Subject to Inquiry

Subject to Inquiry


Government Investigations and White Collar Litigation Group
Anti-Bribery and Corruption, Enforcement and Prosecution Policy and Trends

SEC Expected to Expedite FCPA Investigations in Light of Kokesh

On November 9, 2017, Steven R. Peikin, Co-Director of the SEC’s Division of Enforcement, delivered a keynote speech at a conference commemorating the 40th anniversary of the enactment of the Foreign Corrupt Practices Act (“FCPA”) in which he reflected on “the past, present, and future” of the SEC’s enforcement of the FCPA.

After confirming the SEC’s commitment to robust FCPA enforcement, Peikin noted that a “principal challenge” the SEC is now facing is “the interplay between the length of time it takes to conduct an FCPA investigation and the statute of limitations” imposed by the recent Supreme Court decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017).  Specifically, in June 2017, the Supreme Court unanimously held that SEC enforcement actions seeking disgorgement are subject to a five-year statute of limitations.  Id. at 1639.  Accordingly, in light of Kokesh, the SEC is no longer able to seek disgorgement from defendants for claims that accrue outside of the five-year limitations period.

Although Kokesh is not unique to FCPA matters, Peikin anticipates that the ruling “will have particular significance for [the SEC’s] FCPA cases” for two main reasons.  First, it is common practice for the SEC to seek disgorgement in FCPA matters.  Second, FCPA investigations are among the most lengthy for the SEC because: (a) “[i]n many instances, by the time a foreign corruption matter hits [the SEC’s] radar, the relevant conduct may already be aged;” and (b) once initiated, FCPA investigations are time-consuming in that they are factually complex and require the collection of evidence from foreign jurisdictions.

Therefore, Peikin declared that the SEC has “no choice but to respond by redoubling [its] efforts to bring cases as quickly as possible” in order to pursue all available remedies.  Peikin also expects that the Enforcement Division will continue to work closely with foreign law enforcement and regulators to both maximize efficiencies and to target assets held outside of the United States.

The full text of Peikin’s speech can be found at:

Enforcement and Prosecution Policy and Trends, Financial Institution Regulation, Securities and Commodities, Uncategorized

SEC Approves New PCAOB Standard

Recently, the SEC approved the PCAOB’s new auditor reporting standard, AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. Hailed as the most significant change to the auditor report’s format in over 70 years, AS 3101 significantly changes the format of the existing auditor’s report, arming investors and market participants with increased information to navigate an ever-expanding and increasingly complex and global marketplace.

Adopted by the PCAOB on June 1, 2017, AS 3101 requires auditors to provide new information about the audit and present a more informative and relevant auditor’s report to investors and other financial statement users. The new requirements include:

  • Communication of critical audit matters (CAMs) – i.e., matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment;
  • Disclosure of the year the auditor began serving as the issuer’s auditor; and
  • A number of other improvements to the auditor’s report to clarify the auditor’s role and responsibilities, and make the auditor’s report easier to read.

The most controversial aspect of the new standard, the communication of CAMs, met with opposition from industry trade groups citing several concerns to the SEC:

  • Disclosure of immaterial information;
  • Replacing of management as the source of original information;
  • Imposing additional expenses on firms; and
  • A chilling effect on the audit committee/auditor relationship.

SEC Chairman Jay Clayton acknowledged these concerns, but expressed his support for the SEC’s unanimous decision to approve the PCAOB’s new standard. Clayton noted that AS 3101 “provide[s] investors with meaningful insights into the audit . . . [such as the] auditor’s perspective on matters discussed with the audit committee that relate to material accounts.” Clayton identified company independent audit committees “as one of the most significant and efficient drivers of value to Main Street investors [and] impairing or otherwise negatively affecting the work of well-functioning audit committees could have significant adverse effects on investors.”

AS 3101 will come into effect for large accelerated filers with fiscal years ending on or after June 30, 2019 and for all other companies to which the requirement applies with fiscal years ending on or after December 15, 2020. The PCAOB will be monitoring its progress through a post-implementation review.

Only time will tell whether the new disclosures will provide the intended benefit to the marketplace.

Enforcement and Prosecution Policy and Trends, Immigration and Worksite Enforcement

Increased Immigration Worksite Enforcement Looming in 2018

 The days of speculation may have ended. Immigration and Customs Enforcement’s (ICE) acting director recently made clear that Form I-9 audits and worksite enforcement actions will surge in the coming year.

In line with the Trump Administration’s tough position on immigration and its budget requests, most employers have anticipated increased immigration-focused audits and enforcement actions. But we did not see a noticeable uptick during the first three quarters of 2017.

Lest employers become complacent, on October 17, ICE’s Acting Director Thomas Homan announced that ICE would increase worksite audits by “four or five times” in the next year. This comes after a January Executive order and more recent statement by ICE announcing plans to hire 10,000 new worksite enforcement officers.

All the signs now clearly point to an increase in audits and worksite enforcement in 2018. It will take time to hire and train this large volume of new officers. Therefore, it won’t be until next year—likely next summer—before we see a big impact on employers. This provides a short window for many companies to shore up their immigration compliance efforts or else face substantial penalties. Even simple mistakes, like paperwork violations, can cost companies between $220 and $2,191 per Form I-9.  The most recent increased penalties are available here.

As a start, it is always a good practice to conduct internal I-9 audits to ensure compliance.  The Department of Justice and ICE have provided joint guidance on conducting internal audits: Companies should also ensure they are using the most recent version of the Form I-9.  This version was published in July 2017 and became mandatory in September 2017.  Finally, companies should ensure they retain experienced immigration compliance counsel to assess the adequacy of immigration policies and procedures, ensure compliant Form I-9 practices, and defend the company should a government audit or investigation arise.

Financial Institution Regulation

The New CFPB Consumer Protection Principles

This post originally appeared in our sister publication, Password Protected.

On October 18, 2017, the Consumer Financial Protection Bureau (CFPB) issued a set of Consumer Protection Principles regarding the sharing and aggregation of consumers’ financial data. The timing of the announcement in light of last month’s disclosure of the Equifax breach of approximately 140 million consumers’ financial data seems noteworthy, as all companies whose businesses rely on the consumer-authorized financial data market are scrambling to regain consumer trust.

Noting the “growing market” for consumer-authorized financial data aggregation services, the CFPB has promulgated nine principles which, in the words of CFPB Director Richard Cordray “express [the Bureau’s] vision for realizing an innovative market that gives consumers protection and value.” (See CFPB press release).

Many of the principles themselves will be familiar to anyone who has paid attention to consumer privacy discourse over the last 30+ years. They are in many ways a restatement of the OECD Guidelines, published in 1980 by the Organisation for Economic Co-operation and Development, but with a few useful additions. The “new” CFPB principles include time-tested privacy principles of:

  1. informed consent & control over data sharing
  2. notice and transparency regarding the third parties’ access to and use of consumer data
  3. data quality & accuracy and the right of consumers to dispute inaccuracies
  4. an expectation of security and safeguards to protect consumer data
  5. a right of access by consumers to their own data; and
  6. accountability to the consumer for complying with the foregoing principles.

In addition, however, the CFPB principles contain some fairly specific guidance that is particularly useful in the context of financial data and may have a significant impact on the way financial data is gathered, marketed and retained. For example, the CFPB Principles contain a specific principle (#4) regarding payment authorization:

  • Authorizing Payments. Authorized data access, in and of itself, is not payment authorization. Product or service providers that access information and initiate payments obtain separate and distinct consumer authorizations for these separate activities. Providers that access information and initiate payments may reasonably require consumers to supply both forms of authorization to obtain services.

The above principle is one of several that illustrate the CFPB’s disapproval of broad, open-ended consents from consumers, favoring instead tailored, purpose-specific access. Principle #2 (Data Scope and Usability) is another example of this theme. It reads in part, “Third parties with authorized access only access the data necessary to provide the product(s) or service(s) selected by the consumer and only maintain such data as long as necessary.”

It remains to be seen how these principles might be applied to data collectors like credit bureaus, who typically hold consumer data for as long as a consumer’s lifetime in many cases. The CFPB’s press release emphasized that the principles are not intended to supercede or interpret any existing consumer protection statutes or regulations and that they are not binding. Still, they do provide a window into the CFPB’s mindset and the likely trend for future regulation.

Enforcement and Prosecution Policy and Trends

Profiting from Human Rights Abuses

The Criminal Finances Act 2017 runs to nearly 150 pages. It was hurried through Parliament shortly before the June 2017 election.  It is an example of lazy and confusing legislating, where numerous sections and sub-sections are added on to existing legislation, giving rise to the creation of sections numbered 339ZD and 396L which pile uncertainty on to the already unsatisfactory provisions of the Proceeds of Crime Act 2002.

The 2017 Act, in addition to being impenetrable in its quest to tighten up the rules of confiscation and compensation, has added some interesting new provisions. Much has already been said about Part 3, the corporate offence of failure to prevent facilitation of tax evasion.  It will be surprising if any corporation is prosecuted under this section, but it may assist in making board members more circumspect about tax schemes.  It will certainly encourage corporates to seek advice about how to undertake risk assessments, secure top level commitment from the board, and develop implementation and communications plans.

Less comment has been made about Chapter 3 of Part 1 of the Act. None of the nine Factsheets published by the Home Office refer in any detail to these provisions.  No guidance has been issued – HMRC has produced a 48 page guide to the failure to prevent tax evasion offence.  Nevertheless, section 13 of the Act adds three pages of verbiage to section 241 of POCA, which, in three lines, defines unlawful conduct for the purpose of implementing the civil recovery of the proceeds of unlawful conduct: in short, conduct which is criminal under UK law, or which, where the offence is committed in another jurisdiction, is a criminal offence under the law of that jurisdiction and under UK law.

What has been added by section 13 is that conduct which constitutes gross human rights abuses or violations outside the UK is a type of ‘unlawful conduct’ which can lead to an action in the High Court for civil recovery from a person or entity of the financial proceeds of such abuses or violations. It may be noted in passing that there must have been a recognition by the Home Office that this procedure would be better positioned as a civil recovery rather than relying on a criminal conviction, followed by confiscation proceedings.  It may also be noted that civil recovery actions have been few and far between in the last 15 years (in June 2014 the CPS stated that it had obtained just 2 civil recovery orders, but was embarking on a new strategy to improve its record).

Section 241A POCA, as added by the 2017 Act, sets out the three conditions which have to be met before any conduct can be deemed to be a gross human rights abuse or violation. First, that the abuse must be against a person who has sought to expose illegal activity by a public official; or against a person who has sought to uphold human rights or fundamental freedoms.  Second, that the unlawful conduct must be a consequence of the victim seeking to expose illegal activity or uphold human rights.  Third, the conduct must be carried out by a public official or with their consent or acquiescence.

Section 241(A)(5) states that conduct is connected with the commission of a gross human rights abuse if it is conduct by a person that involves acting as an agent for another, or directing or sponsoring, or profiting from, or materially assisting, such activities.

The conduct must involve the intentional infliction of severe pain and suffering, either physical or mental.

Other provisions define the limits of the offence, including time limits – proceedings may be brought up to 20 years from the date on which the offending conduct occurred.

Therefore, the provisions are aimed specifically at the conduct of foreign public officials, and there is on the face of it no obvious connection between what such an official may do to a man or woman who is protesting about human rights abuses in a foreign jurisdiction, and money or goods received by a UK company. Some improbable scenarios may be imagined: AminingCo PLC faces a strike in sub-Saharan Africa, and public officials, allegedly paid by AminingCo, round up the ring-leader and torture him.  The strike is brought to an end by this means, and production continues, bringing revenue to a UK company which buys the product.  But there are a number of points in this story which will surely be difficult to prove, and it is very difficult to imagine any case being established, even to the civil level of proof, that will result in the recovery of the proceeds of this ‘crime’.  For a start, how will the benefit be assessed?

What can, or should, corporates do about this? What risks are they taking in their production lines around the world?  The answer may be that they simply need to beef up their anti-bribery compliance manual.  If AUKCO PLC pays a sub-Saharan public official, or connives in such a payment by Aminingco, to beat up a protester, it is committing an act of bribery, which may be easier to prove than the abuse of human rights offence.  The company can be fined a large sum, and no complex proceedings in the High Court need to be embarked on.  AUKCO PLC will suffer the same level of opprobrium, perhaps more, than if it has some assets seized by a High Court action.

What, therefore, is behind section 13 of the 2017 Act? Is it gesture legislating, like the Modern Slavery Act, seeking to demonstrate that the UK takes human rights abuses as seriously as slavery, and thereby encouraging better behaviour, but without any realistic prospect of any proceedings being brought?  It is self-evident that there are human rights abuses and torture in many parts of the world, but proving that such abuses lead to unlawful financial gain may be a stretch.  I predict that it will be some time before we see a civil recovery order procedure in the High Court under section 13 of the Criminal Finances Act 2017.

Enforcement and Prosecution Policy and Trends

Will Supreme Court Narrow The Broadest Tax Crime?

In the October 2017 term, the Supreme Court will take up its first criminal tax case in almost a decade, Marinello v. United States.  At issue is a longstanding circuit split about a mainstay of the federal government’s arsenal in financial crime cases, the tax obstruction statute, which makes a felon of anyone who “corruptly … obstructs or impedes, or endeavors to obstruct or impede, the due administration” of the Internal Revenue Code.  26 U.S.C. § 7212(a).  Marinello will decide whether this law only prohibits efforts to obstruct a pending IRS audit or collection proceeding, or instead whether (as the DOJ argues and most circuits agree) it also reaches any other conduct affecting federal taxes.

Often described as a “one-man conspiracy” statute, § 7212(a)’s reach at present is limited mainly by DOJ’s self-restraint.  Every other tax crime of consequence – tax evasion, filing false returns, failure to file, failure to pay, conspiracy to defraud – can also be charged as § 7212(a) on the government’s reading of the statute, which has been endorsed by most circuit courts.  It is undoubtedly the broadest tax crime.

But the government does not need the broad reading of § 7212(a) to fully and fairly enforce the tax laws.  The IRS already has more-specific criminal charges it commonly relies on to combat false tax returns and underpaid taxes – like tax evasion, filing false returns, or aiding and abetting.  DOJ usually relies on section § 7212(a) as a stopgap, precisely to cover conduct that can’t be readily prosecuted under more-specific laws.

The statute’s use as a stopgap also clarifies its potential for misuse.  Like conspiracy, § 7212(a) permits prosecutors to allege that otherwise-lawful acts become criminal because they are performed with wrongful intent.  But unlike the conspiracy charge for which it sometimes serves as a substitute, the DOJ’s broad reading of § 7212(a) cannot be justified by the law’s longstanding assumption that criminally-minded schemers become more dangerous when working together than when operating separately.

Some courts have suggested that tax enforcement needs a capacious charge like § 7212(a) to respond to criminal ingenuity.  Yet DOJ already has such a flexible charge: tax evasion, which similarly can be predicated on otherwise-lawful acts, like using corporate shells or stashing money abroad, if done with the requisite criminal intent.  Unlike the tax obstruction statute, though, tax evasion has a measure of built-in protection against government overreach: it requires proof beyond a reasonable doubt that the IRS suffered a financial loss, and proof of willfulness, that the defendant knew his conduct was illegal.  The prospect of subjecting the government’s theories of intent and taxation to adversarial testing deters charges in dubious cases.  An overbroad view of tax obstruction lessens the deterrent.

In that regard, Marinello touches on an important theme of the Supreme Court’s recent white collar crimes jurisprudence: the Court’s increasing distrust of prosecutorial discretion as a trustworthy safeguard against the abuse of broadly-worded federal criminal statutes.  Yates, construing the Sarbanes-Oxley Act, and McDonnell, addressing corruption offenses, both chose narrower interpretations of the respective crimes in part out of concern that an expansive interpretation of a broadly-worded crime left open too many possibilities for overreach.

In DOJ’s view, tax obstruction is a crime broad enough to penalize acts that are otherwise-lawful, result in no false document, and produce no financial loss to the government.  That much discretion may well be more than the Court is prepared to allow.

Enforcement and Prosecution Policy and Trends

Recent Privilege Decision Raises Questions for Internal Investigations

A recent federal district court case raises significant issues regarding privilege that should be on the radar of any in-house or outside counsel conducting an internal investigation with the goal of producing a public report. As discussed in a recent Privilege Points, the investigation at issue was conducted for the Washington Metropolitan Area Transit Authority (WMATA) and focused on evaluating its business practices and the standard of conduct for its directors. As part of the investigation, the law firm conducted more than 30 interviews and created 51 interview memoranda, all of them marked as work product. The law firm created an investigative report of its findings and the WMATA board publically released the report.

In civil litigation related to the investigation, plaintiffs sought production of the interview memoranda. The court’s decision, Banneker Ventures, LLC v. Graham, 2017 U.S. Dist. LEXIS 74155 (D.D.C. May 16, 2017), held that WMATA had waived privilege as to the subject matter of the memoranda by publically releasing the report. A key point of the decision was that the final report had extensively cited to the interview memoranda, referencing many of the memoranda multiple times. The court also focused on the fact that WMATA had tried to use the final report as part of its defense to the civil litigation and that as a matter of fairness it could not then refuse to disclose the underlying memoranda.

The decision, if followed by other courts, raises significant questions regarding internal investigations and suggests several best practices for organizations considering beginning internal investigations:
• Have a clear understanding of the goals of an investigation from the onset including whether a public report will be desirable.
• Generate interview memoranda and other documents with the understanding that they may become public if there is a public report.
• When drafting a public report, consider whether a report with less specific detail or more general statements could accomplish the same goal while being more likely to preserve privilege.
• Consider releasing only an executive summary or a report drafted specifically to be a high-level description of findings.
• Consider avoiding citation to or detailed discussion of confidential underlying documents.

Most importantly, when determining whether to publically release a report of an investigation, any organization should be aware of the likelihood that such a release will waive privilege, and consider the potential implications for civil litigation and government investigations.

Fraud, Deception and False Claims

Ninth Circuit Ruling Weakens Materiality Standard under the FCA

Last year in Universal Health Services, Inc. v. United States ex rel. Escobar et al. (discussed on this blog), the Supreme Court reminded litigants that the False Claims Act “is not an all-purpose antifraud statute.” In that case, the Court expanded upon the FCA’s materiality standard, calling it both “rigorous” and “demanding.” How demanding that standard would be in practice, however, depended on the lower courts. Earlier this month, a Ninth Circuit panel issued an opinion that appeared to relax that demanding standard.

In United States ex rel. Campie v. Gilead Sciences, relators alleged that Gilead lied to the FDA to secure approval to manufacture three anti-retroviral drugs using certain facilities in China and Canada. (Relators also alleged that Gilead manufactured the drugs in these facilities before getting FDA approval and falsified records to conceal the fact.) Gilead later submitted requests for payment for these drugs through a number of federal programs, each of which makes FDA approval a precondition for payment. Relators argued that the FDA would not have approved these drugs but for Gilead’s misrepresentations. Thus, they argued that Gilead made false claims when it sought payment for FDA-approved drugs. Gilead countered that, in fact, many of the issues it allegedly misrepresented to secure FDA approval became known to the FDA in the years after approval. Despite this knowledge, the FDA never withdrew its approval.

The Ninth Circuit reiterated Escobar’s materiality standard and observed that “[r]elators thus face an uphill battle in alleging materiality.” Nonetheless, the panel found that standard met. It equated Gilead’s submissions to the FDA seeking approval with actionable false claims. Finding that the misrepresentations to the FDA could have impacted the approval decision, the court concluded that those misrepresentations could therefore have affected the government’s decision to pay. The panel also rejected Gilead’s government knowledge defense of materiality, finding that issue to be a factual one. It observed that there could be many reasons why the FDA declined to withdraw its approval after learning of problems. At its core, the decision’s animating concern is preventing FDA approval from being used “as a shield against liability for fraud.”

This decision reduces the rigor of Escobars materiality analysis, allowing the relators to claim a more attenuated connection between the materiality of false statements and the government’s decision to pay. As a result, it substantially increases the opportunities to bring FCA claims under a “fraud-on-the-agency” theory. Late last year, the First Circuit rejected this theory of liability, in part because it found that under Escobar, the fraudulent representation must itself be material to the decision to pay. It thus rejected a fraud-on-the-agency theory of liability. Should more courts follow the approach in Gilead, however, FCA defendants in regulated industries may find themselves increasingly re-litigating agency proceedings in FCA cases.

Enforcement and Prosecution Policy and Trends

DOJ Takes Down AlphaBay, the World’s Largest Dark Web Marketplace

The U.S. Department of Justice has announced the seizure of AlphaBay, the largest criminal marketplace on the Internet, which was used to sell stolen financial information, identification documents and other personal data, computer hacking tools, drugs, firearms, and a vast number of other illegal good and services throughout the world.

AlphaBay was the largest dark web market with estimated annual sales of hundreds of thousands of dollars, which made it nearly ten times the size of the infamous Silk Road dark web marketplace that was shut down by the government in 2013. AlphaBay operated as a hidden service on The Onion Router (“Tor”) network, which hid the locations of its underlying servers and the identities of its administrators, moderators, and users.  Its user interface was configured like a conventional e-commerce website, where vendors could sell illegal goods or services in exchange for paying a percentage of the transaction as a commission to AlphaBay.

AlphaBay had a dedicated section of the website where users could purchase stolen credit cards and financial information, as well as stolen personal identifying information (PII) – even offering specific search controls to allow potential buyers to search the listings by location (city, state and country), social security number, birth year, credit limit, PIN number, seller, seller rating, price, and more.

The international operation to seize AlphaBay’s infrastructure was led by the United States and involved cooperation with law enforcement authorities in Thailand, the Netherlands, Lithuania, Canada, the United Kingdom, and France, as well as the European law enforcement agency Europol. On July 5, Alexandre Cazes, a Canadian citizen residing in Thailand, was arrested by Thai authorities on behalf of the United States for his alleged role as the creator and administrator of AlphaBay.  On July 12, Cazes apparently took his own life while in custody in Thailand.

The Federal Bureau of Investigation (FBI) and the Drug Enforcement Administration (DEA) have seized millions of dollars’ worth of cryptocurrencies that represent the proceeds of AlphaBay’s illegal activities, including at least 1,943 Bitcoin, 8,669 Ethereum, 3,691 Zcash, and 11,993 Monero. Cazes and his wife had also amassed numerous other high value assets, including luxury vehicles, residences and a hotel in Thailand.

Prior to its takedown, there were over 250,000 listings for illegal drugs and toxic chemicals on AlphaBay, and over 100,000 listings for stolen and fraudulent identification documents and access devices, counterfeit goods, malware and other computer hacking tools, firearms and fraudulent services. Comparatively, the Silk Road dark web marketplace reportedly had approximately 14,000 listings for illicit goods and services at the time of seizure in 2013 and was the largest dark web marketplace at the time. These numbers indicate that the use of dark web marketplaces for illegal commerce will only continue to grow, despite the closure of AlphaBay.

In his public remarks regarding the seizure of AlphaBay, Attorney General Jeff Sessions stated, “This is likely one of the most important criminal case of the year. Make no mistake, the forces of law and justice face a new challenge from the criminals and transnational criminal organizations who think they can commit their crimes with impunity by ‘going dark.’ This case, pursued by dedicated agents and prosecutors, says you are not safe.  You cannot hide. We will find you, dismantle your organization and network.  And we will prosecute you.”

Financial Institution Regulation

CFPB Issues Game-Changing Rule On Arbitration Clauses

On Monday, July 10, 2017, the Consumer Financial Protection Bureau (CFPB) issued a game-changing final rule regarding the use of arbitration clauses in consumer contracts.  The Rule is effective 60 days following its publication in the Federal Register and applies only to contracts entered into more than 180 days after that date.  The final rule comes as no surprise—as we reported here, here, and here, the Bureau has forecast for more than a year its intentions to engage in this rulemaking.

Most significantly, the Rule accomplishes the following:

  • Bans the use of arbitration clauses to bar class actions. The Rule bans covered providers of certain consumer financial products and services from using arbitration clauses to bar consumers from filing or participating in class action lawsuits.
  • Requires covered providers to provide the CFPB with records related to their arbitration proceedings. Covered providers that engage in arbitration must provide the CFPB with records relating to initial claims and counterclaims, answers thereto, and awards issued. The CFPB will also collect correspondence covered providers receive from arbitrators regarding (1) determination that an arbitration agreement does not comply with the arbitrator’s “due process or fairness standards”; and (2) dismissal of an action due to a covered provider’s failure to pay required fees.

The CFPB intends to begin publishing this information starting in July 2019 and stated that it will publish additional details of how covered providers should comply. The Bureau stated that gathering and publishing these records will make “the individual arbitration process more transparent” and “enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair.”

Notably, the Rule does not ban the use of clauses to require arbitration of individual actions, but covered providers must include in their agreements specific language to inform consumers that the agreement may not be used to block class action litigation.

The CFPB’s latest regulatory move takes aim at banks and credit card and other covered companies and sets the stage for legal challenges and political battles with Congress and the Trump Administration.

The primary legal question surrounding the Rule’s validity is whether it comports with the Federal Arbitration Act (FAA) and recent Supreme Court rulings that arguably implicitly approve of pre-dispute class-action waivers. For example, in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 347-48 (2011), the Supreme Court held that the FAA preempted California state law, which deemed such class-action waivers unconscionable in consumer cases.  Then, in American Express Company v. Italian Colors Restaurant, 133 S. Ct. 2304, 2309 (2013), the Court rejected the argument that class action litigation is necessary to preserve the opportunity to assert low-value, statutory claims.

In a possible preview of argument in support of the Rule, the CFPB, in its Executive Summary of the Rule, cited its authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to issue regulations that are in the public interest, for the protection of consumers, and based on findings consistent with the Bureau’s study of arbitration.  The CFPB also mentioned Congress’s prohibition of arbitration agreements in the residential mortgage market and the Military Lending Act’s prohibition of such agreements in certain forms of credit extended to servicemembers and their families.  Yet these examples are acts of Congress.

Critics of the Rule point out that the Rule may contradict the CFPB’s research into arbitration.  Dodd-Frank required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets.  The CFPB’s study, released in March 2015 and reported on here, arguably indicates that arbitration is often faster, less expensive, and a more effective way for consumers to resolve disputes with companies compared to class action litigation.  Of the 562 class actions the CFPB studied, the average cash settlement per consumer was $32.35, and the litigation generally took two or more years.  By comparison, the average amount received by a consumer in arbitration was $5,389, and the timeframe for the proceedings averaged two to seven months.

In addition to legal challenges, the Rule may face opposition in Congress. In a July 7 letter, Congressman Jeb Hensarling (R-Tex.), chair of the House Financial Services Committee and longtime CFPB critic, threatened CFPB Director Richard Cordray with possible contempt if the CFPB issued the Rule before supplying the Committee with certain information about the agency’s deliberations and conversations with consumer groups.  Moreover, Congress has the power to overturn the Rule within 60 days of finalization under the Congressional Review Act.

President Trump has already taken some action to begin to dismantle parts of Dodd-Frank through Executive Order and Presidential Memoranda signed on April 21.  And questions remain about whether President Trump may remove Cordray as the constitutionality of the CFPB’s leadership structure awaits decision in the U.S. Court of Appeals for the District of Columbia.  As we reported, the D.C. Circuit granted the CFPB’s petition for rehearing en banc in PHH Corporation v. Consumer Financial Protection Bureau.  The court held oral argument on May 24 and has yet to issue an opinion.

Even if President Trump is able to replace Cordray, questions remain about whether his successor could unilaterally stay the compliance date of the Rule. In another recent D.C. Circuit case, Clean Air Council v. Pruitt, the court held that the Environmental Protection Agency (EPA) lacked authority to stay the compliance date of an EPA rule concerning greenhouse gas emissions and vacated the stay.  Thus, any new CFPB head may be able to issue a notice of proposed rulemaking to reconsider the Rule, but may not be able to unilaterally stay the Rule’s compliance date.

We will continue to monitor developments surrounding the Rule as it progresses towards implementation.