be in favor of the industry, it will not last forever. When it swings back, the industry must be fully prepared to avoid a new era of regulatory overcorrection and burdensomeness.

Conclusion

The stage has now been set for the most profound debate about both separation of powers and the future of the administrative state as any of us have seen in our careers. If the President prevails, not only will it herald a new age of executive power over agencies created by Congress, but it will result in the most significant deregulation in American history. Should that happen, it will redefine the relationship between regulatory examiners and those financial institutions being examined. This could be a healthy thing, with open and informed debates becoming the order of the day as opposed to "You can't fight City Hall."

Much is in the process of becoming, but the changes promise to be profound.

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Should you need additional analysis or guidance in connection with planning how to respond to these changes, the DWT financial services team is prepared to assist.