What powers do national financial services authorities have to examine and investigate compliance? What enforcement powers do they have for compliance breaches? How is compliance examined and enforced in practice?
The Banking Regulators, the CFPB, the Markets Regulators and SROs have broad authority to examine the entities they supervise (and, in some cases, their affiliates) for compliance with applicable laws, rules and regulations. They also have enforcement powers to address legal and regulatory violations. How these authorities are exercised in practice varies by regulator.
The Banking Regulators are prudential regulators, supervising institutions within their jurisdiction to monitor their safety and soundness, as well as their compliance with federal banking laws and regulations. Each of the Banking Regulators regularly conducts on-site safety and soundness examinations to assess the financial and managerial soundness of the regulated institution. In addition, the Banking Regulators conduct examinations that focus on compliance with particular legal and regulatory requirements, such as anti-money laundering laws or community investment and lending requirements. To address violations of laws or regulations or the finding of unsafe or unsound practices, the Banking Regulators may informally require regulated institutions to remediate or may bring formal enforcement actions.
The CFPB is a new federal agency formed in 2010, which has the authority to supervise and examine banking institutions with more than US$10 billion in assets, as well as their affiliates (unless excepted), for compliance with federal consumer financial protection laws. The CFPB has the authority to bring enforcement actions not only against institutions it supervises, but against any institution that engages in financial transactions with consumers, for violations of applicable federal consumer financial laws or for engaging in acts or practices that are deemed unfair, deceptive or abusive.
The Markets Regulators examine regulated institutions for compliance with applicable laws and regulations both directly and indirectly through examinations by the SROs. In addition, the Markets Regulators have the authority to conduct informal or formal investigations of potential misconduct and to bring enforcement actions. Such potential misconduct may come to the attention of the Markets Regulators through a variety of channels, including through examinations, complaints from the public or referrals from other government agencies. Markets Regulators are generally viewed as having more of an enforcement focus than the Banking Regulators.Disciplinary powers
What are the powers of national financial services authorities to discipline or punish infractions? Which other bodies are responsible for criminal enforcement relating to compliance violations?
The Banking and Markets Regulators and the CFPB have civil enforcement powers and can pursue a variety of civil remedies.
The Banking Regulators have the power to pursue a variety of civil remedies, both informal and formal, against depository institutions and their affiliates, as well as associated individuals, for unsafe and unsound practices or compliance violations. Informal remedies include commitment letters, memorandums of understanding or the issuance of findings entitled ‘matters requiring attention’. Formal remedies against firms may include cease-and-desist orders, formal written or supervisory agreements, prompt corrective action directives and civil money penalties. Formal remedies against individuals associated with depository institutions include removal and prohibition orders, cease-and-desist orders, restitution orders and civil money penalties.
The Markets Regulators have the power to seek a variety of civil remedies against both firms and individuals. Sanctions include injunctions or cease-and-desist orders, revocation or suspension of an individual’s or entity’s registration and exchange trading privileges, restitution orders, disgorgement of ill-gotten profits and civil money penalties. Certain industry and conduct-related bars may also be available.
SROs, such as FINRA and the NFA, also have authority to discipline infractions committed by their members in violation of the application statutes and their rules. SROs generally have the authority to fine, suspend or bar individuals and firms from the industry, among others.
To the extent that regulated entities’ or individuals’ compliance failures constitute violations of criminal law, the Department of Justice, a US attorney’s office or local law enforcement agencies may institute a criminal proceeding, either on their own initiative or upon a referral from the applicable Banking or Markets Regulator.Tribunals
What tribunals adjudicate criminal and civil financial services infractions?
Federal district courts in the US adjudicate violations of both civil and criminal federal law. The Banking Regulators, the CFPB and the Markets Regulators may pursue civil violations of federal financial laws and regulations in the federal district courts, although the Banking Regulators generally elect to use administrative proceedings rather than court proceedings. Criminal financial services violations are also adjudicated in the federal district courts. To the extent that compliance failures constitute violations of state law, whether civil or criminal, such infractions would generally be tried in a state civil or criminal court, although federal courts may hear certain civil claims involving parties from different states.
The Banking Regulators, Markets Regulators and CFPB may also seek civil penalties and other remedies in administrative proceedings. Administrative proceedings are presented before administrative law judges (ALJs), who may be employees of the particular financial services authority. These proceedings may result in non-judicial findings of fault or wrongdoing. Certain financial services authorities, such as the SEC, rely heavily on administrative proceedings, while others, like the Federal Reserve, use administrative proceedings less frequently.
Finally, SROs may institute disciplinary proceedings against members that are heard before their own internal bodies, although these may ultimately be appealable to the Markets Regulator itself.Penalties
What are typical sanctions imposed against firms and individuals for violations? Are settlements common?
The majority of enforcement actions pursued by the Banking and Markets Regulators are resolved via settlement, including through cease-and-desist orders, removal and prohibition orders, civil money penalties, and disgorgement orders. The size of monetary sanctions imposed in a given case ranges significantly depending on the nature of the case. The largest penalties tend to be imposed in settlements in which the respondent knowingly violated the law and caused a pecuniary loss as a result.
In addition to imposing penalties, the Banking and Markets Regulators often require settling institutions to undertake substantial remediation efforts to improve policies, procedures, controls and governance, among other things, to mitigate the risk that the activity giving rise to the settlement will reoccur.
A unique and often-criticised aspect of the US financial regulators’ settlement practices is the ability of respondents to settle with the regulators without admitting wrongdoing. Commonly referred to as ‘neither-admit-nor-deny’ settlements, the Banking and Markets Regulators justify this practice by asserting that it allows them to impose consequences on respondents quickly and obtain necessary relief for victims, while also avoiding burdensome litigation costs.