FIFTH CIRCUIT DELIVERS A BLOW AGAINST TRANSPARENCY IN CORPORATE BOARDS. Alliance for Fair Board Recruitment v. SEC, No. 21-60626 (5th Cir.) (decided Dec. 11, 2024). In a 9-8 decision, the conservative majority of the entire Fifth Circuit overturned the SEC’s approval of Nasdaq’s board diversity disclosure requirements. Those rules would have required any company that wanted to list its stock on the Nasdaq exchange to disclose data about the racial and gender diversity of its board and to either include at least two “diverse” directors or explain their absence. A number of groups challenged the SEC’s approval on a variety of constitutional and statutory grounds, and the Fifth Circuit bought at least one: Citing the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), the majority held that the SEC had failed to establish an adequate connection between the rules and the purposes of the Securities Exchange Act of 1934—something that was essential to the SEC’s approval of the rule.
Unfortunately, the court got it wrong on both legal and policy grounds. To justify its decision, the court adopted an exceedingly narrow interpretation of the purposes of the securities laws, confining them to preventing fraud and unfair competition. In reality, and as the SEC argued, the securities laws serve numerous additional purposes, including safeguarding investors and the public interest by providing disclosures that investors need as they decide where to put their money.
The decision represents a terrible setback for transparency, which is the lifeblood of our securities markets. A rapidly growing number of investors, including the largest investment managers in the world, are demanding information about the composition of corporate boards, and specifically their level of racial and gender diversity. That information helps investors make decisions about which companies to support with their capital. In the end, this type of rule promotes the vitality and strength of our securities markets, and that benefits millions of everyday Americans who rely on the markets to save for retirement and achieve their other financial goals. It also provides more evidence that the Fifth Circuit, especially taken as a whole, is intent on striking down agency rules, no matter how important to investors, markets, and the public interest.
CFPB CONTINUES TO PROTECT CONSUMERS WITH TOUGH ENFORCEMENT. The Consumer Financial Protection Bureau (CFPB) recently filed two new cases aimed at halting and punishing widespread exploitation of financial consumers. In CFPB v. JP Morgan Chase et al., 2:24-cv-03652 (D. Az.) (Dec. 20, 2024), the agency sued three large banks—including JP Morgan Chase, Bank of America, and Wells Fargo—for their role in facilitating fraud by the payment platform Zelle. The three banks are alleged to have rushed the development of Zelle to compete against growing payment apps such as Venmo and CashApp without implementing effective consumer safeguards, leading Zelle users to suffer approximately $870 million dollars of fraud over the payment network. And in CFPB v. Wal-Mart, 0:24-cv-04610 (D. Minn.) (Dec. 23, 2024), the agency sued Wal-Mart for allegedly opening deposit accounts on behalf of more than one million employees without their consent and then charging more than $10 million in junk fees to those accounts.
These recent cases exemplify the CFPB’s tireless effort to hold financial firms accountable for unfair and abusive practices that harm everyday Americans. They also serve as a painful reminder that once the Trump administration takes office, we can expect new leadership at the CFPB to dramatically scale back its strong rulemaking agenda and tough enforcement program. That means more fraud and abuse that hurts consumers and less accountability for the firms that prey on everyday Americans with shady financial products and practices.
WHAT TO LOOK FOR IN THE COURTS IN 2025 WHEN IT COMES TO FINANCIAL REGULATION. Over the past four years, we’ve seen a clear pattern in court cases involving financial regulation. Agencies issued important new rules and filed strong enforcement actions that the industry then fought tooth and nail in the courts, seeking to nullify the rules and dismiss the enforcement cases. That has been especially true for the SEC and the CFPB, as they have fought to make the securities and consumer finance markets more fair and transparent in areas ranging from crypto fraud to bank junk fees.
The terrible truth is that in 2025, we expect to see a fundamental shift in this pattern. The agencies under the Trump administration are likely to roll back previously adopted rules or issue weak, new, industry-friendly rules. Investor and consumer advocates will be the ones going to court to stem this de-regulatory tide. The effort to protect the public interest in court will be a tough fight, given the huge costs of such litigation and the legal doctrines such as “standing.” That requirement makes it much more difficult to get into federal court when what’s at stake is the broader public interest, not merely a financial firm’s compliance costs. When it comes to enforcement actions, many of those that are pending are likely to be abandoned, giving the defendants a free pass. And we anticipate seeing far fewer new enforcement actions overall.
Notwithstanding these challenges, Better Markets will continue watching, reporting, and fighting for the public interest in court whenever and wherever it can to promote a financial system that works better for all Americans.
