Federal regulators are not the only ones flexing their muscles against Corporate America these days. State attorneys general are increasingly joining forces to go after corporate wrongdoers, too.
“Obviously, as we have seen over the last several years, attorneys general have become much more aggressive in the way they pursue investigations,” Hector Gonzalez, a lawyer at the law firm Mayer Brown, said during a Webcast on the subject. One of an attorney general’s primary jobs is to protect consumers, he said, which often leads to blanket challenges of an entire industry.
A recent U.S. Supreme Court ruling, Cuomo v. Clearing House Association, added teeth to states’ bite, when the court decided on June 29 that federal regulators could not prevent states from enforcing their own fair-lending laws against nationally chartered banks.
“Implicitly, the decision will allow the state attorneys general to enforce other state consumer protection statutes against national banks,” John Cooney, a lawyer with the Venable law firm, said in an e-mail statement. “The decision means that national banks will be subject to a greater risk of investigations and enforcement actions by state attorneys general.”
The case stemmed from a 2005 investigation launched by Eliot Spitzer, who was New York’s attorney general at the time. Spitzer went after several of the nation’s largest banks—including Chase, Citigroup, JP Morgan, and Wells Fargo—over potential discriminatory practices against minorities. Specifically, Spitzer cited mortgage data that showed black and Hispanic borrowers received a larger percentage of high-interest home loans than white borrowers.
As part of the investigation, Spitzer asked the banks to produce private information about their mortgage-lending practices. The banks then sued, claiming that only their federal regulator, the Office of the Comptroller of the Currency, had authority to demand that information.
“The decision means that national banks will be subject to a greater risk of investigations and enforcement actions by state attorneys general.”
—John Cooney,
Lawyer,
Venable
But in its 5-4 decision, the Supreme Court said that state authorities are allowed to pursue cases against companies operating within their jurisdictions so long as no federal law explicitly prohibits states from doing so, and so long as they pursue claims through the courts.
The decision is a rare defeat for the OCC, which has a long history of successfully defending and expanding its turf in the courts. “Until today, the OCC had an excellent track record of success in persuading the Supreme Court to adopt a broad interpretation of its powers,” Cooney said.
The ruling follows a report published by the Treasury Department on June 17 that calls for all federally chartered institutions to be subject to state consumer protection and civil rights laws. "This would restore a fairer and more measured approach to the roles of the states with respect to federally chartered institutions," the report said.
Gonzalez
Financial institutions aren’t the only ones that need to worry about more aggressive state authorities, however. According to a review done by Mayer Brown, state attorneys general have touted concerns about cyber-security, excessive tele-marketing, identity theft, and (as always) Ponzi schemes or other investor frauds. “That’s always been an area for attorneys general, but it’s certainly garnered a lot more press attention lately,” said Gonzalez.
PROTECTING CONSUMERS
The following excerpt is from the Department of the Treasury’s Financial Regulatory Reform:
A. Create a New Consumer Financial Protection Agency
We propose the creation of a single federal agency, the Consumer Financial Protection
Agency, dedicated to protecting consumers in the financial products and services
markets, except for investment products and services already regulated by the SEC or
CFTC. We recommend that the CFPA be granted consolidated authority over the closely
related functions of writing rules, supervising and examining institutions’ compliance,
and administratively enforcing violations. The CFPA should reduce gaps in federal
supervision; improve coordination among the states; set higher standards for financial
intermediaries; and promote consistent regulation of similar products. Nothing in this
proposal is intended to constrain the Attorney General’s current authorities to enforce the
law or direct litigation on behalf of the United States.
The CFPA should give consumer protection an independent seat at the table in our
financial regulatory system. Consumer protection is a critical foundation for our
financial system. It gives the public confidence that financial markets are fair and
enables policy makers and regulators to maintain stability in regulation. Stable
regulation, in turn, promotes growth, efficiency, and innovation over the long term.
Consumer protection cannot live up to this role, however, unless the financial system
develops and sustains a culture that places a high value on helping responsible consumers
thrive and treating all consumers fairly.
The spread of unsustainable subprime mortgages and abusive credit card contracts
highlighted a serious shortcoming of our present regulatory infrastructure. It too easily
allows consumer protection values to be overwhelmed by other imperatives – whether
short-term gain, innovation for its own sake, or keeping up with the competition. To
instill a genuine culture of consumer protection and not merely of legal compliance in our
financial institutions, we need first to instill that culture in the federal regulatory
structure. For the public to have confidence that consumer protection is important to
regulators, there must be clear accountability in government for this task.
The current system of regulation does not meet these needs. Oversight of federally
supervised institutions for compliance with consumer protection, fair lending, and
community reinvestment laws is fragmented among four agencies. This makes
coordination of supervisory policies difficult, slows responses to emerging consumer
protection threats, and creates opportunities for regulatory arbitrage, where firms choose
their regulator according to which entity will be least restrictive.
The Federal Trade Commission has a clear mission to protect consumers but generally
lacks jurisdiction over the banking sector and has limited tools and resources to promote
robust compliance of nonbank institutions. Mortgage companies not owned by banks fall
into a regulatory “no man’s land” where no regulator exercises leadership and state
attorneys general are left to try to fill the gap. State and federal bank supervisory
agencies’ primary mission is to ensure that financial institutions act prudently, a mission
that, in appearance if not always in practice, often conflicts with their consumer
protection responsibilities.
In addition, the systems, expertise, and culture necessary for the federal banking agencies
to perform their core missions and functions are not conducive to sustaining over the long
term a federal consumer protection program that is vigorous, balanced, and creative.
These agencies are designed, and their professional staff is trained, to see the world
through the lenses of institutions and markets, not consumers. Recent Federal Reserve
regulations have been strong, but quite late in coming. Moreover, they do not ensure that
the federal banking agencies will remain committed to consumer protection.
We do not propose a new regulatory agency because we seek more regulation, but
because we seek better regulation. The very existence of an agency devoted to consumer
protection in financial services will be a strong incentive for institutions to develop strong
cultures of consumer protection. The core of such an agency can be assembled
reasonably quickly from discrete operations of other agencies. Most rule writing
authority is concentrated in a single division of the Federal Reserve, and three of the four
federal banking agencies have mostly or entirely separated consumer compliance
supervision from prudential supervision. Combining staff from different agencies is not
simple, to be sure, but it will bring significant benefits for responsible consumers and
institutions, as well as for the market for consumer financial services and products.
Source
Department of the Treasury
Worse, states are teeming up more and more often to coordinate legal action, as they did in the 1990s to force a settlement with tobacco companies and again this decade to pursue complaints against Microsoft.
Deal With It
Fahner
Handle any state investigation, especially one involving multiple states, delicately. The first step a company should take after receiving a subpoena is to approach the attorney general pursuing the matter “very quickly,” advised Ty Fahner of Mayer Brown—not only to show that you are responsive to the inquiry. Approach the lead attorney general, he said, and ask: “What do you need? How high do you want me to jump?”
Gonzalez agreed: “The more communication, certainly during this early stage, does set the table for what is coming down the road.”
Multi-state investigations will typically have an “executive committee,” led by the state with the greatest interest in the case and devoting the most resources to it; they do most of the work and keep other states informed, Fahner said. It is this state that companies should heed the most. If you have the choice of two attorneys general who are in charge, “find the one that has the reputation for being the most reasonable, and the most competent as well,” he said.
No matter whom you work with, take care to identify and preserve any relevant documents, including all hard copies. While it may be a tremendous burden, both the company and the attorney general “need to have a clear scope for a document request, so you don’t go out and preserve more than you need to,” said Gonzalez.
Carrie Di Santo, chief compliance officer at Aon Corp. and another speaker on the Webcast, recommended companies simply approach the attorney general and say: “‘This is what we are going to be preserving. What do you think about this?’ That really sets the tone for down the road.”
Failing to respond quickly could result in the attorney general becoming much more aggressive in the investigation—especially if that attorney general is running for re-election, Fahner said, in which case their conduct may be “a little less reasonable.”
Poor relations with the attorney general might also bring more media attention to the dispute than the company would like. “You don’t want to turn a one-day press release into an ongoing tirade,” said Fahner. Di Santo recommended that companies prepare public statements in advance, in case someone leaks damaging information for political points. Companies could also review past consumer complaints and how the attorney general handled those.
From a compliance perspective, the most important step is to halt the illegal conduct immediately, and “get compliance folks involved to start enhancing systems and controls so it can’t happen again,” Di Santo said. That may include suspending or even firing employees, “so when it comes time to sit down and settle the matter, you have a great story to tell about everything you did from the second you first heard you had a problem.”
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