States step up as Trump’s US financial regulators step down

State attorneys general have emerged as one of the biggest checks on presidential power after winning a series of US court rulings challenging Donald Trumpʼs executive orders. Financial firms who were expecting an easier time from the new administration instead face more forceful regulators in all 50 states.

While large-dollar actions by US regulators from the Securities and Exchange Commission (SEC) to the Consumer Financial Protection Bureau (CFPB) tend to attract the most attention, the states take more enforcement actions and play an important role in protecting average Americans’ financial wellbeing.

Previously, states also generally focused on smaller, in-state fraud cases arising from consumer and investor complaints, but the rapid revival of cooperative actions has demonstrated their latent power to act effectively on a larger stage. In the confusion over Trump’s war on financial regulators, the states are working to shore up their ability to become a last line of defence.

“The states do have a capacity to do more,” said Joseph Borg, the former Alabama Securities Commissioner and two-time president of the North American Securities Administrators Association (NASAA). But, he adds, their actions are “going to be very state-by-state depending on the resources”.

A heat map of state enforcement cases shows that red states such as Florida and Tennessee are top venues. Their robust securities agencies rival blue states such as New York and Massachusetts, with larger per capita securities units. Their large constituencies of retirement havens are protected by new laws and regulations designed to prevent elderly people from being exploited by financial firms and fraudsters.

“It’s not political at the state level,” Borg told Compliance Corylated. “Not when you are talking about fraud and abuse, and especially when it’s about preying on seniors. Nobody wants that going on in their back yard.”

States more active

The NASAA reported that state securities regulators carried out 8,768 active investigations and initiated 1,186 enforcement actions in 2024, while the SEC filed 583 total enforcement actions over the same period. State actions were mainly driven by complaints and “street level crime”, while the SEC actions came from numerous sources including investigations and whistle-blower tip-offs.

Janaya Moscony, head of compliance firm SEC3 and a former SEC staffer, said she was sceptical that states would become a much larger presence any time soon but admitted hearing that state regulators were concerned over potential SEC pullbacks. “They’re getting calls, and (local) people are asking what is happening, and they are concerned.”

A recent amicus filing by 23 state attorneys opposing the dismantling of the CFPB showed “thereʼs certainly a group thatʼs working together on filling of gaps”, she added.

SEC preparing for shutdown

The CFPB, which regulates large banks’ consumer practices, was largely shuttered by Elon Musk’s Department of Government Efficiency (DOGE) earlier this month. While the SEC has been doing business mostly as usual, according to industry sources, reportedly DOGE also has the regulator in its sights.

“We are currently preparing for a potential shutdown, with a focus on the market integrity and investor protection components of our mission,” the SEC says on its site. While the notice appeared during a budget stalemate last year, the message remains that in “a lapse in appropriations” it would operate based on its statutory authority to maintain at least limited operations. Another government shutdown could be days away.

“At the moment, whatever the turmoil that has been impacting the enforcement division and other aspects like that at the commission, at least the division of examinations appears to be business as usual,” said Philip Moustakis, who heads government practice at law firm Seward & Kissel, in a recent webcast.

Dodd-Frank rollbacks

In policy terms, the Trump administration has called for rollbacks of many Dodd-Frank Act provisions, and the elimination of diversity, equity and inclusion (DEI) initiatives. But “there are so many Ponzi schemes and frauds right now, I donʼt think he wants to jeopardise peopleʼs retirement funds and that kind of thing by pulling back too much”, according to Moscony at SEC3.

To be sure, the Project 2025 manifesto compiled by Republican activists before the election calls for a wide-ranging revamp of financial regulation — ostensibly to reduce overlaps — that involves the consolidation of some agencies and the wholescale elimination of others, such as the CFPB.

State powers remain

The shape of the government bureaucracy could change quickly, but the laws that financial firms must follow will remain enforceable by states until Congress changes them. Trump’s US agency heads, however, can decide which rules it plans to enforce. In one such category, the Department of Justice followed a Trump order to pause Foreign Corrupt Practices Act enforcements, using the authority he claims over the DOJ as an executive branch  agency, as well as others, including the SEC, the Fed and the Commodity Futures Trading Commission (CFTC).

State regulatorsʼ enforcements are mostly limited to fraud and abuse actions, since their securities regulation was curbed significantly by the 1996 National Securities Markets Improvement Act. This gave federal agencies the sole power for regulating national securities market activities. But states have grown increasingly alarmed that the administration has signalled it may reach further, based on its Project 2025 manifesto.

“Congress has given the SEC broad ‘general exemptive authority,’” the Project 2025 Playbook said. “But the SEC has used this authority only rarely. It should use this authority significantly more often to reduce the regulatory burden on issuers, particularly smaller entrepreneurs.”

Not waiting for the future

While those challenges loom ahead, state attorneys  “are not waiting to see what the future holds”, said law firm Ballard Spahr in a client note.  Already “states are stepping up enforcement activities and strengthening their consumer protection laws. Private lawsuits are also rising”.

Even if the states are not yet in a position to replace the powerful national regulatory agencies, the concerted response to Trump’s rollbacks “creates a complex landscape where businesses must navigate a patchwork of state-level statutes, regulations, and enforcement priorities”. Indeed, states pose a different challenge since they can act quickly with more granular, street-level responses to fraud.

Moves by the Trump administration to increase its regulatory authority comes as Republican lawmakers are pushing for a relaxation of banking and securities rules, covering areas such as crypto currencies, fintech and private securities. Those are areas in which state authorities have seen complaints surge, however, and any curbs on state powers would cause a furore.

Meanwhile, banks have fresh memories of the major regional bank crisis that hit Silicon Valley Bank and others, and threatened to blow up into a systemic banking failure. Stripping deposit insurer FDIC of authority could heighten the risk of such consumer bank runs and financial harm.

“If you cut back on states’ ability to enforce consumer protections — well then, buyer beware,” said Borg. “That’s the Wild West.”