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New OMB Guidance on Agency Enforcement Actions

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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-20-32 to all federal agencies further implementing Section 6 of Executive Order 13924, an “Executive Order on Regulatory Relief to Support Economic Recovery.”  Section 6 of the Order instructs all executive agencies to consider an enumerated list of “principles of fairness in administrative enforcement and adjudication,” and revise their practices and procedures accordingly. This new OMB guidance to agencies for implementing Section 6 of the Order (the “OIRA Memo”), articulates “best practices” for agencies to consider during their review. 

The OIRA Memo has the potential to impact the way that enforcement agencies—including the Department of Justice ("DOJ"), Federal Trade Commission (“FTC”), Food and Drug Administration (“FDA”), Securities and Exchange Commission (“SEC”), Consumer Financial Protection Bureau (“CFPB”), the Environmental Protection Agency (“EPA”), and other agencies including the Federal Energy Regulatory Commission (“FERC”)—approach and adjudicate investigations.

Of particular note, the potential impacts of the new best practices include:

  • The possibility that a leniency defense may be viewed more favorably.Agencies are directed to exercise discretion in favor of leniency, including by declining enforcement or penalties where the regulated party “attempted in good faith to comply with the law.”While this has already been a consideration to a certain degree, the new OIRA Memo may make this defense more successful in narrowing enforcement or lowering penalties.
  • The potential to raise the bar on the initiation of investigations—reducing the opportunities for “fishing expeditions” by a government agency.
  • Fewer enforcement actions based on novel theories.Agencies are reminded that enforcement should be based on existing statutes or regulations, and not new or aggressive interpretations.
  • Fewer requests for tolling agreements.Agencies are advised not to enter into tolling agreements without approval by an Officer of the United States (a subset of federal employees, generally limited to persons appointed by the President and approved by the Senate). This may add an extra impediment to a common tactic at the outset of an investigation.
  • More uniform consideration of statutory and regulatory bases for opening an investigation or initiating and enforcement action.Agencies are directed to be more transparent, including through specifically identifying the statute and regulation asserted to be violated—in the document initiating an investigation—and to cite specific conduct alleged to have violated the law.

Below is a summary of the new enforcement guidance.

Background on Executive Order 13924 and the OIRA Memo

Executive Order 13924, issued on May 19, 2020, in response to the economic impacts of the COVID-19 pandemic, directed agencies to “address this economic emergency by rescinding, modifying, waiving, or providing exemptions from regulations and other requirements that may inhibit economic recovery.”  Section 6 directed the heads of all agencies to consider “the principles of fairness in administrative enforcement” in ten areas, and directed agencies to “revise their procedures and practices in light of” those principles, “consistent with applicable law and as they deem appropriate in the context of particular statutory and regulatory programs.”  However, until the OIRA Memo was issued on August 31, those ten principles were not refined, and few agencies appear to have taken steps to implement them.

The recent OIRA Memo expands on those ten principles by setting forth specific best practices for agencies to follow in pursing “fairness in administrative enforcement.”  The OIRA Memo also sets a hard deadline for making those changes: directing agencies to issue any needed final rules implementing Section 6 by November 26, 2020. 

Taken together, the intent of Executive Order 13924 and the OIRA Memo is to shift enforcement resources towards the more obvious and straightforward cases of non-compliance and to lessen the economic burdens on companies associated with responding to investigations and enforcement actions.  The OIRA Memo guidance makes clear that although the basis for the relief is COVID-19, enforcement discretion is encouraged irrespective of the pandemic’s economic impact.  Thus, the effects of this shift towards leniency may last much longer than the pandemic itself.

Best Practices for Fairness in Administrative Enforcement and Adjudication

The OIRA Memo sets forth specific best practices on implementing the 10 recommendations from the Executive Order.

(a) “The Government should bear the burden of proving an alleged violation of law; the subject of enforcement should not bear the burden of proving compliance.” The OIRA Memo reminds agencies that “members of the regulated public are not required to prove a negative to prevent liability and enforcement consequences in the absence of statutory standards requiring otherwise.”  It also states that agencies should “consider applying the rule of lenity”—a principle of statutory construction generally used in criminal cases—“in administrative investigations, enforcement actions, and adjudications,” where there are “genuine statutory or regulatory ambiguities.”

(b) “Administrative enforcement should be prompt and fair.” The OIRA Memo instructs that agencies should seek approval of an “Officer of the United States,” “before entering into a tolling agreement that would extend the statute of limitations for an infraction.”  This seems designed to limit the number of tolling agreements requested by federal agencies by increasing the degree of approval required. The best practices also state: “Agency regulations should apply limiting principles to the duration of investigations; regulations should require investigating staff to either recommend or bring an enforcement action, or instead cease the investigation within a defined time period.”  A party under investigation should be informed when it is closed and if there is no finding of violation.

(c) “Administrative adjudicators should be independent of enforcement staff.” The new guidance states that agency adjudicators should operate independently from investigators and enforcement staff and not engage in ex parte communications with each other. 

(d) “Consistent with any executive branch confidentiality interests, the Government should provide favorable relevant evidence in possession of the agency to the subject of an administrative enforcement action.” Again drawing parallels to doctrines generally used in the criminal context, the best practices suggest: “Administrative agencies should conform their civil adjudicatory evidence disclosure practices to those described” in Brady v. Maryland, Giglio v. United States, and Kyles v. Whitley, and should timely disclose exculpatory evidence to the target using similar procedures as those laid out in the DOJ Justice Manual.  These Supreme Court decisions require federal prosecutors to disclose exculpatory and other favorable evidence to the defense, including any promises made to a witness providing testimony against the accused.

(e) “All rules of evidence and procedure should be public, clear, and effective.” The OIRA Memo suggests agencies adopt evidentiary procedures to “eliminate any unfair prejudice, reduce undue delay, avoid the needless presentation of cumulative evidence, and promote efficiency.” Further, agencies should reduce the use of hearsay evidence and generally adhere to the Daubert standards in presenting scientific evidence – i.e., is the scientific testimony relevant, reliable and the product of an accepted scientific methodology.  The best practices direct agencies to consider incorporating other standards from the Federal Rules of Evidence. 

(f) “Penalties should be proportionate, transparent, and imposed in adherence to consistent standards and only as authorized by law.” The new guidance states: “Agencies should establish policies of enforcement discretion that decline enforcement or the imposition of a penalty, as appropriate, in the course of enforcement when the agency determines that the regulated party attempted in good faith to comply with the law.” As to Consent Decrees: “Agencies should adopt expiration dates and/or termination criteria for consent orders, consent decrees, and settlements that are proportionate to the violation of the law that is being remedied.”

(g) “Administrative enforcement should be free of improper Government coercion.” The guidance directs agency not to select targets for investigations or enforcement actions based on retaliatory or punitive motives. 

(h) “Liability should be imposed only for violations of statutes or duly issued regulations, after notice and an opportunity to respond.” The guidance reminds agencies that liability should only be imposed after notice and an opportunity to respond.  The OIRA Memo further states: “In any document initiating an investigation or enforcement action, an agency should include a citation to the statute and regulation asserted to be violated, and an explanation as to how the asserted conduct is prohibited by the cited statute and regulation.” The guidance further reminds agencies to comply with Section 3 of Executive Order 13892, which limits the use of guidance documents and prohibits using such guidance documents to impose new standards of conduct or as the sole basis for an adjudicatory or enforcement action. The risk that vague agency guidance could result in serious monetary or administrative sanctions was highlighted by the rollout of the Paycheck Protection Program (“PPP”) earlier this year and shifting guidance about what types of entities could be eligible for PPP loans. Much of this guidance was disseminated, at least initially, through updates to an “FAQ” document, not formal rule making. 

(i) “Administrative enforcement should be free of unfair surprise.” The OIRA Memo states that agencies should have rules in place to provide parties with a reasonable period of time to respond to filings or charges brought by the agency—at least as much time as parties would have under the Federal Rules of Civil Procedure, unless there is an urgent need to protect the public.

(j) “Agencies must be accountable for their administrative enforcement decisions.” The guidance provides that the initiation of investigations and enforcement actions should require approval of an Officer of the United States or their designee. 

Conclusion

Whether best practices articulated in the recent OIRA guidance is formally incorporated through rulemaking by enforcement agencies remains to be seen; staff at many agencies will likely take the position that they already follow these best practices. Additionally, there may be an open constitutional question about whether the Executive Branch can dictate rules of practice to independent agencies, including the SEC and EPA, at all. Even so, companies subject to enforcement actions should consider the extent to which they can leverage the OIRA Memo guidance, even informally. 

 

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