A GREAT RESULT: A federal district court has flatly rejected an attempt by the Consumer Financial Protection Bureau (“CFPB”), in league with a Chicago-based mortgage lender, to unwind a settled enforcement action that alleged race discrimination targeting prospective borrowers.  CFPB v. Townstone Financial, Inc., Case No. 1:20-cv-04176 (N.D. Ill.).

The CFPB brought this enforcement action in 2020 to address apparent efforts by a Chicago-based mortgage broker and lender, Townstone Financial, to discourage African-Americans from seeking mortgage loans.  The complaint alleged that the defendant discriminated in part through racist remarks broadcast on its radio show.  The case was tenaciously litigated, even reaching the Seventh Circuit Court of Appeals, which affirmed the CFPB’s view that the Equal Credit Opportunity Act covers prospective applicants for credit, not only those who have already applied.  The case ended with a negotiated settlement in November of 2024, which included a civil penalty.   Yet after the second Trump Administration took over and ordered agencies to identify cases supposedly involving ‘censorship’ or ‘political’ motivations, the CFPB joined with the defendant and petitioned the court to vacate or nullify the settlement.

The parties claimed that the original case lacked a solid evidentiary basis and that staff committed improprieties during the investigation.  They also claimed that the racist statements cited in the complaint constituted protected speech under the First Amendment.  In effect, they sought to immunize illegal race discrimination.  But as Better Markets and its fellow amici argued to the court in a brief led by the National Fair Housing Alliance, neither of those claims had any basis in the facts or the law governing motions for relief from judgments under Federal Rule of Civil Procedure 60(b).

On June 12, the district court agreed with the amici, issuing a thorough, well-reasoned, and decisive repudiation of the parties’ bid to rewrite history.  The court got it right in all respects.  First, it rejected the parties’ claim that the rule governing such motions for relief from judgment should be relaxed, holding that they must still show extraordinary circumstances in accordance with recent Supreme Court precedent.  Next, it rejected the parties’ attacks on the original basis for the enforcement action, and it further observed that their First Amendment claims were never taken up by either the district court or the court of appeals.  As the court said, the CFPB’s about-face on the basis for the action was “an act of legal hara-kiri that would make a samurai blush.”

Finally, the court rested on the enormous threat to the finality of judgments that the parties’ motion represented.  As the Amicus brief pointed out, granting the motion would have severely eroded public confidence in the finality of judgments. In the concluding words of the court, it “would set a precedent suggesting that a new administration could seek to vacate or otherwise nullify the voluntary resolution of a case between a prior administration (or the same administration, but under different agency leadership) and a private party merely because its leadership thought the original litigation unwise or improperly motivated. That is a Pandora’s box the Court refuses to open.”

IMPORTANT DECISIONS EXPECTED SOON:  Two court cases will determine the fate of a rule designed to make stock trading more fair for investors and another rule intended to ensure firms can provide shareholders with timely, independent advice about how to vote on matters of corporate governance. 

• CBOE v. SEC, No. 24-1350 (D.C. Cir.). Exchanges challenge SEC’s sensible update to trading rules that will benefit investors.  In September 2024, the SEC finalized a rule reducing the pricing increments for securities trades and limiting the fees that stock exchanges can charge investors for access to their trading platforms.  While the rule makes seemingly small adjustments to fees, in fractions of a cent, the money adds up to huge savings, especially for institutional investors that manage the 401(k)s and pension funds of millions of Americans.  Predictably, a group of major exchanges filed a court challenge in an effort to protect their profitable status quo.  However, as we argued in our brief in opposition to the industry’s claims, the SEC had clear authority from Congress to do precisely what the rule provides, and it conducted an exceptionally thorough analysis to arrive at a strong and sensible update to the rules that keep our markets running fairly and smoothly. The case was argued on May 15th, and we expect a decision soon.
• Institutional Shareholder Services, Inc. v. SEC, No. 24-5105 (D.C. Cir.).  Corporate America fights to burden firms that help investors vote their proxies.  Proxy advisory firms help investors by providing research and making recommendations on matters subject to a shareholder vote. Because the volume, frequency, and complexity of proxy statements make it difficult for many investors to conduct their own analyses, these firms play a crucial role.  They provide investors with independent advice that is not tainted or spun by the inherently biased management of a company.  The SEC during the first Trump Administration sided with corporate interests and adopted a rule that equated proxy advice with proxy solicitation, thus imposing unnecessary and burdensome requirements on these advisory firms.  Although the SEC later toned down the rule, it left that provision intact, and the plaintiff, Institutional Shareholder Services, sued to challenge the rule.  It prevailed in the district court, which held that the ordinary meaning of “solicitation” does not cover voting advice sought by investors and provided by a firm with no interest in the outcome of the vote.  Now the issue is before the D.C. Circuit.  Although the SEC has predictably dismissed its appeal, the National Association of Manufacturers is defending the rule in its effort to render proxy advise less independent and timely. The case was argued on May 2nd, and we expect a decision soon.

SOME OTHER CASES WE CONTINUE TO WATCH: The federal courts are grappling with a wide range of cases, including challenges to the Administration’s attacks on rules and agencies.  In addition, a gambling platform known as KalshiEX LLC (“Kalshi”) has recently triggered a wave of new cases as it attempts to evade state regulation by offering sports gambling in the guise of legitimate derivatives contracts.      

• Attacks on rules and agencies.   In many cases, the Administration is abandoning its defense of important financial rules issued during the prior administration.  In some instances, it is agreeing to put cases on hold while it decides exactly how it wants to nullify or dilute those rules.  Two examples stand out.  The first is American Council of Life Insurers v. DOL, Case No. 24-10890 (5th Cir.), an insurance industry challenge to a much-needed rule that protects retirement savers from advisers who line their pockets by recommending overpriced, underperforming, and high-risk investments to their clients.  The other example is Bank Policy Institute v. Board of Governors of the Federal Reserve System, Case No. 2:24-cv-04300 (S.D. Ohio), where the banking industry seeks to weaken the vitally important stress testing regime.  That’s one of the most important tools for ensuring that the largest banks have sufficient capital to weather an economic storm and can avoid triggering another global financial crisis.  But rather than vigorously defending these key investor protections and financial stability safeguards, the agencies are preparing to abandon their defense or replace them with much weaker rules.

One of the Administration’s other deregulatory strategies is to undermine the ability of the financial regulators to do their jobs by slashing agency staff, cutting budgets, and even firing board members without cause in violation of the law.  Many of these actions have been challenged in court.  For example, National Treasury Employees Union v. Vaught, Case No. 25-0381 (D.D.C.), is a challenge to the Administration’s attempt to dismantle the CFPB.  And Wilcox v. Trump, Case No. 1:25-cv-00334 (D.D.C.), along with Harris v. Bessent, Case No. 1:25-cv-00412 (D.D.C.), are challenges to the Administration’s sudden removal of board members at the NLRB and MSPB, without cause.  These cases have already been appealed to higher courts over whether the Administration’s action should be stayed pending the litigation, with generally mixed results.  (See our press release on the Supreme Court’s misguided decision in Wilcox here.)  These important cases continue to be litigated, and the ultimate outcomes will matter a great deal, not only in terms of the immediate results affecting the parties but also in terms of establishing precedents that could threaten important legal principles governing regulatory agencies.

• Using federal commodities law to shield gambling from state regulation.  The law governing the futures and swaps markets, known as the Commodity Exchange Act, is suddenly being enlisted to protect sports gambling from the state laws that have traditionally governed the gaming industry.  The tactic is to claim that sports wagers are actually important financial instruments that allow hedging against significant economic risks and that these bets or “event contracts” should therefore be regulated exclusively by the Commodity Futures Trading Commission (“CFTC”).  The CFTC is so far taking a hands-off approach to these wagers, which explains the underlying strategy.  The leader in this effort is Kalshi, a derivatives exchange registered with the CFTC.  Kalshi first drew attention by challenging the CFTC’s decision to ban their dangerous election gambling contracts.  Kalshi won in the district court and although the CFTC initially appealed to the D.C. Circuit (see our amicus brief in the D.C. Circuit here), it later abandoned that appeal in a stark betrayal of the public interest (see our press release here).

Now Kalshi is defying state regulators by offering sports betting without complying with state gaming laws, and so far, they have been winning in the federal district courts.  Noteworthy cases include one pending in New Jersey, where the state has appealed the lower court’s decision in favor of Kalshi to the Third Circuit.  KalshiEX, LLC v. Flaherty, Case No. 1:25cv2152 (D.N.J.).  Another important case is pending in Maryland, where the court is skeptical of Kalshi’s sudden legal about-face. KalshiEX LLC v. Martin, Case No. 25-cv-1283 (D. Md.).  That’s because in the litigation against the CFTC, Kalshi defended its election wagering contracts by contrasting them with sports gambling contracts; it insisted that sports betting had no real financial significance and didn’t belong on a CFTC-registered derivatives exchange.  Now, in its fight with Maryland, Kalshi has reversed course, claiming that sports wagers should be taken seriously as bona fide risk-hedging instruments and that they should be traded on a derivatives exchange subject to the CFTC’s exclusive oversight.   Briefing on that issue is in progress.  A ruling in favor of Maryland may well help turn the tide against Kalshi in other cases.