The CFPB has issued an interim final rule regarding the practice for adjudication proceedings pursuant to section 1053 of the Dodd-Frank Act, which authorizes the Bureau to use administrative adjudications to ensure or enforce compliance with (a) the provisions of the Act, (b) the rules prescribed by the Bureau under the Act, and (c) any other federal law or regulation that the Bureau is authorized to enforce. Modeled after the FTC rules, the SEC rules, and the uniform rules and procedures for administrative hearings adopted by the other federal banking agencies (collectively, the “Agency Rules”), the rule is intended to create a process that provides for the expeditious resolution of claims, while ensuring that parties that appear before the Bureau receive a fair hearing.
The rule implements a procedure, like that of the Agency Rules, whereby a hearing officer will issue a recommended decision in each administrative adjudication. The rule also provides any party the right to contest the recommended decision by filing a notice of appeal to the Director and perfecting the appeal by later filing an opening brief. In the event a party fails to timely file or perfect an appeal, the Director may either adopt the recommended decision as the Bureau’s final decision or order further briefing with respect to any findings of fact or conclusions of law contained in the recommended decision. The rule also provides that the hearing officer will decide dispositive motions in the first instance, subject to the same right of review provided for recommended decisions, in the event that the ruling upon such a motion disposes of the case. The Bureau indicated that it adopted this model because it provides for the most expeditious resolution of matters, while preserving all parties’ rights to review by the Director.
The rule sets deadlines for both the recommended decision of the hearing officer and the final decision of the Director. The hearing officer is permitted a specified period of time – 300 days, beginning with service of the notice of charges – to issue a recommended decision. The proceedings are initiated by the filing of a notice of charges, which must be served on the party being charged. The respondent then has 14 days to file an answer. The rule requires the hearing officer to convene a scheduling conference soon after the respondent files its answer to craft a schedule appropriate to the particular proceeding. If a recommended decision is appealed to the Director, or the Director orders additional briefing regarding the recommended decision, the rule provides that the Director must notify the parties that the case has been submitted for final Bureau decision at the expiration of the time permitted for filing reply briefs with the Director. The Director then must issue his or her final decision within 90 days of providing such notice to the parties.
The Bureau has adopted an affirmative disclosure approach to fact discovery in administrative adjudications. The rule provides that the Division of Enforcement will provide any party in an adjudication proceeding with an opportunity to inspect and copy certain categories of documents obtained by the Division of Enforcement frompersons not employed by the Bureau in connection with the investigation leading to the institution of the proceedings and certain categories of documents created by the Bureau, provided such material is not privileged or otherwise protected from disclosure. The Division of Enforcement’s obligation under this rule relates only to documents obtained by the Division of Enforcement; documents located only in the files of other divisions or offices of the Bureau are beyond the scope of the rule. The rule also includes an obligation to turn over material exculpatory information in the Division of Enforcement’s possession.
The rule attempts to ensure that respondents have access to all the material facts underlying Enforcement Counsel’s decision to commence enforcement proceedings and have a fair opportunity to prepare and represent a defense, while eliminating much of the expense and delay often associated the pretrial discovery in civil matters. Recognizing that administrative adjudications will take place after a Bureau investigation intended to gather relevant evidence, and in light of the affirmative obligation that the rule places on Enforcement Counsel to provide access to materials gathered in the course of the investigation, the rule does not provide for many other traditional forms of pretrial discovery, such as interrogatories and depositions. The rule does provide for the deposition of witnesses unavailable for trial; the use of subpoenas to compel the production of documentary or tangible evidence; and, in appropriate cases, expert discovery, thus ensuring that respondents have an adequate opportunity to marshal evidence in support of their defense.
Practical Tip: While patterned on the Agency Rules, the Bureau’s Adjudication Proceedings Rule does not appear to provide the protections of an SEC Wells process – the process whereby prospective defendants are provided with a notice of charges and the opportunity to respond prior to the filing of an enforcement action, as many had hoped. Accordingly, unless the Division of Enforcement closes the investigation, based on facts or documents obtained during the investigation process, it is likely that an enforcement proceeding will ensue.