The CFPB has finalized a procedural rule that updates its Rules of Practice for Adjudication Proceedings (Rules of Practice). The procedural rule was issued in February 2022 and became effective on February 22, 2022, the date of its publication in the Federal Register. According to the CFPB, because the procedural rule was a rule of agency organization, procedure, and practice, it was exempt from Administrative Procedure Act (APA) notice-and-comment requirements. Nevertheless, the CFPB invited comments on the procedural rule.
The CFPB did not make any changes to the procedural rule in the final rule just issued. The updates to the CFPB’s Rules of Practice made by the procedural rule include the following:
- Bifurcation. New Rule 204(c) allows the Director to order that proceedings be divided into two or more stages if the Director determines that it would promote efficiency in the proceeding or for other good cause. For example, the Director could divide a proceeding into two stages, with the Director issuing a decision at the conclusion of the first stage on whether there has been a violation of law and a final decision and order at the conclusion of the second stage that would include any remedies.
- Availability of documents for inspection and copying. Rule 206 is amended to clarify certain categories of documents that the Bureau can withhold or redact. The amendments are based on recent amendments to the SEC’s rules of practice. As amended, Rule 206 makes clear that the Office of Enforcement does not have to produce a document that reflects only settlement negotiations between the Office and a person or entity who is not a current respondent in the proceeding. The amended rule also allows the Office to redact from documents it produces any information it is not obligated to produce and sensitive personal information about anyone other than the respondent.
- Subpoenas and depositions. Rule 209 previously permitted parties to take depositions only if the witness was unable to attend or testify at a hearing. Also reflecting SEC rules, amended Rule 209 permits discovery depositions in addition to depositions of unavailable witnesses. In addition, respondents and the Office of Enforcement can take depositions by oral examination pursuant to subpoenas and by written questions upon motion and pursuant to a deposition. If a proceeding involves a single respondent, the amended rule allows the respondent and the Office to each depose up to three persons. In proceedings with multiple respondents, respondents can collectively depose up to five persons and the Office of Enforcement can depose up to five persons. A party can move to take additional depositions pursuant to a motion filed no later than 28 days before the hearing date. To correspond with the new provisions on depositions in Rule 209, Rule 208, governing the issuance of subpoenas, is amended by defining the standards for issuing a subpoena requiring the deposition of a witness. The amendments also (1) provide a process for the hearing officer to request more information about the relevance or scope of the testimony sought and refuse to issue the subpoena or issue it only upon conditions, (2) add procedures governing the taking of depositions, and (3) address the relationship of subpoenas to the scheduling of the hearing.
- Rulings on dispositive motions. Rule 213 allows the Director, at any time, to direct that any matter be submitted to him or her for review. Based on a FTC procedure, the amendments add a specific procedure for the Director to exercise this discretion in the context of dispositive motions. As amended, Rule 213(a) provides that the Director will either rule on a dispositive motion, refer the motion to the hearing office, or rule on the motion in part and refer it in part. The amendments also address the timing of a ruling by the Director, oral argument on a dispositive motion, and the types of rulings that the Director or hearing officer can make on a dispositive motion.
- Issue exhaustion. New Rule 208 addresses issue exhaustion and applies to any argument to support a party’s case or defense, including any argument that could be a basis for setting aside a Bureau action. It provides that (1) unless a party has raised an argument before the hearing officer, it is not preserved for later consideration by the Director, (2) unless a party has raised an argument before the Director, it is not preserved for later consideration by a court, (3) an argument must be raised in a manner that complies with the Rules of Practice and that provides a fair opportunity to consider the argument, and (4) the Director has discretion to consider an unpreserved argument, including by considering it in the alternative, but an unpreserved argument that is considered in the alternative remains unpreserved.
In its blog post about the final rule, the CFPB states that it “rarely brings cases through administrative adjudication” and “still plans to bring the vast majority of its matters in district court.” This is not surprising, particularly in light of the legal cloud that the May 2022 Fifth Circuit panel decision in Jarkesy v. Securities and Exchange Commission has created for the use of administrative law judges (ALJ) by federal agencies. The Fifth Circuit denied the SEC’s request for a rehearing en banc and the deadline for the SEC to file a certiorari petition with the U.S. Supreme Court has been extended until March 20, 2023.
In Jarkesy, a divided 3-judge Fifth Circuit panel ruled that the proceedings suffered from three constitutional defects:
- The SEC’s use of an administrative court violated the petitioners’ Seventh Amendment right to a jury trial because the SEC’s fraud claims are analogous to traditional fraud claims at common law to which a right to a jury trial applies when civil penalties are sought.
- Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle to guide the SEC’s use of its discretion to decide whether to bring securities fraud enforcement cases either in district court or within the agency.
- The removal restrictions that apply to SEC administrative law judges are unconstitutional because they interfere with the President’s ability to “take Care that the Laws be faithfully executed” as required by Article II of the Constitution. The APA provides that ALJs may be removed by the agency in which the ALJ is employed “only for good cause established and determined by the Merit Systems Protection Board on the record after opportunity for hearing before the Board.”
These holdings have significant potential implications for the CFPB. First, to the extent the CFPB’s authority to challenge deceptive practices is rooted in common law fraud claims, the CFPB’s use of an ALJ in an enforcement action involving an alleged deceptive act or practice could be found to violate the respondent’s Seventh Amendment right to a jury trial. Second, because the Dodd-Frank Act gives the CFPB unfettered discretion to choose whether to bring an action before an ALJ or in federal district court, the CFPB’s use of an ALJ for any enforcement action could be challenged as an unconstitutional delegation of authority. Third, assuming an ALJ used by the CFPB would be subject to the same APA for-cause removal restriction as an SEC ALJ, the removal restriction could be the basis for a constitutional challenge to the CFPB’s use of an ALJ in any enforcement action.
In addition to the legal cloud that Jarkesy creates for the CFPB’s use of administrative proceedings, the Fifth Circuit panel decision in Community Financial Services Association v. CFPB, holding that the CFPB’s funding mechanism is unconstitutional, creates a legal cloud for enforcement actions brought by the CFPB in federal district court as well as for its use of administrative proceedings. The legal cloud created by the CFSA decision can be expected to continue until the U.S. Supreme Court rules on the case next Term, having granted the CFPB’s certiorari petition in the case.