On August 31, 2020, the Office of Information and Regulatory Affairs (OIRA), an arm of the Office of Management and Budget (OMB) within the Executive Branch, issued a memorandum (M-20-31 memorandum) directing the heads of federal executive departments and agencies to revise their procedures and practices in light of “the principles of fairness in administrative enforcement and adjudication.” The M-20-31 memorandum was issued to implement Section 6 of Executive Order 13924, which reflects the Trump administration’s efforts to combat the economic consequences of COVID–19. However the M-20-31 memorandum’s reach goes beyond the COVID-19 pandemic: the implementation guidelines in the memorandum are clearly aimed at addressing existing gaps in the enforcement framework with broadly-applicable protections for entities that are subject to enforcement.
If followed, the M-20-31 memorandum could have implications for civil and administrative enforcement proceedings by the Consumer Financial Protection Bureau (CFPB) and other federal financial regulatory agencies. The M-20-31 memorandum articulates ten principles for agencies to consider in reviewing their existing procedures, including—first and foremost—that “[t]he Government should bear the burden of proving an alleged violation of law,” not “the subject of enforcement.” Each principle is bolstered with specific and detailed ‘best practices” for agencies to implement. These best practices include:
- Agencies’ procedures should “ensure that members of the regulated public are not required to prove a negative to prevent liability and enforcement consequences.”
- Agencies should “decline enforcement or the imposition of a penalty” when “the regulated party attempted in good faith to comply with the law.”
- Agencies should “read[ ] genuine statutory or regulatory ambiguities related to administrative violations and penalties in favor of the targeted party in enforcement.”
- “Agencies should make the public aware of the conditions in which investigations and enforcement actions will be brought.”
- Agencies “should only have one bite at the apple to investigate and seek enforcement against a regulated entity” “for a single body of operative facts,” and “eliminate multiple enforcement actions.”
- Agencies’ procedures should “ensure that liability is only imposed after notice and an opportunity to respond.”
- “Agency regulations should apply limiting principles to the duration of investigations,” and agencies should “cease the investigation within a defined time period.”
- Agencies should inform parties under investigation “when the investigation is closed and, when the agency has made no finding of violation.”
- Agency employees’ and adjudicators’ “performance metrics and compensation structures should incentivize fact-based, unbiased” decisions.
- Agencies should “reduce the use of hearsay evidence.”
In an ideal world, all financial regulatory agencies will elect to promptly apply the principles reflected in the M-20-31 memorandum to their enforcement activities. And it is possible that some are already taking steps to come into compliance with the articulated best practices. In addition to the ones outlined above, the M-20-31 memorandum also urges agencies to adopt “termination criteria for consent orders” so as to prevent “[d]ecade(s)-long settlement terms that are disproportionate to the violation(s) of law.” Perhaps in response to the M-20-31 memorandum, the CFPB, on October 5, 2020, issued a policy statement on applications for early termination of consent orders. The policy statement describes a mechanism through which entities subject to a consent order can demonstrate that it is appropriate to terminate the consent order before its original expiration date.
The federal agencies’ application of the full set of principles set forth in the M-20-31 memorandum could mitigate issues afflicting enforcement in the consumer financial services industry. For example, the guidance has the potential to reduce the lack of clarity surrounding the legal theories financial regulatory agencies sometimes pursue in enforcement—which are based on broad and ambiguous statutory authority, yet often complicated by specific and potentially contradictory regulations. It could also protect financial institutions from drawn-out investigations with no clear end that feel like fishing expeditions and impose significant strain on the subjects of enforcement.
Tony Alexis, former Head of the Office of Enforcement at the CFPB, and current head of Goodwin’s Consumer Financial Services Enforcement practice, provides the following comment about the CFPB’s probable use of the M-20-31 memorandum: “I am sure the CFPB is studying these principles of fairness in administrative enforcement and adjudication to see where its current examination and enforcement programs can be changed to come into compliance with these principles. It is my sense that the CFPB is already in substantial compliance with these principles. Industry and their counsel look forward to hearing and seeing from the CFPB as it undergoes its process of self-examination.”