NEW INDUSTRY ATTACKS ON CFPB FUNDING MECHANISM MEET RESISTANCE EVEN IN TEXAS: State of Texas v. Colony Ridge, Inc., et al, No. 4:24-cv-00941 (S.D. Tex) – CFPB v. ACTIVE Network, LLC, No. 4:22-cv-00898 (E.D. Tex.)
Following the Supreme Court’s recent affirmation of the Consumer Financial Protection Bureau’s (CFPB) constitutionality, some conservative critics have sought to leverage the agency’s funding structure—which is generated through the Federal Reserve—to generate new potential legal arguments against the agency. This line of attack hinges on the argument that the CFPB can only use surplus funds generated by the Fed, which has reportedly not shown a surplus in recent years.
In Texas, however, this theory has encountered significant resistance. In a recent court filing, Texas Attorney General Ken Paxton, a frequent opponent of the CFPB, called this funding argument “strange” and ineffective, noting that the Supreme Court already established the CFPB’s funding as constitutionally sound. Paxton’s office argued that the theory is based on the mistaken assumption that the bureau must rely solely on a Fed “surplus,” and it emphasized that the CFPB would have access to other funding sources even if the Fed faced financial shortfalls.
Over the past week, two federal judges in Texas dismissed cases in which companies challenged the CFPB’s authority based on its funding structure. In one of these cases, State of Texas v. Colony Ridge, Inc., et al, No. 4:24-cv-00941 (S.D. Tex.), Paxton himself opposed an attempt by Colony Ridge, a Houston-area housing developer, to dismiss a federal consumer protection suit. Federal Magistrate Judge Peter Bray sided with Paxton, stating the Supreme Court had already deemed the CFPB’s funding constitutional. In a similar case, CFPB v. ACTIVE Network, LLC, No. 4:22-cv-00898 (E.D. Tex.), Judge Amos Mazzant of the Eastern District of Texas denied an attempt by Active Network, a registration services company accused of misleading consumers, to dismiss a CFPB complaint based on the funding argument. Unfortunately, legal battles over the CFPB’s funding continue in other courts, where some judges might yet be swayed by the argument.
U.S. DISTRICT COURT ALLOWS SEC TO CONTINUE USING IMPORTANT STOCK TRADING MONITORING TOOL WHILE FACING LITIGATION: Davidson et al v. Gensler et al, No. 6:24-cv-00197 (W.D. Tex., Oct. 24, 2024)
In a recent decision from the Western District of Texas, U.S. District Court Judge Alan Albright held that the SEC can continue to use a market surveillance tool known as the Consolidated Audit Trail (CAT) while it faces a class-action lawsuit challenging the tool’s existence as a threat to privacy. This decision came after a Texas federal judge ruled that halting data collection pending the litigation would lead to significant disruption. Judge Albright emphasized that an abrupt halt in collecting and sharing equity and options trading data would be problematic, as there’s currently no alternative in place. Granting the injunction, he noted, would result in a “chaotic and disruptive effect.”
The Consolidated Audit Trail was initially developed following the 2010 “flash crash,” a rapid and substantial drop in market prices. Regulators realized that a centralized trading database was essential for monitoring and responding to such market events in real-time. The CAT tool has been tracking stock trades since 2020, according to court documents. Judge Albright cited its years of operation as an additional reason for allowing it to continue while the case is pending. “The CAT has been out of the bag for years,” he remarked, underscoring the need to maintain this status quo until a final decision is made. While denying the injunction, Judge Albright nonetheless noted that some of the plaintiffs’ claims may have merit, so the ultimate outcome remains uncertain.
DEPARTMENT OF LABOR APPEALS DISTRICT COURT ORDERS THAT PUT A HOLD ON PROTECTIONS FOR RETIREMENT SAVERS WHILE LITIGATION UNFOLDS: Federation of Americans for Consumer Choice, Inc. v. Department of Labor, No. 6:24-cv-00163, (E.D. Tex.) (May 2, 2024); American Council of Life Insurers v. United States Department of Labor, No. 4:24-cv-00482 (N.D. Tex.) (May 24, 2024).
In April of 2024, the Department of Labor (“DOL”) finalized a rule that will help protect retirement savers from advisers who peddle subpar investments to their clients to enrich themselves with fees and commissions. A group of insurance industry plaintiffs have launched two separate attacks in Texas district courts seeking to nullify the rule. In July, each court issued a stay to prevent the DOL’s rule from going into effect during the litigation.
On September 20, 2024, the DOL appealed those stays to the Fifth Circuit. Given the Fifth Circuit’s past hostility to the DOL’s attempts to curb conflicts of interest among financial advisers, we are not optimistic that the appellate court will afford relief and allow the rule to take effect while the litigation unfolds. If the appellate court doesn’t rescind those stays, retirement savers will lose money every day at the hands of advisers who peddle inferior investments to line their own pockets. Better Markets plans to weigh in with an amicus or “friend of the court” brief opposing the stays.
