Yesterday, the Southern District of New York validated a (defective, IMHO) civil investigative demand (CID)—an administrative subpoena for documents and information—from NCLA’s client, the Law Offices of Crystal Moroney, P.C. It did so over a number of objections, the primary one being that the Consumer Financial Protection Bureau (CFPB) is unconstitutionally funded. It doesn’t receive appropriations from Congress; it demands funds from the Federal Reserve. The Fed can’t deny or alter the demand, and congressional appropriations committees are prohibited from reviewing the CFPB’s funding. Congress gave away its most effective tool to protect civil liberties and its core constitutional duty—the “power of the purse.” So, I argued that Congress cannot divest itself of its exclusive constitutional duty (Article I, § 1) to make appropriations (Article I, § 9) through law (Article I, § 7).
While it’s disappointing that the judge didn’t rule as we had hoped, what was surprising was that the court overlooked the Director’s chutzpah on the issue of ratification. On June 29, 2020, the Supreme Court held that the Director was unconstitutionally empowered with independence from the President, in Seila Law LLC v. CFPB. The court agreed with the CFPB’s claim, that although the Director’s violation of the separation of powers made her investigation of Crystal Moroney’s law firm invalid, the Director can ratify her unlawful investigation to make it retroactively valid. The CFPB made this argument despite that the Director had admitted that her power was unconstitutional before starting the investigation. Never before had a court allowed an unconstitutional agency head to ratify her own prior unlawful acts, when she knew her acts were unlawful at the time she made them.
Seila Law was a stern rebuke of a rogue independent agency
On the surface, the Supreme Court’s Seila Law decision seemed straightforward enough. The 2010 Dodd-Frank Act unconstitutionally insulated the Director of the CFPB from removal by the President. The CFPB was far too independent because “[i]t acts as a mini legislature, prosecutor, and court, responsible for creating substantive rules for a wide swath of industries, prosecuting violations, and levying knee-buckling penalties against private citizens.” Moreover, the CFPB is funded outside the appropriations process—in 2020, it can demand nearly $700 million from the Federal Reserve without congressional oversight.
The Supreme Court didn’t address the constitutionality of CFPB’s funding, but it held that the Dodd-Frank removal provision was unconstitutional. It ruled that the CFPB’s Director must now be accountable to the President because the Director’s position “lack[ed] a foundation in historical practice and clashes with constitutional structure by concentrating power in a unilateral actor insulated from Presidential control.” But the majority opinion added a twist: Except for the Director’s offending removal protection, the agency could continue to operate.
The CFPB would have us believe, however, that this twist means that nothing really changed because the Director is now freely removable by the President. It insists that the agency can go on with its existing regulations and enforcement actions with offhand ratifications and a stroke of the Director’s pen. But that’s not the case, and the President must take control over an agency that the Supreme Court described as having “knee-buckling” power over private citizens.
If anyone can ratify the Director’s unlawful actions, it’s the President
So, the CFPB has chosen a whistle-past-the-graveyard approach, hoping that no one notices. Just three days after Seila Law, the Director began ratifying her prior enforcement actions in federal court. Just five days later, the Director claimed to ratify a full decade of regulations. It strains credulity to assert that the Director actually reexamined every investigation, subpoena, demand, enforcement, adjudication, prosecution, penalty, and underlying justification for every regulation over the last ten years. If anyone can ratify the Bureau’s prior acts while its Director was unconstitutionally insulated from removal by the President, it’s not the Director.
Well, NCLA noticed, and agency law is on our side. Suppose a vacationer mistakenly gives his car keys to an off-duty hotel valet. If the off-duty valet takes the car for a spin before her shift, the valet cannot declare after clocking-in, “I hereby ratify my prior joyride, now that I have the authority to park the car.” Her joyride was invalid because she lacked authority to drive the car when she acquired the keys. If he so chooses, only the vacationer can ratify the valet’s actions by saying something to the effect of, “no harm, no foul—now give me my keys.” Under agency law, only a valid principal (the vacationer) at the time of an invalid agent’s (the valet’s) unlawful act (the joyride) may ratify the agent’s prior unlawfulness to make it retroactively valid.
Seila Law settles that, like the vacationer, the President had the keys to the CFPB, but he unwittingly handed them over to an off-duty valet in the form of a Director unconstitutionally insulated from his control. Thus, because the Director and her predecessors were invalid agents of the President, she cannot now claim that their ten-year joyride is magically validated by her self-serving say-so. The President heads the Executive Office of President, which includes the Office of Management and Budget (OMB). OMB routinely reviews agency actions, typically proposed regulations, so the President’s staff has the expertise and capability needed to objectively review the Director’s prior unlawful decisions and validate or invalidate them, accordingly.
It’s time for President Trump to take the wheel
President Trump views his reform of bureaucratic abuses as one of the key legacies of his administration. It should irritate him that although the Director is answerable to him, she hasn’t asked the President to review her actions, nor has she certified that the agency’s prior acts comport with the President’s Executive Orders regarding bureaucratic overreach. At the top of the list of the President’s concerns should be May 19, 2020’s Executive Order 13924. Issued in part to assist the economy’s recovery from COVID-19, President Trump directed that agencies must consider “the principles of fairness in administrative enforcement and adjudication[.]” They must ensure that administrative enforcement is “prompt and fair[,]” that “favorable relevant evidence in possession of the agency” is given to targets of investigations, that enforcement is “free of improper Government coercion[,]” and “free of unfair surprise.” Moreover, Executive Branch agencies “must be accountable for their administrative enforcement decisions.” The Director has offered no assurances of compliance, probably because she can’t, in Crystal Moroney’s case.
This is not to say that President Trump or OMB would invalidate all CFPB regulations or invalidate all pending enforcement actions. But it is incumbent upon the President, as the only valid principal of the CFPB prior to June 29, 2020 (the day Seila Law was decided), to scrutinize its activities and policies to ensure that all his directives are followed and that his goals are achieved.
If President Trump’s commitment to deregulation and bureaucratic responsibility are truly cornerstones of his administration, he must take the wheel from the Director and drive the CFPB. He should independently assess whether the Bureau and its “knee-buckling” power have been exercised responsibly throughout the last ten years, to ensure that it will be in the future.
Photo Credit: Ted Eytan