The State-Level Regulatory War Your Team Probably Isn’t Prepared For

Written by Zack Condry, Co-Founder of Watermark Strategies

Last week offered another reminder that states now treat each other as adversaries by default.

Louisiana Governor Jeff Landry publicly asked California for a controversial out-of-state extradition. California Governor Gavin Newsom said no on X. No quiet process. Just messages meant for visibility and engagement of the base.

State actors are increasingly rewarded for escalation rather than coordination. That posture is showing up across business-relevant regulatory areas where companies are stuck between incompatible expectations. 

Federal engagement is still essential. It is just no longer sufficient. States are building a fragmented enforcement environment, and national consistency is no longer a given.

When one coalition of states (usually down party lines) elevates a regulatory priority, another coalition organizes against it. In many cases, the underlying policy question is secondary to the signal being sent.

Blue state legislatures mandate climate risk disclosures. Red state legislatures prohibit financial institutions from considering ESG factors. One group pushes enhanced scrutiny of firearms-related activity. Another frames that same scrutiny as discrimination.

This dance is performative governance designed to generate headlines, energize donors, and position ambitious legislators and AGs for their next campaign. And companies are stuck in the middle, forced to navigate contradictory mandates from regulators who view each other as deeply evil adversaries rather than colleagues.

The contradictions are not hypothetical:

ESG and Climate Risk

California requires certain financial institutions to disclose climate-related financial risks and has signaled a willingness to enforce against firms that fail to account for environmental factors. Texas restricts state contracts with firms that it claims “boycott” fossil fuel companies and has investigated banks for allegedly discriminating against the energy sector. A national bank with operations in both states faces a bind. Comply with California’s expectations and risk losing Texas public finance business, or align with Texas and invite scrutiny from California regulators.

Firearms

New York has required financial institutions to treat certain firearm-related activity as a priority area for monitoring and has investigated firms it believes facilitate transactions without adequate controls. Wyoming and Montana have enacted laws prohibiting “financial discrimination” against firearms businesses and have threatened enforcement against institutions that apply heightened scrutiny. Payment processors, banks, and card networks are forced into a decision tree where a risk-based control in one jurisdiction can be framed as unlawful discrimination in another.

State legislators have strong incentives to distinguish themselves from opposing coalitions. Attorneys general have broad enforcement discretion, limited oversight, and frequent ambitions for higher office. State treasurers and securities regulators have increasingly divergent political and cultural views.

In practice, companies encounter materially different supervisory expectations depending on footprint, customer base, and the majority political party.

For companies, this creates three immediate problems:

• Compliance costs increase as firms build controls meant to satisfy conflicting state-level requirements.
• Strategic clarity and, frankly, operational speed evaporate as expectations shift with elections, leadership changes, and coordinated political campaigns.
• Public affairs and lobbying strategies built around Washington miss the fragmentation happening in state capitals and AG offices.

 The firms that manage this well are not trying to win every state fight. They are making deliberate choices about where to invest, where to de-risk, and where to engage early enough to prevent a compliance issue from becoming a headline. They identify which states matter most to the business model, which legislators and AGs drive coalition priorities, and which regulators coordinate across state lines. They monitor state legislative calendars with the same discipline they apply to federal committees. They track transitions in AG offices the way they track agency leadership changes in Washington. And they build relationships before an inquiry, subpoena, or press release forces the first conversation.

Companies that understand this dynamic can engage more strategically, avoid becoming a test case, and shape outcomes before an issue becomes a priority. 

The fragmentation also increases the value of federal clarity, which, given the concussive nature of rulemaking and sweeping policies, can be tough. 

For financial services firms, the political landscape, both state and federal, poses practical risks with direct consequences for product development, customer communications, M&A integration, vendor oversight, and operational infrastructure. 

Companies that manage this effectively treat state-level government relations as core infrastructure rather than a secondary function. That requires dedicated resources, tailored messaging, and coalition building with peers facing the same contradictions. It also requires discipline, including knowing when strategic retreat is more effective than continued resistance and when a quiet adjustment is smarter than a public fight. 

The alternative is waiting for clarity that is unlikely to arrive. State legislatures are not going to stop passing contradictory and adversarial laws. Attorneys general are not going to stop using enforcement to define political targets. Polarization is not going to ease. And the regulatory patchwork will continue to expand as more issues are pulled into the vortex of the culture war du jour.

The companies that move now will shape how their industries navigate state-level fragmentation. Those who wait will spend the next decade managing crises that were entirely foreseeable.