Regulators Hold Industry Accountable

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Regulatory contracts needed to hold consumer financial bureau accountable

New leadership at the Consumer Financial Protection Bureau promises a whole new approach to running the agency. A new director will have the opportunity to swiftly implement a law-based approach to rule-making through rescinding guidance, changing enforcement priorities, and placing more rules through a more transparent notice and comment process. New leadership will be able to accomplish this objective in part because of the unprecedented independence and authority Congress placed in that agency.

But what’s to stop the next CFPB director from falling into politically motivated abuses of discretion? The same discretion afforded to the agency could once again be used to swing the agency’s priorities away from a rule of law approach, and away from clear guidance to help foster innovation in consumer finance. One tool the CFPB could use to cement interpretations of rules is the regulatory contract.

Consider the case of U.S. v. Winstar Corp. During the aftermath of the Savings & Loan (S&L) crisis, the Office of Thrift Supervision encouraged healthy thrifts to buy up distressed thrifts, and along the way they made promises to healthy thrifts in binding contracts about which accounting methods they could use in determining regulatory capital requirements.

Congress later changed the law, but the Supreme Court upheld the binding commitment by the Office of Thrift Supervision and awarded damages to the thrifts that relied on the promises of their regulator. This was a particularly strong case because Congress changed the law! The Supreme Court found in Winstar that the regulatory agency assumed the risk of subsequent legal change as an agent of the government in the contract.

The Supreme Court explicitly recognized the legitimacy of agency’s entering into binding contracts to accomplish regulatory objectives. Subsequent cases interpreting Winstar have been unwilling to second guess the elements of the contract, like offer, acceptance, or consideration, and instead err in favor of holding government agencies to their regulatory contracts.

The government is held to a high standard in regulatory contracts, and even when underlying promises are found to involve technical violations of law, the regulated party often wins anyway. The court reasons that the government is in a better position to interpret the law than the regulated party, and the government is held to a high standard of good faith dealing.

One way in which regulatory contracts could prove particularly useful at the CFPB is in creating a healthy “regulatory sandbox” for new innovators in consumer finance. The CFPB previously introduced “Project Catalyst” to encourage innovators to come to the CFPB and get assurance about how laws would not unintentionally impede new innovations in finance that were not anticipated in prior regulations. Similar regulatory sandbox approaches have proved successful in the United Kingdom. And yet Project Catalyst has catalyzed very little; industry participants report their fear that the CFPB might later reverse course and use information obtained through Project Catalyst against them in an enforcement action.

That problem will remain under the new administration. Regulatory contracts could provide the assurance and predictability that Project Catalyst was intended to introduce.

This is certainly not an optimal approach to governance. Ideally agencies would put clear rules through a transparent notice and comment process. They should conduct objective cost-benefit analysis of those rules to ensure new rules do not diminish consumer access to credit. They shouldn’t bring enforcement actions based on erroneous interpretations of law. The CFPB has been subject to critiques for failure to meet all of those standards from both Republicans and Democrats since. Under future leadership it may commit the same infractions.

The CFPB could adopt a number of policies to ensure transparency in the regulatory contracting process. For example, the agency could put its process for reviewing regulatory contracts through a public notice and comment process. It could further put individual regulatory contracts through notice and comment. It could publicize the standard language it intends to include in regulatory contracts.

Companies that provide funding to main street businesses and are eager to follow the law, but to do that, they need to know what the law requires. Regulatory contracts are a useful and legitimate tool to bind the CFPB to its commitments to regulated entities. They have been successfully used by banking regulators in the past and should be considered as a helpful tool in the CFPB’s regulatory toolbox going forward.

Want to Hold Washington Regulators More Accountable? Here’s How.

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Want to Hold Washington Regulators More Accountable? Here’s How.

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The start of a new year brings the opportunity to take a fresh approach to current policy problems. For example, take burdensome federal regulations. When federal regulation is necessary, it should: 1) be based on sound science and good data; 2) ensure that a rule’s benefits outweigh its costs; and 3) allow the public to have adequate time for input.

As Bill Kovacs, U.S. Chamber Senior Vice President for Environment, Technology, and Regulatory Affairs, explains, the Regulatory Accountability Act (RAA) would require a “ better process for today’s rulemakings .”

The Act requires agencies to justify the need for new rules and show that their proposal is actually the best alternative for achieving congressional intent. By compelling agencies to do their homework and show the public the data that supports their action early in the process, the Act will result in better rules.

The RAA would require agencies to:

  • Lay out in detail the data supporting the rules at an earlier stage before they were proposed;
  • Have on-the-record hearings or be subject to requests from interested parties who want to challenge the data on which the agency is relying;
  • Consider the rule’s impact on jobs and the economy, as well as the cumulative and indirect impacts of the rule;
  • Show why they didn’t select less costly alternatives that accomplish Congressional objectives.

Why does this matter? Why would we be better off if regulatory agencies have a better, more open process that includes more detailed analysis and public input?

Imagine if the RAA were law. Here are three examples, one covering an environmental regulation, one covering an Obamacare rule, and one covering a financial regulation that show how the RAA would make federal regulators more accountable, resulting in better, less burdensome regulations.

Utility MACT Rule

Part of the Obama administration’s “War on Coal” and reliable electricity generation, EPA finalized Utility MACT in 2020 to reduce mercury and other air pollutants produced by power plants. However, 99.9% of the “ Blackout Rule’s ” benefits will come not from reductions in mercury but from reductions in particulates already covered by other regulations , making this rule costly and duplicative.

If the RAA were law, EPA would have to justify the rule’s benefits earlier in the rulemaking process, give those potentially affected by the rule, utilities and manufacturers for example, an opportunity to challenge EPA’s particulates “ co-benefits ” justification, and make EPA consider the costs on the economy of forcing 25% of electrical power plants to close.

Grandfathered Plan Rule

The Patient Protection and Affordable Care Act (PPACA or Obamacare) contains a provision to grandfather health plans that existed when the law was signed, March 23, 2020. However, the Departments of Health and Human Services (HHS), Treasury, and Labor paid lip service to this and gutted the law by writing regulations that force plans which adopt minor changes— a $5 increase in co-pays for instance —to lose this grandfathered status and require them to adhere to all Obamacare regulations thereby breaking President Obama’s “if you like your plan, you can keep your plan” promise.

The regulation was initially issued as an “ interim final rule ,” which according to HHS’s website, means there “is immediate implementation of a rule by Federal agencies without prior public comment on a rulemaking proposal, usually due to overwhelming need for the rule(s),” instead of undergoing 60-120 days of public input. It was later revised and an “Amended Interim Final Rule” was issued. If the RAA were law, employers and employees who insisted that the President’s promise be kept could challenge the rule-writing process and force the Departments to justify where in the law it allowed them to bypass the normal rulemaking process .

The Volcker Rule would bar banks from engaging in “proprietary trading” of stocks, bonds, and other securities, but as Tom Quaadman, Vice President for the U.S. Chamber’s Center for Capital Market Competitiveness, writes, doing so would restrict “the ability of financial institutions to underwrite stocks, bonds and make business loans,” making it harder for business to get the funds. The U.S. Chamber estimates that the rule would tie up $800 billion in capital that wouldn’t be used to grow companies and hire new workers.

None of the five agencies involved with the development of the Volcker Rule–the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, or the Comptroller of the Currency–conducted a cost-benefit analysis. Under the RAA, the agencies would have to conduct a cost-benefit analysis and consider how the rule would affect the U.S. banking system and the economy.

As you can see in these three examples, if the Regulatory Accountability Act were law, federal regulators wouldn’t be so quick to pump out economy-harming regulations. They would have to justify the basis for proposed regulations, thoroughly analyze their costs and effects on the economy, and allow for adequate public input.

The RAA doesn’t guarantee perfectly-crafted regulations—there’s no solution for human infallibility. However, if the RAA were in place, federal regulators would be forced to use science and data to better justify proposed rules, while allowing the public sufficient opportunity to question and hold regulators accountable.

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Opinion: Why it’s hard to hold corporate executives accountable for crime

Elliot Blair Smith

Current laws, at risk of being lightened, make white-collar prosecution difficult

Former Massey Energy Chief Executive Don Blankenship (center) smiles outside the Robert C. Byrd U.S. Courthouse just moments after the verdict was handed down to him.

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Former Massey Energy CEO Don Blankenship was found guilty last week of a criminal conspiracy “to willfully violate mandatory mine safety and health standards.” With a paper trail that connected Blankenship directly to the knowledge of hundreds of mine-safety violations, the jury nevertheless absolved him of his alleged campaign to mislead federal mining investigators before an underground explosion killed 29 miners, in April 2020, and of fraud for the press release he approved, after the fact, stating, “we strive to be in compliance with all regulations at all times.”

The underlying laws were written in a way that means the conspiracy count—accusing Blankenship of fostering a death trap in the Upper Big Branch mine—amounted only to a misdemeanor, with a penalty of up to a year in prison. In contrast, lying to federal investigators and the Securities and Exchange Commission (counts on which he was acquitted) could have meant incarceration for decades.

The West Virginia jury’s decision underscores the difficulty of holding business executives accountable for corporate crimes even when they are plainly responsible. With Exxon Mobil (climate-change science), Valeant Pharmaceuticals US:VRX (pricing and distribution) and Volkswagen Group (environmental engineering and subterfuge) now in the crosshairs of state or federal investigators, the standard for convictions in white-collar cases might soon become higher yet.

The Kansas billionaire Charles Koch and the conservative Heritage Foundation in Washington are promoting legislation that would require federal prosecutors to prove a white-collar criminal defendant’s knowledge of the charging law—and his or her intent on breaking it—in order to obtain a conviction. This is part of a larger campaign against supposed “overcriminalization” in the United States federal code, according to the Koch Industries CEO and others.

“Congress creates, on average, more than 50 new criminal laws each year. Over time, this has translated into more than 4,500 federal criminal laws spread across 27,00 pages,” wrote Koch and his general counsel, Mark Holden, earlier this year. Two Republican presidential candidates, Sens. Ted Cruz and Marco Rubio, jumped on the bandwagon. Cruz, a former Texas solicitor general, decries an “overcriminalization epidemic” and argues that Congress should convert “regulatory crimes into civil offenses.” Rubio, a graduate of University of Miami’s law school (which takes pride in tax and estate planning), accuses Congress of delegating “new criminal lawmaking authority to unelected regulators” whom it “must rein in.”

Of course, as I’ve written, federal white-collar crime prosecutions were at a new low in fiscal 2020. The caseload declined 12.2% from a year earlier and was 17.1% below the 2020 total, according to the Transactional Records Access Clearinghouse at Syracuse University. The sharpest drop in prosecutions was in mail fraud, a charge frequently brought against white-collar defendants.

“We don’t have a white collar overcriminalization problem in this country. We have an undercriminalization problem,” says Rena Steinzor, a law professor at the University of Maryland, and author of the book Why Not Jail? Industrial Catastrophes, Corporate Malfeasance and Government Inaction.

“People die for preventable reasons every day in America, and the vast majority of corporate managers responsible for such episodes escape even a hint of criminal charges,” says Steinzor, listing as examples the Massey Energy mine collapse; the 2005 explosion at a BP refinery in Texas City that killed 15; the Peanut Corporation of America’s 20008 shipment of peanut paste contaminated with salmonella, from which nine people died; the Deepwater Horizon tragedy in 2020 that killed 11 and released 210 million gallons of crude oil into the Gulf of Mexico; and the New England Compounding Center’s sale in 2020 of 17,000 vials of steroids tainted by fungal meningitis, resulting in 741 illnesses and 64 deaths in nine states.

In September, a federal judge sentenced former Peanut Corporation of America owner Stewart Parnell and three others to lengthy prison terms, and signaled this month that the defendants still must make restitution to the victims.

And next April, a federal court in Boston will hear murder, racketeering, mail fraud and other criminal charges against the owner and chief supervisory pharmacist of the New England Compounding Center. However, Steinzor argues that Congress passed “a shockingly weak new law” in response to the meningitis outbreak that invites custom pharmaceutical blenders—“compounders”—to voluntarily register with the Food and Drug Administration, thereby triggering an obligation to pay user fees to pay for their oversight, and periodic inspections.

“The last I checked, 56 out of 3,000 had done so,” Steinzor told me.

The bigger issue looming in white-collar criminal justice is the legislative initiative to conflate overcrowding in federal prisons—which even supporters say arises predominantly from the incarceration of non-violent drug offenders—with the proposed imposition of higher evidentiary standards to convict well-lawyered business executives under a concept known as mens rea, or “the guilty mind.”

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“Mass incarceration of drug offenders has absolutely no relationship to the plight of white-collar criminals, and it’s appalling to me that the Koch brothers and their allies are trying to combine sentencing reform with white-collar crime. They should be ashamed of themselves, as should Republicans in Congress who are pushing their agendas,” says University of Michigan law professor David Uhlmann, a former head of the Justice Department’s Environmental Crimes Section.

“The problem with the mens rea proposal,” Uhlmann says, “is that its ultimate goal is to make ignorance of the law a defense to white-collar crime. It’s not a defense to any other form of criminal activity, so why it needs to be a defense to white-collar crime is beyond me. The bottom line is we want corporations across America to know their legal obligations; not to incentivize them to plead ignorance about essential public health, safety, food, drug and environmental requirements.”

I asked Uhlmann, Steinzor and University of Virginia law professor Brandon Garrett, author of Too Big to Jail: How Prosecutors Compromise with Corporations, for their assessments of the Blankenship verdict in West Virginia, and to handicap the likelihood of criminal actions being brought against Exxon, VW and others.

New York Attorney General Eric Schneiderman subpoenaed Exxon in November to produce records responsive to whether the company lied publicly about what its own scientific research revealed on the risks of climate change. Volkswagen is being investigated in the United States and in Europe for installing software that turned off emissions-control equipment on some diesel vehicles. It has scheduled a press conference on Thursday to further discuss the matter.

“The Blankenship case shows how prosecutors can successfully bring prosecutions against the highest-level corporate misconduct,” says the University of Virginia’s Garrett. “However, such prosecutions are extremely rare. And it would take a major change in focus at DOJ to make such prosecutions more common and also more successful.” Any federal case against VW, he adds, would represent one of the first tests of a new government policy to emphasize individual accountability over corporate financial settlements.

Steinzor says the prosecution against the former Massey CEO foundered on a “pretty tortured” legal strategy that emphasized lying to regulators in a West Virginia community where “the coal industry has convinced them all they’ll be eating Saltines and living in pup tents” if not for their mining employers. Steinzor says the jurors “didn’t have trouble with the mine-safety violations. But when it came to lying and the securities law violation, they just got confused.”

The University of Michigan’s Uhlmann responds, “The problem was not the evidence, or the case against Blankenship. The problem is with the mine-safety health laws. One of the ways our laws are deficient is you can commit willful violations, causing the deaths of 29 workers, and the most you can be convicted of is a misdemeanor. That is nonsensical, and sends a terrible message about the value we place on the lives of hardworking Americans.”

(Blankenship’s lawyer, William Taylor III, told me, “We certainly will appeal and fully expect the [U.S.] Court of Appeals to reverse the misdemeanor.”)

As for Exxon XOM, +2.31% , Uhlmann says: “Exxon engaged in conduct that is morally reprehensible, when it spent the better part of two decades peddling climate denial, and undermining the emerging consensus around climate change. That we must address. There’s no evidence, however, that Exxon hid its scientific findings. All of the research that Exxon conducted was published, and is widely available.”

As for VW VOW3, +3.69% , the former Justice prosecutor says: “Using a defeat device—and having safety detects in your car—may be only civil infractions, as crazy as that sounds. But hiding those facts from the American public and the government is a federal crime.” For that reason, he expects charges to be brought against VW.

Uhlmann, Steinzor and Garrett know more about the law than I do. But I speak a language Blankenship understands, and which conveys a broader message.

Don, you gave up a job that paid you $17.8 million a year, according to the Massey Energy proxy statement filed two weeks after the mine blast. That includes a bonus for supposedly doubling the company’s targeted reduction in environmental violations, and a 14-fold improvement on the targeted “non-fatal days lost” in production. Imagine what you could have accomplished if instead of being convicted of a conspiracy to willfully violate mandatory mine safety and health standards, you’d fulfilled the proxy’s description of you as a man with “extensive knowledge in the areas of leadership, safety, risk oversight, management and corporate governance, each of which provides great value to the board of directors.”

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