Given all the tumult with natural disasters, COVID-19, and other goings on in Washington, a memorandum directing government agencies to reform how they operate may have gone unnoticed. It’s worth considering. On August 31, 2020, the Office of Information and Regulatory Affairs (OIRA), a subagency within the Office of Management and Budget (OMB), issued Memorandum M-20-31 (the “Memo”), which elaborates on and implements directives from a prior executive order to consider and adopt certain best practices and procedures to promote fairness in administrative enforcement and adjudication. The Memo directs federal agencies to adopt measures aimed at according greater due process to individual and company targets for investigations and enforcement actions, and to promote transparency and accountability in the initiation and pursuit of administrative actions. The Memo’s directives usher in the potential for long-overdue substantive and procedural revisions to the rules of practice for independent agencies.
By way of background, the President signed Executive Order 13924, “Executive Order on Regulatory Relief to Support Economic Recovery,” on May 19, 2020, in response to economic impacts due to the COVID-19 pandemic. EO 13924 directs federal agencies to “address this economic emergency by rescinding, modifying, and waiving or providing exemptions from regulations and other requirements that may inhibit economic recovery” as enumerated in Section 6. The OIRA Memo sets forth specific best practices for implementing changes for the ten principles in Section 6 and sets a deadline of November 26, 2020 for agencies to engage in any necessary rulemaking to implement them.
The guidance will apply to all federal government departments and agencies, such as the Federal Trade Commission, the U.S. Securities and Exchange Commission, the Federal Reserve Board, the Consumer Financial Protection Bureau, and many others.
A significant portion of the Memo is dedicated to reforming procedural safeguards. First, to ensure that the agencies bear the burden of proving alleged violations of the law, the Memo directs agencies to revise their procedures to ensure that the target of an investigation is not required to prove a negative to prevent liability and enforcement consequences. Specifically, the Memo advises agencies to consider applying “the rule of lenity” to administrative investigations, enforcement actions, and adjudication. This rule affords regulated defendants the favorable reading of an ambiguous statute or regulation related to administrative violations and penalties.
Borrowing from standards the U.S. Department of Justice is subject to in the criminal context, the Memo advises agencies to conform civil adjudicatory evidence disclosures to the requirements of Brady v. Maryland, 373 U.S. 83 (1963). This would require agencies to adhere to the DOJ’s policy of timely disclosing exculpatory evidence and evidence material to mitigating damages or penalties.
In administrative adjudication (litigation before an administrative law judge rather than in court), the Memo advises that agencies should more closely track the Federal Rules of Evidence, including reducing the use of hearsay evidence and applying the Daubert framework to determine the veracity of scientific evidence.
Agency Accountability and Transparency
The Memo also puts the onus on agencies to increase their accountability and transparency. The Memo places limitations on tolling agreements by directing agencies to seek approval from an “Officer of the United States” prior to entering into agreements that would extend the statute of limitations for an alleged violation. The FTC has made frequent use of such agreements recently. The “Officers” empowered to provide such approval include cabinet secretary or federal judges confirmed by the Senate, and “inferior” officers who are appointed but not Senate confirmed. In addition, agencies are encouraged to apply “limiting principles to the duration of investigations” by creating regulations that will require an investigation to end with either a staff recommendation to commence an enforcement action or a closing of the investigation “within a defined time period.” The Memo favors streamlining actions through the “the adopt[ion of] estoppel and res judicata principles to eliminate multiple enforcement actions for a single body of operative facts” and advises that “an agency should have only one bite at the apple to investigate and seek enforcement” based on a fact pattern that is “not a continuing or expanding violation.” The Memo further stresses that agency adjudicators should act independently from and not engage in ex parte communications with investigators and enforcement staff. Agencies are also cautioned against maintaining performance evaluation metrics for enforcement employees that reward or incentivize the initiation and pursuit of “meritless or unwarranted” actions. Moreover, agencies are discouraged from selecting investigation or enforcement targets based on retaliatory or punitive motives.
With respect to penalties, agencies are encouraged to establish enforcement discretion policies that take into account a regulated party’s good faith attempts to comply with the law. To promote transparency, agencies are instructed to “make the public aware of the conditions in which investigations and enforcement actions will be brought” and the nature of the penalties that will be “sought for common infractions.” To that end, the Memo instructs agencies to initiate charges by citing the applicable statute or regulations and to provide an explanation of how the alleged conduct violates those cited provisions.
Finally, consent orders and settlements should contain expiration dates and/or termination criteria that are proportional to the violation being remedied, and private parties to such agreements should not be barred from discussing their cases. If followed by the FTC and other agencies, this could change the terms in consent orders considerably.
The best practices and recommendations set forth in the Memo will need to be formally incorporated through agency rulemaking. Agencies are directed to coordinate with OIRA staff to formulate and issue any final rules by November 26, 2020. We will be watching closely to see what agencies promulgate in response. Interested parties should stay tuned for rule announcements and be prepared to submit public comments and proposed revisions.
The authors and others at Venable have considerable experience representing those subjected to Federal Trade Commission investigations and law enforcement actions, including matters and issues related to regulatory compliance, risk management, and other consumer protection concerns.