What is your company's exposure to state-level regulations?
The Trump administration has made it clear that one of its first priorities will be turning back the dial on the aggressive pace of regulation that has marked the last 8 years. Dodd-Frank, the Affordable Care Act, the Foreign Corrupt Practices Act – they’ve all been called out by name as major targets for modification, if not outright repeal.
Accordingly, this has fueled endless speculation about the impact these changes will have on big businesses that have spent the last several years and billions of dollars retooling to get themselves into compliance with the very regulations that may now be going away. This view on reduced regulation has in part contributed to the run up of the stock market since the Trump victory, with a belief that less regulation is good for big business.
But don’t expect a free ride when it comes to regulatory compliance over the next four years.
Beyond the new logistical hurdles that will come with a new federal regulatory changes, the other major issue affecting companies is their exposure to state-level regulations.
Take for example, Airbnb, which was effectively outlawed in New York in October when Gov. Andrew Cuomo signed a bill that would impose significant fines on property owners who advertise short-term rentals.
The root of the Airbnb issue is the peer-to-peer business model the site uses, which allows individuals to rent temporary space directly to vacationers, circumventing the traditional supply chain and its various tax collection and regulatory touch points.
These types of short-term rentals have traditionally been the domain of the hotel industry, for which the state and local municipalities have set up special sales and occupancy taxes and various health and safety regulations designed to standardize the marketplace. By cutting out the hotel, Airbnb also cut out a valuable chunk of tax revenue and the regulatory infrastructure that governed hotels for so many years.
Will the ethos of de-regulation currently being espoused by the Trump transition team carry any weight in a situation like this where an aggressive state authority is imposing the kinds of regulatory standards that have the power to kill a business one state at a time?
One theory that’s been gaining increased visibility in recent weeks is the notion that state-level regulation will actually get stiffer to counterbalance the lighter federal regulatory burden. Many commentators have pointed to the Martin Act as an example. This New York state law gives the attorney general and Manhattan district attorney the power to bring civil and criminal cases without having to prove a defendant’s intent or knowledge of wrongdoing. It has been the lynchpin to a number of major securities law cases and – despite lacking the teeth of a federal mandate – it has resulted in billion dollar settlements with some of the world’s largest corporations. This law, and dozens of others like it could become increasingly important for companies to watch in this coming era of deregulation.
With several big business states still run by Democratic administrations, notably New York and California, the stage is set for a great deal of state-level muscle flexing as the federal government prepares to loosen regulations.
For businesses of every size, this is likely to affect everything from corporate compliance to tax compliance and to overall growth prospects.
At least with federal regulations, companies generally have a single authority to deal with. When it comes to state regulations and compliance, the individual rules and idiosyncrasies can be far more numerous and difficult to follow. For those hoping for a smooth path through all of this, stay tuned – it may be a game of whack-a-mole regulation.
View the story as it appeared in Forbes.