Tools To Limit the Administrative State – The Revival and Enhancement of Executive Orders

Efforts by the Executive Branch to shape and control regulatory output is nothing new. Beginning with the Nixon Administration, several administrations have issued Executive Orders (EOs) to limit or otherwise influence how federal agencies develop, implement, monitor, and sunset regulations. These standards, if followed, provide an efficient and effective regulatory framework. Each new administration may also shift positions in ongoing legal challenges to regulatory actions and take positions in future litigation that affect the implementation of existing and new regulations.

The incoming Trump Administration plans to restrain and shrink the regulatory state. It could begin doing so quickly and easily by reviving and updating prior EOs, as well as issuing new EOs. A review of EOs relevant to regulatory reform may be helpful to understand possible changes in the near term. As in the first Trump Administration, regulatory contraction is expected to affect the financial services industry by:

(1) encouraging private market growth—new institutions, new products and services—and

(2) emphasizing market discipline, rather than regulatory initiatives, to drive changes in financial services.

How these traditional tools of regulatory reform will combine with the so-called "Department of Government Efficiency" (DOGE) remains to be seen. Little information has been released about this specific proposed entity/initiative. But we can expect that it will build on the principles of regulatory efficiency espoused in EOs to pursue its mandate.

The Likely Use of EOs in the Second Trump Administration

The following are key EOs that are likely to be revived, strengthened, and/or adhered to more closely throughout the Executive Branch post-inauguration in January 2025:

• Regulatory takings. EO 12630 (Mar. 15, 1988). This EO focuses on when regulation can result in a "taking" under the Fifth Amendment to the U.S. Constitution, even when there has not been an invasion of property or a direct deprivation of rights. The EO requires agencies to follow specific procedures to avoid regulatory takings and consider the Just Compensation Clause in connection with the obligation to pay compensation to affected parties. This EO will likely be revised and updated and used in connection with environmental regulation, which may have a spillover effect and blunt the climate initiatives and other regulations with which banks and other financial institutions are wrestling. It may also serve as a basis for dampening enforcement of the SEC's ESG disclosure regulations.
• Only necessary regulations. EO 12866 (Sept. 30, 1993). Arguably the most significant EO with respect to principles for regulatory development, oversight, and management by the Executive Branch, this EO sets standards for the implementation of regulation and notes that regulation should be confined to when and where there is an actual need for it. The EO states that "Federal agencies should promulgate only such regulations as are required by law, are necessary to interpret the law, or are made necessary by compelling public need, such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of the American people. In deciding whether and how to regulate, agencies should assess all costs and benefits of available regulatory alternatives, including the alternative of not regulating." The EO also indicates that regulations should be developed with ample input from impacted parties and unneeded regulations should be sunset. The Biden Administration relaxed some of the requirements of this EO, but most of its vitality remains.
• Considering federalism. EO 13132 (August 10, 1999). This EO directs federal agencies to consider the implications of proposed rules on federalism, the division of governmental responsibilities between the federal government and the states intended by the Constitution. If a proposed rule has federalism implications, a federal agency must prepare a "federalism summary impact statement" that details any concerns expressed by state and local governments, the federal agency's rationale for issuing the rule, and an explanation of how it plans to address the state and local concerns. The incoming Trump Administration may use this EO to avoid federal interference in what traditionally have been state matters, including the issuance of bank charters and the regulation of permissible activities.
• One in, two out. EO 13771 (Jan. 30, 2017) and EO 13777 (Feb. 24, 2017). EO 13771 was the first Trump Administration's so-called "one-in, two-out" rule, which required a federal agency that planned to announce a new regulation to propose the repeal of at least two other regulations. The Biden Administration quickly rescinded the EO after taking office. We expect it will be revived immediately on Inauguration Day and perhaps strengthened to require, for instance, that 10 existing regulations be repealed, as has been suggested by the incoming president's transition team.
  
  Under EO 13777, each agency was required to develop standards for the implementation of EO 13771, as well as appoint a Regulatory Reform Officer and a Regulatory Reform Task Force. While the Biden Administration revoked these efforts, the blueprint for how to implement this initiative remains. To the extent that the incoming Trump Administration wishes to quickly begin its regulatory reform efforts, these EOs, once revived, could provide powerful instruments for action. The Regulatory Reform Officers and Regulatory Reform Task Forces, if reconstituted, could also serve as connection points with the new DOGE, since this new "department" is supposed to connect with the Office of Management and Budget (OMB), which during the first Trump Administration oversaw the "one-in, two-out" process.
• Reining in masked guidance. EO 13891 (Oct. 9, 2019). This EO set standards for the development and issuance of guidance documents and required all federal agencies to "treat guidance documents as non-binding both in law and in practice" and "take public input into account where appropriate in formulating guidance documents." The Biden Administration rescinded it; we expect the incoming Trump Administration to revive it. Its revival could have a profound impact on guidance issued during the Biden Administration. For instance, the EO's definition of a "guidance document" would cover interpretive rules like the CFPB's Buy Now, Pay Later rules and Earned Wage Access products, as well as others that we discussed in our previous post on bank regulatory considerations in a second Trump Administration.
• Defendant rights. EO 13892 (Oct. 9, 2019) and EO 13924 (May 19, 2020). EO 13892 and EO 13924 were intended to safeguard the rights of defendants and ensure fairness in civil administrative enforcement actions and adjudications. EO 13892 mandated that federal agencies provide public notice to defendants of both the enforcing agency's jurisdiction over particular conduct and the legal standards applicable to that conduct. It also required that a federal agency afford the defendant an opportunity to be heard regarding the agency's proposed legal and factual determinations before it took any action that has "legal consequences."
  
  EO 13924 required agencies to revise their procedures and practices in light of the principles of fairness in administrative enforcement and adjudication, including that the subject of an enforcement action should not bear the burden of proving compliance, and that administrative enforcement should be free of improper government coercion and unfair surprise. Because administrative enforcement actions still exist—the Supreme Court's recent decision in Jarkesy on the right to a jury trial only applies when the enforcing agency seeks civil penalties—these protections are important, and the incoming Trump Administration is expected to revive these EOs.
  
  EO 13892 also purported to extend the protections of the Paperwork Reduction Act (PRA) to "any [federal] agency seeking to collect information from a person about the compliance of that person or of any other person with legal requirements." The PRA clearance process through the Office of Information and Regulatory Affairs requires a
  
  60-day notice in the Federal Register for comment. If revived, this requirement may slow the ability of bank examination teams to collect information from banks in so-called "sweeps."
• Pay as you go. EO 13893 (Oct. 10, 2019). This EO required that federal agencies comply with "Administrative PAYGO" regulations, which mandated that if an agency adopts new discretionary rules, they must be paid for in a particular way. If they are not paid for, then the regulation cannot go forward. The Biden Administration rescinded this EO; we expect the incoming Trump Administration to revive it.
• General formalities. EO 13979 (January 18, 2020). EO 13979 required that only a senior appointee could initiate the rulemaking process and that a senior appointee must sign each federal agency rule. The EO never took effect before the Biden Administration rescinded it. We expect that the incoming Trump Administration will revive and enhance it. During the first Trump Administration, suggestions were made to require federal agency heads to certify that any new regulation is consistent with EO 12866 (i.e., only necessary rules) as well as with the Administrative Procedure Act, and that this certification would have the same force and effect as a certification by a CEO and a CFO of their company's financial statements under the Sarbanes-Oxley Act. In other words, ensuring that senior government officials have personal "skin in the game" was thought to be both fair and likely to result in closer and more thorough examination of regulations prior to their promulgation. It is possible that this practice may be revisited and implemented as part of a revived EO 13979.
• Specific clarity for criminal penalties. EO 13980 (January 18, 2020). EO 13980 required that agencies "be explicit about what conduct is subject to criminal penalties and the mens rea standard applicable to those offenses." The EO was issued at the end of the first Trump Administration and did not take effect before the Biden Administration rescinded it. We expect that it, or a modified version of it, will be revived in a second Trump Administration.

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Actions Beyond the Traditional Uses of EOs

• Independence of agencies reined in. EOs traditionally have not applied (or been viewed to apply) to independent agencies, such as the Federal Reserve, FDIC, CFPB, SEC, CFTC, and FTC, among others. The incoming Trump Administration may abandon this view/courtesy. For instance, on October 8, 2019, the Department of Justice's Office of Legal Counsel issued a memorandum that concluded that "the President may direct independent regulatory agencies to comply with the centralized review process prescribed in Executive Order 12866." In addition, many of these agencies have proved in recent years to be quite political. As a result, we expect the 2019 opinion's principles to be reflected in early stage EOs from the second Trump Administration, providing the second Trump Administration the ability to exercise tighter control over the actions of "independent" agencies. These agencies could also become considerably less independent should the Supreme Court overrule Humphrey's Executor v. U.S. and allow the president to remove independent agencies' officers.
• Private rights to further check agencies. In almost every EO there is limiting language to the effect that the EO "is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person." In the name of accountability, it is possible that this language may be either eliminated from future EOs or substantially watered down, to serve as a further check and balance on federal agency actions.
• Supportive legislation. The incoming Trump Administration may work with Congress to maximize the utility of the Congressional Review Act by enacting the Midnight Rules Relief Act, which would enable multiple regulatory actions to be packaged and voted on at the same time, saving significant time on the legislative calendars in the House and the Senate. We also expect that the incoming Administration and Congress will look to move forward in current or amended form the Regulatory Accountability Act, the Guidance Out Of Darkness Act, the Regulations from the Executive In Need of Scrutiny Act, the Early Participation in Regulations Act, and the Unfunded Mandates Information and Transparency Act.

The "Department of Government Efficiency"

The announcement that Elon Musk and Vivek Ramaswamy will lead a new DOGE underscores the second Trump Administration's interest in regulatory reform generally. While details of the proposal have not been fully fleshed out, we understand currently that the DOGE is intended to be a nongovernmental consultative body that may nonetheless consult with OMB.

There are several steps the DOGE can and may take to drive regulatory reform and alleviate regulatory burdens—particularly for the fintech and crypto sectors—but those efforts will likely take time to staff, organize, and launch. In the meantime, the EOs discussed above could be quickly revived, put into effect, and have meaningful impacts on federal agencies, including federal financial regulators. Should the DOGE come to fruition as presently conceived, once it is stood up, staffed, and working, we anticipate that its actions and recommendations will work together with the EOs. The likely prospect of Russ Vought (or one aligned with his views) returning to run OMB, coupled with emerging support from Congressional Republicans from the House Oversight and Ways and Means committees, significantly increases the chances of the second Trump Administration leveraging these tools.

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If you have questions about the potential impact of a second Trump Administration on your business activities, plans, or pending matters before a federal financial agency, please contact the authors or your DWT attorney contact.