The CFPB Defines its Investigative Powers

July 24, 2012

The CFPB’s recent clarification of its investigative powers leaves the agency a wide berth to commence and pursue investigations against market participants.

The Issue: 12 USC § 5562 governs CFPB investigations. On June 29, 2012, the CFPB issued its final rule clarifying its policies and procedures for investigations.[1] The CFPB’s investigative procedures are based primarily on the Federal Trade Commission’s (FTC) investigative procedures but draw upon the procedures used by the Securities and Exchange Commission (SEC) and the other prudential banking regulators.[2] Some of the principal elements are detailed below.

Initiation of an investigation: While the CFPB has discretion to determine whether and when to initiate an investigation, the CFPB clarified in the final rule that only the Assistant Director or Deputy Assistant Directors of the Office of Enforcement have the authorize an investigation. The CFPB recognized the import of an investigation and, and took pains to disclaim that any “staff-level employee could unilaterally open an investigation[.]”[3]

Confidentiality: Investigations are generally non-public and confidential, but the CFPB can disclose the existence of an investigation to the extent necessary to advance that investigation.[4] Although comments argued that such disclosures create reputation and litigation risk for an investigated entity, the CFPB dismissed such concerns on the grounds that the final rule “does not contemplate publicizing an investigation, but rather disclosing the existence of the investigation to, for example, a potential witness or third party with potentially relevant information” as necessary to advance the investigation.[5]

Information that can be requested: Like the predecessor agencies whose powers with respect to consumer financial services have been transferred to it, the CFPB can issue “civil investigative demands” (CIDs) for documents, tangible things, written reports, answers to questions and/or oral testimony.[6] Only the Director of the CFPB and the Assistant Director and Deputy Assistant Directors of the Office of Enforcement may issue CIDs.[7] Responses to CIDs must be made under a sworn certificate.[8]

Disclosure of the nature of the investigation: If the CFPB demands information or testimony from a person, it must advise that person of “the nature of the conduct constituting the alleged violation that is under investigation and the provisions of law applicable to such violation.”[9] However, unlike the FTC’s procedures, the recipient need not be advised of the “purpose and scope” of the investigation.[10]

Meet and confer: Within ten calendar days after receipt of the CID, the recipient and the CFPB will hold a conference to discuss the demand, any limitations on the scope of the demand, issues related to electronically stored information, issues of confidentiality or privilege, and a reasonable timetable for compliance.[11]

Requests to modify the CID: The recipient can, within 20 calendar days of service of the CID, petition to modify the CID.[12] While the recipient can request an extension of this 20-day deadline, the CFPB (unlike the FTC) disfavors such requests.[13] The petition to modify the CID will be sent, along with the CFPB investigator’s statement in reply to the petition, to the Director of the CFPB. The Director will then issue an order accepting or denying the petition. That order and the petition will both be made public, but the investigator’s statement in reply to the petition will not be made public.[14]

Enforcement of the CID: The CFPB can seek a court order to enforce a CID, in the district court of the jurisdiction in which the non-complying party resides, is found or transacts business in connect with failure to comply. It can also seek civil contempt or other appropriate relief to enforce such court orders.[15] The Director of the CFPB has the non-delegable authority to request, from the Attorney General, the issuance of an order granting immunity and compelling production of testimony or other information.[16] As with FTC CIDs, a failure to timely petition the CFPB to modify the CID on grounds of undue burden, or other impropriety, may disable the recipient from raising those same objections in response to the agency’s effort to judicially enforce the CID.[17]

Oral testimony: Oral testimony is taken at a private hearing, and all persons except for the witness, counsel, hearing officer, recorder and CFPB investigator are excluded from the hearing room. Representatives of state or federal agencies with whom the CFPB is conducting a joint investigation can also attend the hearing and/or receive copies of the hearing transcript.[18] A person testifying at a hearing has a right to have counsel present, and that counsel can make objections on legal and constitutional grounds such as privilege.[19]

Close of the investigation: Once its investigation is completed, the CFPB can bring an action in federal or state court to seek a ruling that there has been a violation of federal consumer financial law. Alternatively, the CFPB can pursue such a ruling before its own administrative law judges.[20] It can also refer investigations to other federal, state or foreign government agencies.[21] If the CFPB does not believe that further efforts are warranted, it can simply close the investigation.[22]

Implications: In addition to having powers of examination over many market participants, the CFPB has broad investigative powers that allow it to carefully, thoroughly and efficiently gather evidence before commencing judicial proceedings. Recipients of CIDs from the CFPB may face limited time to prepare responses to CIDs, and commence production. They must meet and confer with the CFPB within 10 days of receipt of the CID and have just 20 days to request a modification of the CID—on pain of surrendering those objections in the event of a judicial proceeding to enforce the CID. Entities subject to a CFPB investigation who are unable to secure a modification of a burdensome CID in the meet and confer phase will find it necessary to preserve their rights through a detailed petition to modify, which can then serve as a platform for narrowing the CID thereafter—either before the CFPB or in court.

Brian Boyle  - (202) 383-5327  bboyle@omm.com
Vivi Lee  - (650) 473-2655  vlee@omm.com

[1] 77 FR 39101 (June 29, 2012), available here.
[2] Id. at 39102.
[3] Id.at 39102.
[4] Id.at 39107.
[5] Id.at 39107.
[6] Id.at 39104.
[7] Id.at 39104.
[8] Id.at 39104.
[9] Id.at 39104.
[10] Id.at 39104.
[11] Id.at 39104.
[12] Id.at 39104.
[13] Id.at 39104.
[14] Id.at 39104.
[15] Id.at 39106.
[16] Id.at 39106.
[17] See e.g. F.T.C. v. O'Connell Associates, Inc., 828 F. Supp. 165, 168 (E.D.N.Y. 1993) (“[R]espondents' position is that they need not bring their objections to the attention of the FTC in order to preserve them for district court review. The FTC counters that respondents have no such option: in order to exhaust their administrative remedies and preserve their objections for the district court, respondents must first make a petition to limit or quash to the FTC. Having failed to do so in this case, they have not exhausted their administrative remedies. According to the FTC, this failure to exhaust results in a waiver of any substantive objections to the CIDs before this Court and requires the Court to direct compliance with the CIDs. . . . It is a well established proposition of law that an individual is required to exhaust his administrative remedies before coming to court for relief. . . . The slightly more nuanced question is whether a similar exhaustion requirement is implicated in an FTC-initiated enforcement proceeding. The Court finds that it is.”)
[18] 77 FR 39103, 39105.
[19] Id.at 39105-39106.
[20] Id.at 39106.
[21] Id.at 39106.
[22] Id.at 39106.