All Things FinReg


The US Supreme Court on June 29 ruled in Seila Law v. Consumer Financial Protection Bureau that the Consumer Financial Protection Bureau’s (CFPB’s) structure unconstitutionally insulates the agency from presidential oversight and must be altered.

The Dodd-Frank Act sculpted the now-stricken structure, including protective provisions for the independent regulatory agency’s sole director that were known to be novel in that they allowed the president to oust the unitary director, who is appointed by the president with the advice and consent of the Senate for a five-year term, only “for cause” (more specifically for “inefficiency, neglect of duty or malfeasance”), while the vast majority of presidential appointees serve at the president’s pleasure alone and thus may be terminated for any reason or no reason at all. Prior to the CFPB’s creation, such “for cause” removal provisions typically were associated with independent regulatory agencies governed by multimember boards or commissions, rather than by a single director. Following the decision, the president may remove the agency’s director “at will.”

The case arose from a CFPB investigation of Seila Law, a law firm that provides debt-relief services, among others. During its investigation, the CFPB issued a civil investigative demand (CID) to Seila Law that required the firm to respond to interrogatories and requests for documents. Seila Law refused to comply; in turn, the CFPB filed a petition in federal district court to enforce compliance. The district court granted the agency’s petition and ordered that Seila Law comply with the CID. Seila Law appealed the district court’s order to the Ninth Circuit, partly on grounds that the CFPB’s structure was unconstitutional. The Ninth Circuit disagreed with that assertion and Seila Law sought review by the US Supreme Court, which granted Seila Law’s request.

In brief, the Court’s opinion refused to extend New Deal–era administrative law precedent, which arguably supported allowing the CFPB’s distinctive structure to persist, to the “new situation” presented here. That “new situation,” according to Chief Justice Roberts’ opinion, “an independent agency led by a single director and vested with significant power” was not envisioned in the past precedent and “has no foothold in history or tradition.”

The chief justice noted that Congress has provided removal protection to principal officers who alone wield power in only four isolated instances: the Office of the Comptroller of the Currency (for a one-year period during the Civil War); the Office of Special Counsel; the administrator of the Social Security Administration; and the director of the Federal Housing Finance Agency. According to Chief Justice Roberts, “[a]side from the one-year blip for the Comptroller of the Currency, these examples are modern and contested; and they do not involve regulatory or enforcement authority comparable to that exercised by the CFPB.”

In contrast, the dissenting justices would have extended that past precedent to the admittedly novel structure of the CFPB (as the Ninth Circuit’s opinion below did, emphasizing its agreement with the DC Circuit’s same result in the PHH Corp. case). Ultimately, the Court held that “the structure of the CFPB violates the separation of powers.”

Importantly, the Court’s decision found the removal provision in question to be severable from the statutory provisions bearing on the CFPB’s authority. Seven of the justices agreed that the provision in Title X of the Dodd-Frank Act that gives the director for-cause removal protection can be severed, thereby leaving the remainder of Title X in place. Accordingly, the Court stopped short of eliminating the agency or making any other changes to its powers due to the structural defect, but remarked that the agency’s director, “in light of our decision, must be removable by the president at will.”

For those subject to regulation and supervision by the CFPB, the Seila Law decision brings to a close the protracted debate over the legitimacy of the agency and its structure, which we have discussed previously in 2016, 2017, and 2018. At the same time, the new requirement that the CFPB director be removable by the president “at will” should, to a large degree, serve to align the director’s policy aims with those of the then-current presidential administration.

However, in the face of a potential change in administrations, as incumbent CFPB directors see the writing on the wall that their remaining time in office may be nigh, they might be further incentivized to leave behind a lasting legacy, whether through rulemakings or formal or informal guidance.

In the short term, Seila Law means that the November presidential elections now have significant new consequences for the direction of the CFPB. Previously, Director Kathleen Kraninger could have continued to serve in office until well into 2023. Now, a new president could replace her—and dramatically alter the agency’s course—as soon as January 2021.

Financial services firms subject to the agency’s jurisdiction should take account of this coming potential for abrupt change, together with the three-year statute of limitations on the agency’s civil enforcement authority, in gauging prospective risks.