Is regulatory independence on the way out?

The idea of regulatory independence has been central to banking policy for decades but has also been declining steadily for years. The Trump administration’s assertions of power over those agencies — and the Supreme Court’s apparent willingness to revisit the constitutionality of regulatory independence in general — could hasten that decline, leading observers to question what a less independent bank regulatory landscape will look like.

The concept of a bipartisan, independent regulatory commission emerged and took root in the late 19th and early 20th century with the establishment of agencies like the Federal Trade Commission, Interstate Commerce Commission and the Federal Reserve. The idea was that Congress would entrust technical policy decisions to experts nominated by the president and confirmed by the Senate, but who enjoy policy independence for the entirety of their fixed terms. The Supreme Court upheld the constitutionality of those agencies in the 1935 case Humphrey’s executor v. United States, which found that if agencies are performing quasi-legislative or quasi-judicial functions, the agencies could be considered outside of purely executive control. 

But Donald Trump in his second term as president has embraced unitary executive theory — the notion that all executive power lies with the president alone, meaning they should have the power to put their preferred nominees in whatever role they choose at any time they choose, regardless of fixed terms.

Trump issued an executive order in February directing independent agencies to submit regulations to the Office of Management and Budget for review, and Trump has fired several Democrats on independence commissions, including members of the National Labor Relations Board and National Credit Union Administration. Treasury Secretary Scott Bessent said in March that he was coordinating regulatory actions at the banking regulators to ensure that they are “singing in unison from the same song sheet.”

Greg Lyons, a partner at Debevoise and Plimpton, said that earlier administrations had already been getting more active in directing policy at independent regulators, and the Trump administration has already followed that example by selecting like-minded nominees to key banking roles. 

“You could argue that once Trump has the senior folks in place, maybe Humphrey’s doesn’t matter as much anyway, because they certainly seem to be trying to play off the same playbook, to perhaps an even greater extent than they had under prior administrations,” Lyons said. “[So] as to whether that has a significant impact on the future or the direction of the agency is probably less certain, because you do have greater coordination and alignment than you’ve had potentially in the past.”

Despite the promise of regulatory independence, regulation has never been perfectly shielded from politics. Agency heads — often appointed by the president in power — have tended to be deferential to the policy preferences of the administration in power. But Todd Phillips, an assistant professor at Georgia State University and former FDIC official, said removal protections are a key legal protection that are meant to empower regulators to make tough or unpopular choices — much the way judicial independence benefits the legal system. 

“What makes [judges] independent is that they have life tenure, that they can serve for as long as they want without the president being able to remove them, unless they’re impeached by Congress — that’s as much independence as one can really get,” Phillips said. “I think when you look at these independent agencies, yeah, [agency heads] are put there by a president, they are confirmed by a Senate — there’s no getting around that. I think the question is, once they’re in there, how independent do we want them to be?”

Legal scholars have long interpreted Humphrey’s Executor to apply to similar multi-member boards like the FDIC and the Securities and Exchange Commission. But in a recent ruling in Trump v. Wilcox — a case in which Gwynne Wilcox, a fired Democratic member of the NLRB, is challenging her removal — the Supreme Court signaled growing skepticism toward the rationale behind the 1935 decision. 

Wilcox won an injunction from the district court allowing her to remain on the job pending litigation, and the Trump administration appealed the decision, ultimately to the Supreme Court. The Court granted the administration’s challenge in May, and in doing so found that the president has broad removal authority over executive officials with only narrow exceptions, such as Federal Reserve’s monetary policy functions.

Lyons says the court has indicated that Humphreys is, above all, an out-of-date precedent. While the FTC of the 1930s was relatively narrow in its power, independent agencies today — particularly banking agencies, which can issue enforcement actions and cease-and-desist orders — have roles so broad and sweeping that many legal scholars have come to question the constitutional validity of regulatory independence within the executive branch.

“I think the current majority of the justices take the view that even if Humphrey’s was appropriate at the time, it applied to a specific situation that doesn’t really exist anymore  — at least not for the banking agencies,” Lyons said. “I do think we’ll continue to see a diminishment of Humphrey’s — and for the federal banking agencies, that could be significant.”

While ending explicit legal removal protections could produce major changes in the discretion presidents have to fire regulators, Joseph Lynyak, a partner at Dorsey & Whitney, said the court is clearly aware of the implications for the Fed if it were to allow the president to fire Fed officials for their monetary policy actions.

“It’s going to be very easy if they want to say something along the lines of, ‘This is such an important consideration that we’re … not going to apply it to the Federal Reserve right now,’ — in the same way that they carved out the exception on [Diversity Equity and Inclusion] for the military academy — because you, you really do want independence [there],” Lynyak said. “If they decide to just completely eliminate [independence], any administration — including this one — could fire all of the members of the other political party, and, as long as they still have a quorum, be able to conduct business with very little [internal] pushback.”

That lack of pushback is heightened when the heads of agencies are only there in acting capacities. The heads of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Consumer Financial Protection Bureau and the Commodity Futures Trading Commission are all acting heads, meaning there is no ambiguity about whether they serve at the pleasure of the president. Prolonged tenures of acting agency heads is not a unique characteristic of the Trump administration — former acting Comptroller of the Currency Michael Hsu served as an acting agency head for over three years during the Biden administration — but it demonstrates a secular decline in the spirit of regulatory independence. 

“At some point, if everyone’s following the same playbook, does Humphrey’s even matter?” Lyons asked rhetorically.

Phillips said that one consequence of the erosion of regulatory independence is the erosion of the public expectation that regulatory and supervisory decisions — like the granting of charters or licenses — will be made without political consideration. 

“One of the reasons that Congress made a lot of the economic policy agencies multi-member independent agencies is because we really want them to apply the law without fear or favor,” Phillips said. “When we talk about the bank regulators, they give licenses, and they can decide to give licenses to some people and deny licenses to others. We want that decision-making process and the application of the laws to be fair.”

One example of that potential conflict is in the realm of stablecoins. The Senate last week passed the GENIUS Act, one of two competing bills that would set the rules and processes around issuing stablecoins. Since the Trump family has made its own forays into the cryptocurrency market, Phillips said there could be real questions of favoritism being asked if the Trump family applies for a stablecoin charter. 

“If they go to the OCC and ask for a charter if the OCC isn’t independent, it kind of seems like the OCC is going to have to give them … approval, or else the comptroller is fired, and that’s really bad,” Phillips said. “Do we want it so that his son’s stablecoin does not have to comply with the same laws and requirements as everyone else, just because, if the OCC tries to bring an enforcement action, the comptroller is fired?”

Banking trade groups — whose industries rely on the stability provided by agency independence — have been notably quiet on the issue, even as bankers overwhelmingly support agency independence to mitigate policy swings between presidents. Lynyak said that may be due to the deregulatory push the current administration has undertaken.

“I guess there’s a practical side to it in that I think, you can make a strong argument that the the banks have been very well received by the existing leadership, and many of the things that they have been criticizing, they’ve already received relief on so it, it’s not the highest priority,” Lynyak said. “You’ve gotten most of what you asked for, and many of the criticized regulations have already been pulled back, or been promised to be pulled back.”