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May 29, 2024

Actions in the Federal Courts – Month in Review Newsletter – May 2024

SUPREME COURT UPHOLDS THE CONSTITUTIONALITY OF THE CFPB’S INDEPENDENT FUNDING STRUCTURE – Consumer Financial Protection Bureau v. Community Financial Services Association of America, No. 22-448 (May 16, 2024) – On May 16, 2024, in a highly anticipated decision, the Supreme Court issued a 7-2 ruling rejecting the latest assault on the CFPB, this time from the payday lending industry, and upholding its funding mechanism. The decision is a resounding victory for the CFPB, which in just 13 years of operation, has proven to be one of the most effective financial consumer protection agencies in the nation’s history.  Through its rules, it has reined in abusive practices in the consumer financial markets, and through its enforcement actions, it has returned $19 billion to millions of everyday Americans victimized by predatory financial practices.  And as demonstrated in the amicus brief we joined, the CFPB has also fought to protect individuals from racial discrimination in the financial markets.  The decision will benefit not only the CFPB but also a number of other agencies with similar independent funding structures, such as the OCC and other banking regulators. Most immediately, however, the CFPB will finally be free to press ahead with its important mission without a cloud of uncertainty hanging over its legitimacy and its future.

Writing for the majority, Justice Clarence Thomas relied heavily on both the text of the Constitution and early English and American history to uphold the constitutionality of the CFPB’s independent funding structure.  Under that structure, the CFPB draws funds, up to a cap, from the earnings of the Federal Reserve System rather than through the annual congressional appropriation process. According to the majority, “pre-founding history supports the conclusion that an identified source and purpose are all that is required for a valid appropriation.” Here, Justice Thomas concluded, Congress specified the source (the Federal Reserve) from which the CFPB can draw its funding, and it specified how the CFPB is supposed to use that funding (to pay the expenses of the Bureau in carrying out its responsibilities). According to Justice Thomas, then, the CFPB’s funding process satisfies all the requirements of the Appropriations Clause, and the Court therefore reversed the Fifth Circuit’s decision.

INSURANCE INDUSTRY GROUPS FIGHT TO PROTECT EASY PROFITS AT THE EXPENSE OF THEIR CLIENTS BY ATTACKING THE DOL’S NEW INVESTMENT ADVICE RULE – Federation of Americans for Consumer Choice, Inc. et al v. Department of Labor, No. 6:24-cv-00163, (E.D. Tex.) (May 2, 2024) – A group of insurance industry plaintiffs recently sued the Department of Labor (DOL) in a Texas federal district court seeking to invalidate recently finalized rules from the DOL.  Those rules broaden protections for retirement savers who are losing tens of billions a year at the hands of financial advisers who are still permitted to recommend investment products that fatten their profits and bonuses while saddling their clients with poor returns, high risks, and loss of access to their funds.  The DOL’s new rule has been widely hailed by investor advocates as a victory for investors, because the rule requires all financial advisers to act in the best interest of their clients when they give advice about retirement investments. It is no surprise then, that industry groups—especially the insurance companies and agents who sell lucrative annuities—are dead set on nullifying the new protections.

This is the first legal challenge filed against the rule since its release in late April. The plaintiffs allege that the DOL exceeded the agency’s statutory authority under ERISA and the Tax Code and that the rule is arbitrary and capricious under the Administrative Procedure Act. On May 24, a second lawsuit was filed against the DOL’s “best interest” package of rules by insurance trade associations acting on behalf of their members.  That case, also filed in Texas district court, is American Council of Life Insurers v. United States Department of Labor, No. 4:24-cv-00482 (N.D. Tex.). 

FEDERAL DISTRICT COURT IN TEXAS ALLOWS EXXON SUIT AGAINST CLIMATE SHAREHOLDER ACTIVISTS TO PROCEED – Exxon Mobil Corporation v. Arjuna Capital, LLC et al, No. 4:24-cv-00069 (N.D. Tex.) (May 22, 2024) – The defendants in this case engaged in shareholder activism, submitting proposals designed to combat climate change and reduce the oil industry’s greenhouse gas emissions.  However, following Exxon’s lawsuit seeking a declaratory judgment that it was not required to put the resolutions to a shareholder vote, the defendants withdrew their proposals and argued that the case was moot.  The court nevertheless ruled in favor of Exxon because it was not “absolutely clear” the offending conduct would not recur. The result is troubling because shareholders are meant to participate in the governance of the companies they own on important matters of corporate policy—including climate change.  Here, the court seemed to go out of its way to keep the case alive, perhaps with the intention of ultimately ruling against the shareholders on the merits and limiting their ability to shape corporate policy.



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