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  • Supreme Court hears oral argument in case challenging SEC ALJ use

    Courts

    On November 29, the Supreme Court heard oral argument in the SEC’s request to appeal the 5th Circuit’s decision in Securities and Exchange Commission v. Jarkesy. As previously covered by InfoBytes, the 5th Circuit held that the SEC’s in-house adjudication of a petitioners’ case violated their Seventh Amendment right to a jury trial and relied on unconstitutionally delegated legislative power. At oral argument, Justice Kavanaugh stated in his questioning of Principal Deputy Solicitor General Brian Fletcher (representing the SEC) that given the severity of the potential outcome of cases, the SEC’s decision-making process fully being carried out in-house could be “problematic,” and that it “doesn’t seem like a neutral process.” Meanwhile, Fletcher mentioned that the boundaries and “outer edges” of the public rights doctrine can be “fuzzy.” Justices’ questions also centered around Atlas Roofing v. Occupational Safety and Health Review Commission—a Supreme Court case that held that “Congress does not violate the Seventh Amendment when it authorizes an agency to impose civil penalties in administrative proceedings to enforce a federal statute.”

    Courts Appellate U.S. Supreme Court ALJ Constitution Securities Exchange Act SEC Advisers Act Fifth Circuit Securities Act

  • Fifth Circuit affirms dismissal of Fannie, Freddie shareholders’ claims related to FHFA removal restriction and funding

    Courts

    On October 12, the U.S. Court of Appeals for the Fifth Circuit affirmed dismissal of Fannie Mae and Freddie Mac shareholders’ claims that the FHFA’s unconstitutional removal restriction caused them harm and that the FHFA’s funding mechanism is inconsistent with the Appropriations Clause. After the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, it entered into several preferred stock purchase agreements with the U.S. Treasury. As a result of these agreements, any value the companies generated would go to the Treasury and not to junior preferred and common stockholders such as plaintiffs.

    The plaintiff shareholders sued in 2016, arguing that the “for cause” removal protection for the director of the FHFA was unconstitutional. The district court granted summary judgment in favor of FHFA, but a panel of the 5th Circuit reversed. Sitting en banc, the 5th Circuit then determined that the removal provision violated the separation of powers, and held that the proper remedy was to sever the removal restriction from the rest of the authorizing statute. On further appeal, the Supreme Court held that for-cause restriction on the President’s removal authority violates the separation of powers, but it refused to hold that the relevant preferred stock purchase agreement must be undone.

    The Supreme Court remanded the case for lower courts to resolve whether the unconstitutional removal provision caused harm to plaintiffs as shareholders, and the 5th Circuit, again sitting en banc, remanded that question to the district court. Plaintiffs filed an amended complaint on remand, bringing claims under the Administrative Procedure Act (“APA”) and directly under the Constitution. The amended complaint also alleged, for the first time, that the FHFA’s financing structure violates the Appropriations Clause. Defendants moved to dismiss, and the district court granted the motion in its entirety and dismissed all claims with prejudice.

    The 5th Circuit determined that the removal claims were within the scope of the remand order, contrary to the district court’s conclusion, but that the plaintiff’s APA claim was barred by an anti-injunction clause in the authorizing statute. Turning to the Constitutional claim, the 5th Circuit concluded that judicial review was not precluded and proceeded to the merits of the claim.

    To show compensable harm from the unconstitutional removal provision, plaintiffs had to allege, among other things, a “nexus between the desire to remove and the challenged actions taken by the insulated actor.” More specifically, they had to allege a connection between the Trump Administration’s desire to remove the director of the FHFA and the Administration’s failure to have FHFA exit the conservatorships and return Fannie Mae and Freddie Mac to private control. The amended complaint, however, failed to plead facts demonstrating that the Trump Administration’s purported plan for re-privatization would have been completed if President Trump had been able to remove the existing FHFA director. Those allegations, the Fifth Circuit held, were insufficient.

    The 5th Circuit agreed with the district court that the plaintiffs’ Appropriations Clause argument was outside the mandate of the earlier remand order. The appeals court reasoned that the remand order “[left] no opening for plaintiffs to bring a challenge under a completely different constitutional theory for the first time on remand,” nor was there an intervening change in the law such that the mandate rule would not apply.

    Courts Fifth Circuit Appellate FHFA Fannie Mae Freddie Mac Shareholders Constitution U.S. Supreme Court

  • Senator Warren delivers remarks in support of the CFPB

    Federal Issues

    On September 28, Senator Elizabeth Warren delivered a keynote speech at the Center for American Progress, in which she chronicled the history of the CFPB and defended the agency against political attacks. Further, ahead of the oral arguments that took place before the Supreme Court on October 3, Senator Warren criticized the holding of the 5th Circuit, which ruled that the agency’s funding mechanism was unconstitutional. She noted that “none of the federal banking regulators is funded through appropriations,” and that “Congress decided to protect the integrity of these regulators from the chaos and politicking of the annual appropriations process by giving them independent funding structures.”

    Federal Issues CFPB Constitution Funding Structure Elizabeth Warren Fifth Circuit

  • SEC files brief in its Supreme Court appeal to reverse 5th Circuit ruling against use of adjudication powers and ALJs

    Courts

    On August 28, the SEC filed a brief in its appeal to the U.S. Supreme Court to reverse the decision of the U.S. Court of Appeals for the Fifth Circuit’s 2022 ruling that the commission’s in-house adjudication is unconstitutional. As previously covered by InfoBytes, the 5th Circuit held that the SEC’s in-house adjudication of a petitioners’ case violated their Seventh Amendment right to a jury trial and relied on unconstitutionally delegated legislative power. The brief argues that securities laws are “distinct from common law because they authorize the government to seek civil penalties even if no private person has yet suffered harm from the defendant’s violation (and therefore no person could obtain damages).” Moreover, the SEC argues that the Court has continually upheld the right of an agency to decide whether to enter an enforcement action through the civil or criminal process. The SEC referenced the 1985 Heckler v. Chaney case, which set the precedent that there is no constitutional difference between the power to decide whether to pursue an enforcement action and where to pursue an enforcement action, as they are both executive powers, supporting the claim that there is “a long and unbroken line of decisions that have relied on the public-rights doctrine in upholding such statutory schemes against Article III and Seventh Amendment challenges.” The SEC also reminded the Court that when it enforces securities laws through an administrative enforcement proceeding with a result that is not in favor of the respondent, the respondent may obtain a judicial review through the court of appeals. Finally, the commission contends that the 5th Circuit erred when it held that statutory removal restrictions for ALJs are unconstitutional, and that Congress has “acted permissibly in requiring agencies to establish cause for their removal of ALJs.”

    Courts Securities SEC U.S. Supreme Court Fifth Circuit ALJ Constitution Securities Act Securities Exchange Act Enforcement

  • CFPB files reply brief supporting its constitutional structure

    Courts

    On August 3, the CFPB filed a Reply Brief in support of its request to overturn the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, in which the 5th Circuit found that the CFPB’s funding structure violated the Constitution’s Appropriations Clause (covered by InfoBytes here, here, and here, and in a firm article here).

    In its Reply Brief, the CFPB argues that Congress did not violate the Appropriations Clause by failing to specify a specific dollar amount to fund the CFPB because “the Appropriations Clause contains no dollar-amount requirement.” In support of that argument, the CFPB points to the Founders’ appropriation of funds for the Post Office and the National Mint where they did not decide the specific amounts of annual funding, the funding structure for the OCC and the Federal Reserve Board, and to current federal appropriations for Social Security payments and unemployment assistance.

    The Bureau then argues that even if there was a specific dollar amount requirement, that requirement is nonetheless satisfied because “Congress fixed the CFPB’s maximum annual funding.” According to the Bureau, the fact that it has the discretion to ask for less than the maximum authorized is commonplace and “[t]o this day, Congress routinely appropriates sums ‘not to exceed’ a particular amount;’ that phrase appears more than 400 times in the Consolidated Appropriations Act, 2022.”

    The Bureau then aims to refute plaintiff’s arguments that the Appropriations Clause requires time-limited funding laws and imposes special rules for law enforcement agencies. The Bureau argues that the fact that the Constitution includes a specific restriction limiting Congress from funding the army for more than two years dictates that by negative implication there is no such prohibition of a standing appropriation for a different appropriation.

    Finally, the Bureau argues that its combination of features is not as unique as CFSA contends, and that even if the Supreme Court ultimately finds the funding structure unconstitutional vacating the Payday Lending Rule is an inappropriate remedy because the 5th Circuit failed “to consider whether the defect it perceived could be cured by severing portions of Section 5497.”

    Courts CFPB Constitution Supreme Court Funding Structure Fifth Circuit Appellate Payday Rule

  • States urge Supreme Court to find CFPB funding unconstitutional

    Courts

    On July 10, the West Virginia attorney general, along with 26 other states, filed an amicus brief in support of respondents in Consumer Financial Protection Bureau v. Community Financial Services Association of America, arguing that the CFPB’s funding structure violates the Constitution and that by operating outside the ordinary appropriations process states are often left “out in the cold.” In their brief, the states urged the U.S. Supreme Court to uphold the U.S. Court of Appeals for the Fifth Circuit’s decision in which it found that the Bureau’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause (covered by InfoBytes here and a firm article here). The 5th Circuit’s decision also vacated the agency’s Payday Lending Rule on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding.

    Arguing that the Bureau is operating beyond the boundaries established by the Constitution, the states maintained that the current funding mechanism limits Congress’s ability to oversee the agency. “Even if the CFPB has done some good—and some would even dispute that premise—it wouldn't matter,” the states said, warning that “sidelining Congress can greenlight an agency to wreak havoc,” especially if the “agency wields broad regulatory and enforcement powers over the entire U.S. financial system, acts under the control of a single powerful figure, and lacks other protections from meaningful oversight.”

    The appropriations process plays a crucial role in enabling states to influence agency actions indirectly, the states maintained, explaining that when an agency initiates a new enforcement initiative or significant rulemaking endeavor, it is required to publicly outline its projected work in order to secure the necessary funding to carry it out. “Disclosure on the front end of the appropriations process can empower affected parties—including the [s]tates—to take quick, responsive actions beyond lobbying their representatives (up to suing to stop illegal action, if need be).” In contrast, the Bureau’s insulation from this process has allowed it to hide its actions from public view, the states wrote. As an example, the Bureau has repeatedly declined to interpret or provide further clarity on how the provisions governing unfair, deceptive, or abusive acts or practices work.

    The brief also highlighted examples of when Congress used funding cuts through the appropriations process to curtail agencies’ powers. Additionally, unlike the challenges of amending authorizing statutes, appropriations bills must be passed by Congress each year to avoid a government shutdown, which can be “a painful pill to swallow for the sake of standing up for an agency’s policy choice,” the states noted, adding that “[b]ecause appropriations involves both oversight committees and appropriations committees, agencies may have ‘less flexibility to ally themselves with executive branch officials or interest groups.’”

    The states also urged the Court to “ignore doomsaying” about the consequences of finding the funding structure unconstitutional. Should the Court agree to invalidate the funding structure, Congress can pass a proper appropriations bill for the Bureau, the states explained, adding that “a rebuke from this Court would no doubt grease the sticky wheels of the legislative process and move them a bit faster.” Moreover, states could also fill any gaps should Congress somehow pare back the CFPB’s funding, the brief stressed.

    Several amicus briefs were also filed this week in support of CFSA, including an amici curiae brief filed by the U.S. Chamber of Commerce and several banking associations and an amici curiae brief filed by 132 members of Congress, including 99 representatives and 33 senators, which urged the Court to uphold the 5th Circuit’s decision.

    Courts State Issues CFPB U.S. Supreme Court Funding Structure Constitution State Attorney General Appellate Fifth Circuit

  • CFSA says CFPB funding violates Constitution

    Courts

    On July 3, the Community Financial Services Association of America (CFSA) and the Consumer Service Alliance of Texas filed their brief with the U.S. Supreme Court, urging the high court that the CFPB’s independent funding structure is “unprecedented and must be stopped before it spreads without limit.” Respondents asked the Court to affirm the U.S. Court of Appeals for the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where the appellate court found that the Bureau’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause (covered by InfoBytes here and a firm article here). The 5th Circuit’s decision also vacated the agency’s Payday Lending Rule on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding.

    The Bureau expanded on why it believes the 5th Circuit erred in its holding in its opening brief filed with the Court in May (covered by InfoBytes here), and explained that even if there were some constitutional flaw in the statute creating the agency’s funding mechanism, the 5th Circuit should have looked for some cure to allow the remainder of the funding mechanism to stand independently instead of presuming the funding mechanism created under Section 5497(a)-(c) was entirely invalid. Vacatur of the agency’s past actions was not an appropriate remedy and is inconsistent with historical practice, the Bureau stressed.

    In their brief, the respondents challenged the Bureau’s arguments, writing that the “unconstitutionality of the CFPB’s funding scheme is confirmed by both its unprecedented nature and lack of any limiting principle. Whether viewed with an eye toward the past or the future, the threat to separated powers and individual liberty is easy to see.” Disagreeing with the Bureau’s position that the Constitution gives Congress wide discretion to exempt agencies from annual appropriations and that independent funding is not uncommon for a financial regulator, the respondents stated that Congress gave up its appropriations power to the Bureau “without any temporal limit.” The respondents further took the position that the Bureau “can continue to set its own funding ‘forever’” unless both chambers agree and can persuade or override the president. Moreover, because the Federal Reserve Board is required to transfer “the amount determined by the Director to be reasonably necessary to carry out the [CFPB’s] authorities, . . . it ‘foreclose[s] the application of any meaningful judicial standard of review.’”

    The respondents also argued that the Bureau’s funding structure is clearly distinguishable from other assessment-funded agencies in that these financial regulators are held to “some level of political accountability” since “they must consider the risk of losing funding if entities exit their regulatory sphere due to imprudent regulation.” Additionally, the respondents claimed that the fundamental flaws in the funding statute cannot be severed, reasoning, among other things, that courts “cannot ‘re-write Congress’s work’” and are not able to replace the Bureau’s self-funding discretion with either a specific sum or assessments from regulated parties.

    With respect to the vacatur of the Payday Lending Rule and the potential for unintended consequences, the respondents urged the Court to affirm the 5th Circuit’s rejection of the rule, claiming it was unlawfully promulgated since a valid appropriation was a necessary condition to its rulemaking. “Lacking any viable legal argument, the Bureau resorts to fear-mongering about ‘significant disruption’ if all ‘the CFPB’s past actions’ are vacated,” the respondents wrote, claiming the Bureau “grossly exaggerates the effects and implications of setting aside this Rule.” According to the respondents, the Bureau does not claim that any harm would result from setting aside the rule, especially since no one has “reasonably relied” on the rule as it has been stayed and never went into effect. As to other rules issued by the agency, the respondents countered that Congress could “legislatively ratify” some or all of the agency’s existing rules and that only “‘timely’ claims can lead to relief” in past adjudications. Additionally, the respondents noted that many of the Bureau’s rules were issued outside the six-year limitations period prescribed in 28 U.S.C. § 2401(a). This includes a substantial portion of its rules related to mortgage-related disclosure. Even for challenges filed within the time limit, courts can apply equitable defenses such as “laches” to deny retrospective relief and prevent disruption or inequity, the respondents said.

    Courts CFPB U.S. Supreme Court Appellate Fifth Circuit Funding Structure Constitution Payday Lending Payday Rule

  • CFPB brief defends funding structure

    Courts

    On May 8, petitioner CFPB filed its brief with the U.S. Supreme Court, criticizing the U.S. Court of Appeals for the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where the appellate court found that the Bureau’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause (covered by InfoBytes here and a firm article here). The 5th Circuit’s decision also vacated the agency’s Payday Lending Rule on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding. 

    Earlier this year, the Bureau filed a petition for a writ of certiorari, which the Court granted (covered by InfoBytes here). The Bureau explained in its petition that the 5th Circuit’s decision would negatively impact its “critical work administering and enforcing consumer financial protection laws” and “threatens the validity of all past CFPB actions as well” as the decision vacates a past agency action based on the purported Appropriations Clause violation. Community Financial Services Association of America (CFSA) filed a conditional cross-petition, seeking review on other aspects of the 5th Circuit’s decision, including that the 5th Circuit’s decision does not warrant review because the appellate court correctly vacated the Payday Lending Rule, which, according to the respondents, has “multiple legal defects, including but not limited to the Appropriations Clause issue.” (Covered by InfoBytes here.)

    In its opening brief, the Bureau expanded on why it believes the 5th Circuit erred in its holding. The Bureau argued that the text of the Appropriations Clause “does not limit Congress’ authority to determine the specificity, duration, and source of its appropriations.” The agency further explained that Congress has chosen similar funding mechanisms for many other financial regulatory agencies, including the FDIC, NCUA, FHFA, and the Farm Credit Administration (and agencies outside of the financial regulatory sector), where they are all funded in part through the collection of fees, assessments, and investments. The Bureau emphasized that the 5th Circuit and the CFSA failed “to grapple with the Appropriation Clause’s text, Congress’ historical practice, or [Supreme] Court precedent,” but instead asserted only that the funding mechanism was “unprecedented.” “Congress enacted a statute explicitly authorizing the CFPB to use a specified amount of funds from a specified source for specified purposes,” the Bureau emphasized. “The Appropriations Clause requires nothing more.” The 5th Circuit’s “novel and ill-defined limits on Congress’s appropriations authority contradict the Constitution’s text and congressional practice dating to the Founding.”

    The Bureau also addressed the now-vacated Payday Lending Rule. Arguing that even if there were some constitutional flaw in 12 U.S.C. § 5497 (the statute creating the Bureau’s funding mechanism), the 5th Circuit should have looked for some cure to allow the remainder of the funding mechanism to stand independently instead of “adopting an unjustified and profoundly disruptive retrospective remedy” and presuming the funding mechanism created under Section 5497(a)-(c) was entirely invalid. The Bureau also stressed that vacatur of the agency’s past actions was not an appropriate remedy and is inconsistent with historical practice. Adopting a remedial approach, the Bureau warned, would inflict significant disruption by calling into question 12 years of past agency actions.

    The Bureau urged the Court to at most grant only “prospective relief preventing the CFPB from enforcing the Payday Lending Rule against [CFSA] or their members until Congress provides the Bureau with funding from another source.” While such an approach could still “upend” the Bureau’s activities, “it would at least avoid the profoundly disruptive effect of unwinding already completed and concededly authorized agency actions like the Payday Lending Rule,” the Bureau wrote, adding that “[v]acatur of the CFPB’s past actions would be inappropriate in light of the significant disruption that such vacatur would produce.”

    Courts CFPB U.S. Supreme Court Appellate Fifth Circuit Payday Lending Payday Rule Funding Structure Constitution

  • CFPB, New York AG ask court to lift stay after 2nd Circuit decision

    Courts

    On March 31, plaintiffs CFPB and the New York Attorney General moved the U.S. District Court for the Southern District of New York to lift its stay order in their litigation against a remittance provider in response to a recent U.S. Court of Appeals for the Second Circuit decision upholding the CFPB’s funding structure under the Constitution’s Appropriations Clause. (Covered by InfoBytes here.) The plaintiffs argued that the 2nd Circuit’s binding opinion has now “answer[ed] the question at the heart of this Court’s stay order: whether the Bureau’s statutory funding mechanism violates the Constitution.”

    As previously covered by InfoBytes, the district court had originally paused the proceedings at the defendant’s request when the Supreme Court was considering whether to hear an appeal in a different matter relating to the Bureau’s funding structure. The district court continued the stay after the Supreme Court agreed to review the 5th Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where it found that the CFPB’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause. The Supreme Court is scheduled to review the 5th Circuit’s decision next term (covered by InfoBytes here).

    The agencies argued primarily that (i) the 2nd Circuit “expressly considered and rejected the Fifth Circuit’s contrary view in CFSA;” (ii) it “did so notwithstanding that the Supreme Court will consider the same issue next Term”; and (iii) “[g]rants of certiorari do not change the law, and a district court remains bound by circuit precedent until the Supreme Court or the court of appeals changes that precedent.”

    On April 7, the court issued an order denying the Bureau's request and electing to keep the stay in place while the Supreme Court resolves the circuit split on this issue.

     

    Courts State Issues CFPB State Attorney General New York Enforcement Remittance Appellate Second Circuit Funding Structure Constitution U.S. Supreme Court Fifth Circuit

  • 2nd Circuit: CFPB funding is constitutional

    Courts

    On March 23, the U.S. Court of Appeals for the Second Circuit held that the CFPB’s funding structure is constitutional—splitting from the U.S. Court of Appeals for the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, which concluded that Congress violated the Constitution’s Appropriations Clause when it created what that Court described as a “perpetual self-directed, double-insulated funding structure.” The U.S. Supreme Court is scheduled to review the 5th Circuit’s decision next term (covered by InfoBytes here).

    Meanwhile, the 2nd Circuit concluded that it “cannot find any support” for the 5th Circuit’s determination in Supreme Court precedent, the text of the Constitution text, or in the history of the Appropriations Clause. “Because the CFPB’s funding structure was authorized by Congress and bound by specific statutory provisions, we find that the CFPB’s funding structure does not offend the Appropriations Clause,” the 2nd Circuit wrote. As such, the appellate court affirmed a 2020 district court order requiring the defendant debt collection law office to comply with a civil investigative demand issued by the Bureau in June 2017. As previously covered by InfoBytes, the CID requested information from the defendant as part of a Bureau investigation into whether debt collectors, furnishers, or other persons associated with the collection of debt and furnishing of information have engaged or are engaging in unfair, deceptive, or abusive acts or practices in violation of the CFPA, FDCPA, and FCRA. The defendant objected on several grounds, including that the CID was void ab initio under Seila Law LLC v. CFPB (the defendant contended that “the CFPB Director was shielded from presidential oversight by an unconstitutional removal provision at the time the CID was issued”), and that the Bureau is unconstitutionally funded. As noted in the opinion, the Bureau ratified the CID and the enforcement action against the defendant following the Supreme Court’s decision in Seila Law, and the district court ultimately granted the Bureau’s petition to enforce the CID.

    On review, the 2nd Circuit affirmed the district court’s order, concluding that the CID was not void ab initio because “there is no dispute that the CFPB Director who issued the CID was properly appointed.” The appellate court pointed to the majority opinion in the Supreme Court’s decision in Collins v. Yellen (covered by InfoBytes here), which held that “‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[,]’” and therefore the Bureau’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” The panel further noted that “[s]ince the CID was issued, there have been three different CFPB Directors appointed by two different presidents, each of whom has been subject to at-will removal at some point in their tenure. There is nothing to suggest that the Director’s removal protection affected the issuance of the CID or the investigation into [the defendant].” The 2nd Circuit further concluded that “the CFPB’s funding structure is not constitutionally infirm under either the Appropriations Clause or the nondelegation doctrine, and that the CID served on [the defendant] is not an unduly burdensome administrative subpoena.”

    Courts CFPB Appellate Second Circuit Fifth Circuit CID Constitution Crowdfunding U.S. Supreme Court

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