Signs of a Step Back in Financial Regulatory Enforcement

When you drive down the highway and see a police cruiser off to the side, the immediate response is to take your foot off the gas and check to see how much over the speed limit you were driving. There is that momentary anguish that the officer might stop you, and a sigh of relief when you check the mirror and see the officer hasn’t moved.

Enforcement often relies on the presence of people with the authority to issue punishments, so cutting back is not so much a matter of changing the law as having fewer cops on the beat.

We may be seeing the beginning of that kind of shift away from enforcement as President Trump’s administration works to roll back how agencies pursue potential violations.

The Securities and Exchange Commission and the Consumer Financial Protection Bureau are the targets of an effort to change how the agencies enforce the law in the financial markets. The major banks are looking to change how data related to possible money laundering and other crimes are collected by shifting more responsibility to the government — which may lower their costs of compliance.

It remains to be seen whether this is a matter of curbing over-regulation or a push to make it easier for companies to test the edges of the law to generate more profits. No one is in favor of crime, and there is always an ebb and flow to the optimal amount of scrutiny, but scaling back enforcement could mean that violations will go undetected until they grow into significant problems.

The S.E.C. has already seen the first step in a changing enforcement landscape as Michael Piwowar, the acting chairman, issued a directive, according to Reuters, saying that only the director of the enforcement division can authorize the commencement of a formal investigation. The reason is to ensure consistency in pursuing investigations — but it also means any requests must go through a centralized location, which could slow the process.

After the Ponzi scheme perpetrated by Bernard L. Madoff, which the S.E.C. failed to detect, the chairwoman, Mary L. Schapiro, shifted the authority to start a formal investigation to a number of senior enforcement officials throughout the country from the full commission.

Mr. Piwowar’s move was probably coordinated with Walter J. Clayton, who has been nominated by the president to be the next chairman and will appoint the new enforcement director once he is confirmed.

Mr. Piwowar said in a speech in 2013 that “I question whether the processes currently in place are sufficient for the commission to exercise the appropriate level of oversight of the formal order process.”

Limiting approval to just the enforcement director may signal a shift back to requiring the five commissioners to approve a formal investigation, which means greater oversight of the issues the agency will investigate and perhaps an effort to limit inquiries into certain parts of the markets or corporate practices.

Another area that may see a cutback involves whistle-blowers who provide information to the S.E.C. about possible violations. A memorandum from Representative Jeb Hensarling, Republican of Texas and the chairman of the Financial Services Committee, outlined potential changes to the 2010 Dodd-Frank Act, including eliminating any reward to a person who was a “co-conspirator” in the misconduct.

The program currently takes into account the whistle-blower’s involvement in the violations when determining the award amount. Blocking any bounty if the person participated in the conduct would cut down on the number of likely sources of information about corporate misconduct. It is not clear what would constitute acting as a co-conspirator, so the effect is difficult to assess at this point.

Corporations have never been happy with the whistle-blowing program because it allows employees to bypass internal reporting systems, making it more difficult for corporate counsel to know how much the S.E.C. might know about possible violations. The math here is simple: The fewer whistle-blowers there might be, the less likely the agency will be able to open investigations of corporate misconduct.

Even when the S.E.C. successfully pursues a case, there has been criticism of the hefty penalties corporations pay for their violations, with the claim that the enforcement actions punish current investors for the misconduct of others. In 2014, Mr. Piwowar said, “Given the significant concerns expressed in Congress and elsewhere about penalizing innocent shareholders by imposition of a corporate penalty, it is appropriate to have a more refined analysis rather than only relying on past amounts or statutory maximums.”

So do not be surprised to see a push for the S.E.C. to limit the penalties assessed against companies in resolving cases, perhaps ending the multimillion-dollar payments flowing out of corporate coffers as part of a settlement.

The Consumer Financial Protection Bureau has been a lightning rod for criticism since it was first proposed as part of the Dodd-Frank Act, and changes to how the bureau operates and its authority to conduct investigations seem inevitable. Mr. Hensarling’s memo outlined a plan to cut back the authority to supervise financial firms and give it to a director, appointed by the president, who can be removed at any time. The current director, Richard Cordray, is serving a fixed term that will expire in 2018. The law limits the grounds for his removal to conduct that would constitute “cause” for dismissal, although those protections have not precluded demands that Mr. Trump fire him.

What the consumer agency will look like in the coming months is anyone’s guess, but it should come as no surprise that it is unlikely to be as aggressive as it was during the Obama administration.

For banks, the cost of complying with the anti-money-laundering laws has grown significantly over the past decade, with regulatory and compliance expenses running into the billions of dollars annually for the industry. A particular target of bank ire is the Suspicious Activity Report, which requires banks and other businesses handling money to flag any questionable transaction of $5,000 or more by identifying the parties in a report submitted to the Financial Crimes Enforcement Network, part of the Treasury Department. In 2016, banks filed nearly one million reports, and other businesses dealing in cash, like casinos and money-transfer companies, submitted thousands more.

The Clearing House, a trade association for the largest commercial banks, issued a report on Thursday calling for changes in how the money-laundering laws are administered, especially restructuring the “outdated SAR regime” to significantly reduce the number of reports filed. It asserts that “financial institutions devote vast resources to activities that could easily be performed centrally by government” — in other words, move the costs from the banks and to the federal budget.

Naturally, the report does not advocate less enforcement, but instead a reorientation and better use of resources. The current system has been in place for almost 20 years, so it is certainly worth considering how to make it more effective.

It also turns out that the anti-money-laundering laws have been used to extract significant settlements from banks that failed to meet the reporting requirements. JPMorgan Chase paid a $1.7 billion penalty in 2014 for failing to detect and report misconduct by Mr. Madoff in his account. In 2012, HSBC paid over $1.2 billion for failing to maintain an effective compliance program that allowed for what the Justice Department described as “stunning failures of oversight.”

Banks do not like the risk that these laws present if they don’t commit enough resources to compliance. It will be interesting to see if any tinkering with the system results in allowing banks to pay less for dealing with the money laundering requirements while lowering their exposure to violations.

Less enforcement by the federal government is not necessarily a bad thing, especially if the law has been used arbitrarily to target companies and individuals that leave them little choice but to pay the penalties. But just like having fewer cops on the highway, reduced enforcement creates the potential for greater risk-taking as everyone starts to drive a little faster, which may result in more crashes.