A recent holding by the U.S. Court of Appeals for the District of Columbia could substantially alter the regulatory climate for many institutions, as well as hapless officers, directors, and their counselors, particularly with regard to otherwise forgotten or unknown infractions.
The appeals court broadly applied the general five-year federal statute of limitations to administrative enforcement proceedings undertaken by federal regulatory agencies -- where the federal agencies generally thought no such limitation exists.
The rationale of the decision should have direct application to administrative actions by the federal bank regulatory agencies. Under this ruling the five-year period in which an agency must undertake an enforcement action begins to run at the time of the allegedly violative conduct, regardless of when the agency subsequently discovers the violation.
Significantly, the Solicitor General determined to seek a rehearing of the ruling only on the limited issue of whether, "for purposes of the statute of limitations ... any action for enforcement of a civil money penalty ... accrues when the violation occurs, rather than when the violation is reasonably discoverable."
That is, the government in requesting that the appeals court rehear the case conceded the finding that the federal statute of limitations applies governmentwide to all regulatory proceedings. The appeals court, however, on May 9 denied the government's petition, and decided not to reconsider even this limited issue.
The U.S. Court of Appeals for the District of Columbia is widely recognized as the most expert such judicial forum of federal regulatory law.
Time Constraints Likely
The unanimous decision by a three-judge panel in the newest case will likely stand to restrict the time during which many federal regulatory agencies -- including the federal bank regulatory agencies -- can initiate proceedings for the imposition of civil money penalties, as well as certain other enforcement actions.
The case, 3M Co. v. Browner, involved Environmental Protection Agency proceedings to access civil money penalties against 3M Co. for violation of the Toxic Substances Control Act.
The court's decision, however, expressly applies "to the entire federal government in all civil penalty cases," in holding that the federal five-year statute of limitations, 28 USC 2462 ("section 2462"), applies to administrative enforcement proceedings initiated by federal agencies.
To reach its result, the court resolved two issues. First, the five-year statute of limitations applies broadly to administrative proceedings initiated by federal agencies. Second, this five-year period begins to run on the date the violation occurs, regardless of when the agency discovers the violation.
Section 2462 provides that "[e]xcept as otherwise provided by act of Congress, an action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued, if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon."
Statute of Limitations
While Section 2462 has long been applied to judicial proceedings initiated by the federal government and its agencies, the D.C. circuit has an initial matter that the provision also applies to the administrative assessment of civil money penalties.
In so holding, the court reasoned that because the procedures for imposing civil money penalties closely resemble judicial proceedings, the statute of limitations applies with equal force to both.
In particular, the court pointed to the procedural safeguards found in the civil penalty proceedings under the particular statute in question, including: notice and the opportunity to respond, depositions and other discovery, and an adversarial hearing after which normal findings are rendered.
Similar safeguards as required where the federal banking agencies seek civil money penalties and other administrative actions under 12 USC 1818. Under the law, the federal bank regulatory agencies are authorized to undertake various enforcement proceedings including, for example, cease and desist orders, removal of directors and officers, and the imposition of civil money penalties.
The court's rationale for applying the federal statute of limitations to certain types of administrative enforcement actions should be applicable to actions undertaken by federal banking and other agencies.
Indeed, the government appears to have conceded this point in 3M -- in the recently unsuccessful petition for rehearing and suggestion for rehearing en banc, the government did not request reconsideration of the applicability of Section 2462 to agency proceedings.
More General Application
While the court's discussion is generally limited to the applicability of the statute of limitations to civil money proceedings, the court's reasoning and the language of Section 2462 suggest that the five-year limitation may apply more generally to other formal enforcement actions available to the federal bank regulators, including some cease and desist orders under 12 USC 1818 (b) and possibly removal proceedings under 12 USC 1818(c).
Section 2462 explicitly applies to proceedings for penalties, whether pecuniary or otherwise. The language leads to the conclusion that the five-year limitations period applies to formal administrative proceedings, regardless of whether money penalties are sought.
The court also held that the five-year limitations period begins to run (that is, the action "accrues") as soon as the violation occurs. The court characterized the proceedings to be "punitive" and distinguished "remedial, civil claims," such as those for latent medical conditions where the harm, and therefore the claim, does not arise until years after the conduct occurred.
Rules Attach to the Violation
Rather, the court pointed out that liability for violations of regulatory statutes and rules generally attaches simply with the occurrence of the violation. It is the happening of the violative act that allows the agency to undertake enforcement proceedings.
In the context of banking law, for example, it is the violation of statute or regulation that allows a federal bank regulator to impose civil money penalties under 12 USC 1818(i).
The court found this to be the general rule, regardless of the difficulty an agency encounters in enforcing a particular regulatory scheme: The court dismissed the assertion that a five-year limitation is insufficient for agencies to uncover violations in complex regulatory schemes based on self-reporting by the regulated industry.
This reasoning appears particularly relevant to bank regulation where agencies rely in large part on periodic examinations and reports prepared by regulated financial institutions.
The court's decision requires only that an agency initiate an enforcement action within five years; the agency need not reduce the proceeding to a final order in that same period. The court did not resolve whether an agency thereafter has an additional five years under Section 2462 to try to collect penalties so ordered.
The court suggested, however, that agencies may have another five years where the statute in question provides for separate actions to assess penalties and subsequently collect them.
The 3M decision is likely to have dramatic effects on the ability of federal banking agencies to undertake many administrative enforcement actions under 12 USC 1818.
The court did not resolve, however, whether the statute would bar enforcement proceedings against conduct begun before the five-year period but that is continuing in nature; for example, failure to file a required report.
The court's sweeping language seemingly applies across the board to all punitive actions undertaken by federal agencies, unless a particular statutory scheme provides otherwise.