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All Things FinReg

LATEST REGULATORY DEVELOPMENTS IMPACTING
THE FINANCIAL SERVICES INDUSTRY

An August 31 memorandum issued by the Office of Information and Regulatory Affairs (OIRA), an arm of the Office of Management and Budget (OMB) within the Executive Branch, could dramatically change the way agencies handle civil and administrative enforcement proceedings. The memorandum directs covered agencies to provide greater due process to individuals and companies under investigation and reemphasizes the principle that the burden of proof of a violation rests solely with the government. The memorandum was issued to implement the directives contained in Section 6 of Executive Order 13924, Executive Order on Regulatory Relief to Support Economic Recovery (issued May 19, 2020). In relevant part, the executive order directed agency heads to revise agency procedures and practices in light of “the principles of fairness in administrative enforcement and adjudication.”

Whether a given agency is subject to OMB/OIRA authority depends on the organic statute that created the agency. Accordingly, the memorandum’s directives do not apply to all US government agencies, nor do they appear to apply formally to the major federal financial regulatory agencies (including the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Consumer Financial Protection Bureau, US Securities and Exchange Commission, and Commodity Futures Trading Commission). However, OIRA pronouncements are binding on the Cabinet agencies, and therefore all criminal, civil & administrative actions of those 23 agencies, including the US Department of Justice, and by longstanding practice, OIRA pronouncements also carry significant persuasive weight even when not mandatory. Further, the Memorandum’s requirements, even if not formally applicable, will have the greatest practical significance for agencies with robust civil investigatory, enforcement, and adjudicatory arms, which include all of the federal financial regulatory agencies, particularly where senior agency leadership consists largely of persons who may share the governance views reflected in the memorandum.

The memorandum contains the following key provisions.

Burden of Proof

  • The burden to prove a violation in any enforcement action rests with the government. Agencies are reminded that those being investigated need not prove their compliance, nor should they have to “prove a negative.”
  • Assertions of violations should be based on actual misconduct that violated a specific statute or regulation, rather than on what the agency believes the person being investigated “should have done.” Accordingly, agencies and their administrative law judges “should consider applying the rule of lenity . . . in favor of the [subject of an investigation].” This provision echoes and reinforces Executive Order 13891, issued in October 2019, aimed at curbing agencies from using informal guidance as a de facto rule of law.

Required Notice

  • Agencies must create procedures to make pre-enforcement rulings available to subjects of investigations and also provide a reasonable amount of time for subjects to respond to charges.
  • An agency must cite the relevant statutes or regulations that it alleges the subject violated and describe the allegedly violative conduct.

Investigations

  • Once an investigation concludes, agencies should inform parties of that fact if they have been told that they are under investigation and, if applicable, notify the party that there has not been a finding of any violation.

Administrative Proceedings

  • Agencies must avoid undue delay in bringing charges and effect regulations that apply limiting principles to the duration of investigations. And approval by an officer of the United States (or designee) is required before entering into a tolling agreement that effectively would extend the statute of limitations for an infraction.
  • Agencies are required to produce to the subject of the investigation any exculpatory evidence and agency adjudicators are mandated to operate independently from investigators and enforcement staff, including by not engaging in ex parte communications with such staff.

Other Provisions

  • The memorandum contains other important provisions relevant to regulated entities and individuals, including (1) guidance on public disclosure of an agency’s approach to setting penalties for specific infractions; (2) that consent orders and settlements should not bar private parties from disseminating information about their cases; and (3) that agency procedures should encourage voluntary self-reporting of regulatory violations in exchange for reductions or waivers of civil penalties, including grace periods to cure minor violations without fear of penalty.

Takeaways

  • This guidance should enhance the protections afforded to subjects of agency investigations and may lead to greater transparency and accountability for enforcement practices.
  • Although the memorandum’s principles are familiar ones that have been long enshrined in our nation’s criminal procedure, as applied now to civil agency investigatory, enforcement, and adjudication activity, those principles mark a sweeping, bold departure from recent practices within many federal agencies. However, a near-term change in presidential administration may result in a rollback of some or all of these new requirements for agencies.
  • The significance of the memorandum for the financial services industry, however, will depend on the extent to which one or more of the major financial regulatory agencies elects to apply the principles reflected in the memorandum to their activities and operations. Prior actions taken by financial agencies (e.g., the FDIC and OCC) to improve the transparency and accessibility of their regulatory activities and requirements could suggest, however, that the principles set forth in the memorandum might have a receptive audience within the banking agencies.
  • Fintechs and other businesses in emerging fields may be particular beneficiaries of any application of a civil rule of lenity. Relevant rules in such fields are often less concrete and such businesses frequently encounter “genuine statutory or regulatory ambiguities” as they work to enact their business operations and compliance programs.

The memorandum does not directly affect the procedural playbook for state agencies that wield broad civil powers, such as California’s soon to be minted Department of Financial Protection and Innovation, which we reported on most recently in September.