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| Jason W. McElroy |
Justice Antonin Scalia (joined by Justice Clarence Thomas) recently asked this question in an order denying a petition for writ of certiorari in Whitman v. United States.[1] Whitman’s petition sought review of his conviction under Section 10(b) of the Securities Exchange Act of 1934 for trading while in “knowing possession” of material nonpublic information. Notably however, the “knowing possession” standard relied on by the Second Circuit to sustain Whitman’s conviction cannot be found in the text of the ‘34 Act — it is found in the rules promulgated by the U.S. Securities and Exchange Commission.[2] And more notable still, the Second Circuit has explicitly given Chevron deference to the SEC’s “knowing possession” standard.[3]
Although Whitman’s petition was denied by the court because of its procedural posture and because it did not seek review on the issue of deference to agency interpretation, Justice Scalia stated he would be “receptive” to granting a petition that properly presented the question. True to form, he left no doubt concerning where he stood on the issue:
I doubt the Government’s pretensions to deference. They collide with the norm that legislatures, not executive officers, define crimes. When King James I tried to create new crimes by royal command, the judges responded that “the King cannot create any offence by his prohibition or proclamation, which was not an offence before.” James I, however, did not have the benefit of Chevron deference. With deference to agency interpretations of statutory provisions to which criminal prohibitions are attached, federal administrators can in effect create (and uncreate) new crimes at will, so long as they do not roam beyond ambiguities that the laws contain. Undoubtedly Congress may make it a crime to violate a regulation, but it is quite a different matter for Congress to give agencies — let alone for us to presume that Congress gave agencies — power to resolve ambiguities in criminal legislation.[4]
It is no coincidence that Scalia’s rebuke of the government is directed toward “agencies” and “federal administrators” — not just the SEC. Known as a “hybrid statute,” Section 10(b) is among a small fraternity of federal statutes that carry both criminal and civil penalties for the same violation. Other hybrid statutes include the Racketeer Influenced and Corrupt Organizations Act’s ban on illicit racketeering activities,[5] the Sherman Act’s restriction of anti-competitive business practices,[6] and the Real Estate Settlement Procedures Act’s prohibition of kickbacks and fee splitting. Of particular interest, although Section 8 of RESPA is typically enforced civilly, it also carries criminal penalties and has been the basis of criminal prosecutions.[7]
The danger of deference to agency interpretation of RESPA’s hybrid provisions, the same type of danger Scalia noted in Whitman, has not gone unnoticed. In Carter v. Welles-Bowen Realty Inc.,[8] which Scalia cites in his statement in Whitman, the Sixth Circuit Court of Appeals considered the U.S. Department of Housing and Urban Development’s Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements, and held that its interpretation of RESPA was not entitled to deference because it was not binding and was too indefinite in its application.
Carter also has a thorough concurring opinion by Circuit Judge Jeffrey S. Sutton, explaining that the rule of lenity — which requires ambiguities in criminal statutes to be interpreted in favor of the defendant — prevents HUD (and now the Consumer Financial Protection Bureau, which by the time of the decision in Carter had taken over authority for RESPA from HUD) from adding substantive requirements to RESPA’s hybrid provisions, even if it were to use notice-and-comment rule-making and issue a more precise rule. Indeed, this defense was quickly raised in at least one RESPA civil enforcement action brought by the CFPB against a law firm in Kentucky.[9]
The concerns addressed in Carter and Whitman are part of a judicial trend, where courts are increasingly expressing concerns over administrative overreach. Chief Justice Roberts expressed his displeasure a few years ago in a dissenting opinion:
One of the principal authors of the Constitution famously wrote that the “accumulation of all powers, legislative, executive, and judiciary, in the same hands, ... may justly be pronounced the very definition of tyranny.” The Federalist No. 47, p. 324 (J. Cooke ed., 1961) (J. Madison). Although modern administrative agencies fit most comfortably within the Executive Branch, as a practical matter they exercise legislative power, by promulgating regulations with the force of law; executive power, by policing compliance with those regulations; and judicial power, by adjudicating enforcement actions and imposing sanctions on those found to have violated their rules. The accumulation of these powers in the same hands is not an occasional or isolated exception to the constitutional plan; it is a central feature of modern American government.[10]
Similarly, Justice Scalia, who has often been a champion of deference to administrative agencies,[11] noted in dissent last year that “[t]oo many important decisions of the Federal Government are made nowadays by unelected agency officials exercising broad lawmaking authority, rather than by the people's representatives in Congress.”[12] U.S. District Judge Jed Rakoff has been particularly outspoken regarding the increased use of administrative proceedings by the SEC under its augmented Dodd-Frank authorities, concerned that “the result would be that the law in such cases would effectively be made, not by neutral federal courts, but by SEC administrative judges.”[13]
Judge Rakoff further lamented that such decisions, based on recent Second Circuit authority, are entitled to Chevron deference, effectively taking the federal judiciary out of the determinations altogether.[14] In doing so, Judge Rakoff argued that this practice hinders impartial development of the law, displacing the constitutional review of federal courts with “administrative fiat.”[15] Ultimately, Judge Rakoff argued, it is not in the interest of the agency itself or the markets it regulates for the agency to become “a law onto itself.”[16]
The Dodd-Frank Act not only strengthened the SEC’s already significant enforcement capabilities, but also provided the same type of authority to the CFPB.[17] Indeed, the CFPB has brought some 41 administrative actions to date, most of which have resulted in consent orders. Since 2011, the CFPB has further utilized an “amicus program” to file friend of the court briefs. In its own words, the program is designed to “ensure that consumer financial protection statutes and regulations are correctly and consistently interpreted by the courts.”[18] Many of these administrative actions and amicus briefs have involved alleged violations of RESPA § 8, the hybrid statute that Judge Sutton’s concurrence in Carter held requires lenity.[19]
These actions are part of an aggressive attempt by the CFPB to rewrite RESPA through administrative proceedings and amicus briefs. In First American v. Edwards, a case famous for having been granted review, oral argument and subsequently dismissed as “improvidently granted” by the U.S. Supreme Court, the CFPB has argued aggressively in the court of appeals (after cert. was dismissed) that Section 8(c)(2)’s exemption for “goods or facilities actually furnished or for services actually performed” somehow should not apply as an exception to Section 8(a)’s prohibition on kickbacks for referrals.[20]
Effectively, the CFPB’s position is that a payment for services actually performed would violate RESPA if a referral of settlement service business also happened to occur. The appeal from denial of class certification in Edwards is currently scheduled for oral argument on March 3, 2015, and it will be interesting to see whether the CFPB’s new 8(c)(2) interpretation — supported by little more than the agency’s ipse dixit — attracts any attention or support from the Ninth Circuit panel.
The CFPB’s new RESPA interpretation is clearly seen in the agency’s recent consent order in the administrative proceeding In re: Lighthouse Title, in which the CFPB took the position that “[e]ntering a contract is a ‘thing of value’ within the meaning of Section 8, even if the fees paid under that contract are fair market value for the goods or services provided.”[21] The facts alleged in Lighthouse Title made this statement wholly superfluous, except as a gratuitous statement (of questionable legal importance) of the CFPB’s new position.
The CFPB’s position is not only a sharp departure from HUD’s interpretations and application of RESPA, but it appears facially at odds with the plain language of the statute, which states rather simply that “[n]othing in this section shall be construed as prohibiting ... the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”[22]
This is even more extreme than the position adopted by HUD that was rejected by the court of appeals in Carter, which noted that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”[23] The CFPB’s position in Lighthouse Title is this type of administrative “creation” of law that Justice Scalia seems to be taking aim at in Whitman, and which Judge Rakoff has so articulately lamented.
One might think that, since the CFPB’s amicus brief in Edwards was presented to a court — which will accept or reject it — it poses less of a threat to our constitutional order. But the same implied demand for deference is present there, too. For the CFPB’s novel 8(c)(2) interpretation is supported by nothing more than the agency’s own say-so, and contrary case law is relegated to a footnote, without elaboration.[24] Thus, although the Edwards amicus brief does not implicate the specific scenario addressed by Judge Rakoff, it falls squarely within Justice Scalia’s stated concern.
It is clear that at least two Supreme Court justices are willing to address the issue of deference to the interpretation of criminal or hybrid statutes, which is particularly important given the strength and breadth of the CFPB’s administrative enforcement authority. It is less clear whether the court is interested in curbing the use of administrative adjudication to make law — a practice upheld decades ago in other, arguably distinguishable contexts.[25]
Because of the hostile regulatory climate, however, both of these related trends carry particular importance for the financial services industry, as the CFPB’s and other government agencies’ aggressive use and interpretation of hybrid and similar statutes, including RESPA and the Financial Institution Reform, Recovery, and Enforcement Act, continues to grow.
If the Supreme Court were to rule conclusively that the rule of lenity applies to such statutes, then aggressive interpretations such as those taken by the CFPB in recent amicus and administrative filings would be much more difficult to maintain, and the CFPB’s incentive to use its own administrative proceedings might diminish. In light of Justice Scalia’s proclamation, and the CFPB’s aggressive interpretations and desire to ensure that courts adopt those interpretations, that day may come sooner rather than later.
—By Michael Y. Kieval, Jason W. McElroy and Jeffrey P. Blackwood, Weiner Brodsky Kider PC
Michael Kieval and Jason McElroy are partners at Washington, D.C.-based law firm Weiner Brodsky Kider. Jeffrey Blackwood is an associate at the firm.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] 574 U.S. __, 135 S. Ct. 352 (2014).
[2] See S.E.C. Rule 10b5-1, 17 C.F.R. § 240.10b5-1.
[3] Whitman was not the first time the Second Circuit affirmed a criminal securities conviction by deferring to the SEC’s knowing possession standard of Section 10(b). See United States v. Royer, 549 F.3d 886, 899 (2d Cir. 2008) (“[T]he SEC subsequently enacted Rule 10b5-1, adopting a knowing possession standard, and that determination is itself entitled to deference.”) (citing Chevron USA Inc. v. Natural Res. Def. Council Inc., 467 U.S. 837, 843-44 (1984)).)
[4] Whitman, 135 S. Ct. at 353 (emphasis in original) (internal citations omitted).
[5] 18 U.S.C. §§ 1961–68.
[6] 15 U.S.C. §§ 1–37a.
[7] See 12 U.S.C. § 2607(d)(1) (“Any person or persons who violate the provisions of this section shall be fined not more than $ 10,000 or imprisoned for not more than one year, or both.”).
[8] 736 F.3d 722, 729 (6th Cir. Ohio 2013).
[9] See Defendant’s Answer, CFPB v. Borders and Borders, No. 3:13-cv-01047-JGH (W.D. Ky.) (“The rule of lenity precludes the enforcement position of the CFPB in this action.”) (citing Carter v. Welles-Bowen).
[10] City of Arlington v. FCC, 569 U.S. __, 133 S. Ct. 1863, 1877-78 (2013) (Roberts, C.J., dissenting).
[11] See, e.g., City of Arlington v. FCC, 569 U.S. __, 133 S. Ct. 1863 (2013) (authoring majority opinion granting deference to FCC’s interpretation of its own jurisdiction).
[12] EPA v. EME Homer City Generation, L.P., 574 U.S. __, 134 S. Ct. 1584, 1610 (2014) (Scalia, J., dissenting).
[13] Comments of the Honorable Jed Rakoff, U.S.D.J., Southern District of New York, PLI Securities Regulation Institute at 10 (Nov. 5, 2014) (“Rakoff Speech”), available at http://media.jrn.com/documents/secaddress.pdf.
[14] Rakoff Speech at 10-11; see Van Cook v. SEC, 653 F.3d 130, 140 n.8 (2d Cir. 2011).
[15] Rakoff Speech at 12.
[16] Rakoff Speech at 12.
[17] Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203 §§ 1053, 1055 (July 21, 2010).
[18] See CFPB’s Website regarding its Amicus Program. http://www.consumerfinance.gov/amicus/.
[19] See http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-wells-fargo-and-jpmorgan-chase-for-illegal-mortgage-kickbacks/ (Jan. 22, 2015); http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-newday-financial-for-deceptive-mortgage-advertising-and-kickbacks/ (February 10, 2015).
[20] Edwards v. First Am. Corp., No. 13-55542, CFPB Amicus Brief at 15-16 (9th Cir. Oct. 30, 2013) (“Edwards amicus brief”).
[21] In re: Lighthouse Title Inc., CFPB Administrative Proceeding File No. 2014-CFPB-0015, Consent Order at ¶ 20 (Sept. 30, 2014) (emphasis added).
[22] 12 U.S.C. § 2607(c)(2).
[23] Carter, 736 F.3d at 726.
[24] Edwards amicus brief at 17 n.8.
[25] See, e.g., NLRB v. Bell Aerospace Co., 416 U.S. 267 (1974).