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Federalism vs. State Law: Effects on the Economy

The Entrepreneur Fund

Following is a look at recent conflicts between the states and the federal government over regulatory matters of concern to consumers and investors.

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Financial technology companies—including money transmitters, online and app-driven mobile consumer-lending platforms, and virtual currency licensees—are not covered by a single federal regulatory framework. Companies may be required to submit to licensing at the federal and at state levels.

“Banking and mortgage banking always have had a dual regulatory environment,” says Scott Samlin, a partner in the consumer financial services group of the law firm Blank Rome in New York City, where he focuses on compliance and advisory work for financial services companies. “Typically, the federal government sets a floor, not a ceiling, and encourages the states if they provide greater protections to consumers. Typically, the states take the lead, and courts have typically ruled in favor of states and against the OCC [U.S. Office of the Comptroller of the Currency] unless there is a direct conflict with federal law, such that the state law is preempted under the supremacy clause.”

“These tensions are most certainly going to continue,” Samlin says, “as long as there is a perception that the federal government is not being proactive in terms of adopting regulations in new areas like fintech and in enforcement of existing regulations.”

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And in March, at a House Appropriations Financial Services and General Government Subcommittee Hearing, U.S. Treasury Secretary Steven Mnuchin said that he would not take administrative action to protect banks servicing marijuana businesses from being penalized by federal regulators. Mnuchin told the committee that it was up to Congress to enact legislation to resolve the problem.

“Congress can act to preempt anything that is left to the states. It is only generally left to state power when Congress doesn’t act. But in our legislative environment it isn’t that easy to get legislation passed,” says Samlin, of the law firm Blank Rome.

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“Federalism vs. State Law: Effects on the Economy,” by Amy Harvey was published in The Entrepreneur Fund on July 15, 2020.