WASHINGTON — When President Trump targeted Wells Fargo in a tweet earlier this month, he had an ominous message for the industry at large: His administration would limit regulation but would “make penalties severe when [institutions are] caught cheating.” Banks and industry experts were left wondering how seriously to take the warning.

On the one hand, the tweet seemed aimed at countering a Reuters story indicating that the Consumer Financial Protection Bureau was reviewing and potentially scrapping an enforcement action against the embattled bank over fees it levied on mortgage holders. It is reasonable to conclude, therefore, that Trump's message was meant entirely for Wells, and not beyond that.

But some observers say the tweet also suggests a broader policy about how the president views his administration’s approach to regulating: namely, that while the administration will seek to roll back regulations, it may punish wrongdoers with renewed vigor.

U.S. President Donald Trump.
President Trump's tweet targeting Wells Fargo may have some predictive value if for no other reason than it articulates a view of many leaders in the administration about positioning agencies to be more focused on enforcement than regulation. Bloomberg News

“While the tweet in and of itself may not be a statement of policy, it is consistent with the idea that the better way to protect consumers is not to burden the entire industry with detailed regulations, but to just target wrongdoing with enforcement actions,” said Benjamin K. Olson, a partner at Buckley Sandler and former regulator with the CFPB and Federal Reserve.

H. Rodgin “Rodge” Cohen, senior chairman at Sullivan & Cromwell, said there is no way to know whether the tweet speaks more broadly than in the context of the Reuters story, since the administration’s top bank regulators are either not yet confirmed or have only been in place for a short time.

“It’s really premature to be able to express a view,” Cohen said. “We only have the new key people in place for a short period of time. It’s an interesting hypothesis, but it’s really not provable at this point.”

For starters, a tweet — however broadly worded — is not an official statement of administration policy. There are other ways of doing that, such as through an interagency memorandum or an executive order. But Cohen said administrations have cultures and approaches that are not always formally written and yet are articulated from the top early on in a presidential term.

“The Obama administration made it clear from the beginning that they were going to seek legislation which would impose a more stringent regulatory regime after 2008,” Cohen said. “President Clinton shortly after he came into office said he was going to look at creating a more progressive banking system. You do get some intimation as to a president’s objectives, but not in all administrations. In some, banking is not exactly going to be an issue.”

Olson said that the tweet does have some predictive value if for no other reason than it articulates a view of many leaders in the Trump administration about positioning agencies, in particular the CFPB, to be more focused on enforcement than regulation.

“I read the tweet in a larger context of what I think is a coherent view of some segments of the administration and members of Congress about how the CFPB ought to work,” he said.

V. Gerard Comizio, a partner at Fried Frank and former regulator at the Securities and Exchange Commission and the Office of Thrift Supervision, said there are several ways to interpret the tweet. Rather than suggest some kind of policy priority for his administration, he said it merely could be articulating what is the regulators' core mission.

“This could be referred to as a penetrating glimpse of the obvious, which is, if you engage in a serious enough violation of the banking laws and the examiners catch you doing that, they’re going bring an enforcement action,” Comizio said. “If the tweet can be read to say, ‘If someone violates laws and regulations, we’ll take enforcement actions,’ that’s kind of what they’re doing now. That’s what banking agencies do for a living — administer and enforce the banking laws.”

But he said the tweet could also be taken another way, which is to say that the president would prefer that his administration not only take enforcement actions against violators, but take the kinds of enforcement actions that are meant to be an example to others in the industry.

In the wake of the savings and loan scandal in the 1980s and after the passage of Sarbanes-Oxley in the early 2000s, Comizio said, regulators pursued actions that held chief executives personally responsible for wrongdoing at their institutions, and that had a palpable effect on compliance activities across the industry.

If that is what the president had in mind, Comizio said, banks should take heed, particularly in areas that are not part of the administration’s Dodd-Frank rollback efforts, like anti-money-laundering efforts and cybersecurity.

“If that tweet was meant to send an important signal with some force behind it, then every banking institution’s management team and board would need to look carefully at their own liability,” Comizio said. “The issues that are implied there is, potentially, this is not going to be about fines and penalties. This is going to be going after individuals who are responsible for the activities that cause regulatory problems. That would be one way to read the message there.”

If that is the president’s intention, he wouldn’t be alone in favoring such an approach. The Financial Choice Act, authored by House Financial Services Committee Chairman Jeb Hensarling, R-Texas, includes substantial increases to the SEC’s civil and criminal authorities for the most serious offenses, and includes a new enforcement tier for recidivist offenders.

In the comprehensive summary of the bill, the sections describing the changes to the SEC’s enforcement powers describe how the imposition of civil penalties against corporations — rather than individual fines and criminal sanctions — could incentivize bad behavior, whereas holding individuals responsible can have a deterrent effect.

“The SEC’s recent penchant for imposing civil penalties on corporations that violate the federal securities laws instead of bringing enforcement actions against individual offenders also has raised concerns … that innocent shareholders are being penalized while the culpable corporate officers escape liability,” the summary said. “Corporate employees tempted to cut legal corners or engage in malfeasance will think twice if they know they are likely to pay a price for their wrongdoing.”

Some of the industry’s biggest critics on the other side of the aisle have reached similar conclusions. Sen. Elizabeth Warren, D-Mass., has called on the Fed to take the relatively drastic action of removing most of the members of Wells Fargo’s board of directors in response to the cross-selling scandal that rocked the company late last year.

“The Federal Reserve must hold the Wells Fargo Board members accountable for their risk-management failures — both to ensure the safety and soundness of one of the country's biggest banks and to show the rest of the banking industry that poor risk management practices will not be tolerated,” Warren said in a letter to Fed Chair Janet Yellen.

Cohen said that the nature of the laws and regulations that govern banks is such that the choices about enforcement and supervision come down, in large part, to the bank regulators themselves.

"The banking industry is subject to an extraordinarily complex web of regulation in the statute and inevitably — and it’s not the fault of legislators or regulators — but you can’t have such an extensive set of regulations without a lot of uncertainty and judgment and ambiguity. And discretion,” Cohen said.

There is little doubt that bank regulators have the discretion to take tough action against bad actors if they choose. Banking laws give regulators the power to take broad enforcement actions against both companies and individuals, ranging from suspension or expulsion from the industry and substantial fines or even jail time.

Meanwhile, when it comes to regulating the entire industry, the Trump administration has articulated a policy that leaves little doubt about officials' interest in reducing banks' burden. The president issued an executive order early in his administration laying out “core principles” of efficiency and simplicity for bank regulators to follow in their regulatory approaches. The Treasury Department further articulated those priorities in its regulatory blueprint published in June.

Lucy Morris, a partner at Hudson Cook and former deputy enforcement director at the CFPB, said that there is something of a pattern about how regulation and enforcement interact between administrations.

Generally speaking, conservative administrations tend to focus on enforcement actions, while more liberal administrations tend to focus on regulation. But even within that paradigm, she said, the kinds of enforcement actions that conservative administrations tend to pursue are more black-and-white cases of fraud or deception rather than actions that are more subject to interpretation.

“More conservative administrations are tougher when it’s a clear violation — something that’s fraud or close to fraud,” Morris said. “It may be a matter of emphasis — it may be more of a focus on fraud or things that are more straightforward and less on things that are kind of close calls that may be better suited to supervisory action or something like that.”

But Morris said recent court challenges to the CFPB's enforcement powers, which have picked up as companies have contested their penalties, could mean that even if the administration wants to pursue enforcement action against bad actors, it could face an uphill climb. She noted that the Trump administration's control of the CFPB and the recent court cases could embolden companies or executives targeted by the bureau to further challenge enforcement orders.

“The CFPB enforcement office has had some losses on individual things in the past few months, and I think there is also the feeling out there that there is some vulnerability at the bureau, given the leadership change,” Morris said. “Whereas in the early years everyone was treading very carefully in CFPB enforcement matters, you’re seeing people increasingly push back, and so these cases are more likely to be litigated.”

Olson said that one practical effect of emphasizing enforcement over regulation is a greater opportunity for smaller banks and financial institutions to try new things to grow their businesses. Big regulatory apparatuses require large compliance costs — costs that bigger institutions are by definition better able to absorb.

“The cost of complying with complex regulations can drive smaller competitors out of the marketplace, so oftentimes these types of regulations are viewed as an advantage for larger banks,” Olson said. “An enforcement regime could be seen as an advantage to smaller players who can fly under the radar.”

But agencies have to strike some kind of balance, he said. The rules surrounding mortgages, for example, may be vast and cost-intensive, but aside from consumer protection value, the secondary mortgage market relies on a certain amount of similarity between individual contracts in order to ensure that each stands up to a comparable degree of stress and each carries similar basic features.

“It’s fine to say you’re going to enforce the law against wrongdoers, but you have to know what wrongdoing is — that has to be defined somewhere, and that is what regulations do,” Olson said. “Regulations, for better or for worse, are a huge part of how markets function, and that can’t just go away overnight.”

Morris agreed that there has to be a balance between enforcement and regulation, and added that, in principle, taking an enforcement-heavy approach is a reasonable choice for this or any administration to take. But there has to be a balance.

“It is a reasonable approach,” Morris said. “There is an argument for regulation, but regulation is not a cure-all. It’s very difficult to write a rule for every scenario, and very cumbersome. Law enforcement is much easier … and at the end of the day, regulations don’t cover everything.”

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