In order to provide an overview for busy in-house counsel and compliance professionals, this newsletter summarizes some of the most important and interesting developments from State Attorneys General across the country in the past month, with links to primary resources. This month’s topics include:

• Investigations of Environmental, Social, and Governance (“ESG”) Practices
• New York State Attorney General Civil Fraud Action Against CEO of Crypto Lending Platform
• State Attorneys General Continued Activity Related to Data Privacy Issues
• State Attorneys General Opposing Positions on the authority of the federal Consumer Financial Protection Bureau
• State Attorneys General Weigh in on Consumer Protection and the Airline Industry

1. Investigations of Environmental, Social, and Governance Practices

As ESG continues to evolve and take on increasing significance for investors and their advisors, state attorneys general have been increasingly active in investigating how ESG practices are being stated and implemented. The impact of these investigative activities can be dramatic, including the costs and burden of responding to government information requests and, more broadly, because the investigations can raise the public profile of corporate actors that may have a reputational impact.

• On January 26, 2023, 25 state attorneys general[1] filed a federal civil action challenging new federal regulations that the attorneys general contend impermissibly permit the consideration of ESG factors in the administration of retirement funds. The suit alleges that the new rules harm both retirement fund administrators (by increasing the administrative costs) and beneficiaries (by permitting investment decisions based on considerations other than the fiduciary interests of the beneficiaries). The case was just filed and motion practice is expected.
  • Earlier in January 2023, 21 of the same attorneys general publicly sent a letter (the “Letter Request”) to two of the nation’s largest firms (the “Proxy Firms”) that provide proxy advice to institutional investors. The Letter Request alleges that the Proxy Firms may have violated their fiduciary duties to their clients by premising recommendations on political and environmental (rather than financial) goals and makes wide-ranging requests for information regarding the Proxy Firms’ operations and personnel.
    
    The Letter Request followed similar letter requests and civil investigative demands to large asset managers and financial institutions expressing the view that these entities’ consideration of ESG-related goals was inconsistent with their duty to maximize financial returns for investors.
  • In January 2023, the Texas Attorney General (“TXAG”) informed Citigroup Inc. (“Citigroup”) that it believed Citigroup had discriminated against the firearm industry and thus that the TXAG would “not approve any public security issued on or after today’s date” in which the bank “purchases or underwrites the public security.” Citigroup has indicated that it disagrees with the TXAG’s position and believes it complies with Texas law. Nevertheless, in February 2023, the Texas Natural Gas Securitization Finance Corp. took steps to “reconstitute” the syndicate of banks underwriting a $3.4 billion bond issuance, removing Citigroup from the group of banks underwriting that bond. Citigroup was the second financial institution to be removed from the transaction. In October 2022, UBS Group AG was removed from the underwriting syndicate based on UBS’s purported bias against the fossil fuel industry.

Given the increasing public debate about how ESG considerations should impact corporate conduct and investment practices, attorneys general-led investigations likely also will increase both in scope and in number.

2. New York Attorney General (“NYAG”) Civil Fraud Action Against CEO of Crypto Lending Platform

The significant turmoil in the cryptocurrency markets has drawn intense scrutiny from regulators and enforcers at the federal and state levels. NYAG’s recent enforcement action against the former chief executive officer of a failed cryptocurrency concern makes clear that the NYAG will be an active and aggressive enforcement agency in the digital asset realm. Companies in the digital asset space who have been adversely impacted by the market downturn can expect that, in addition to facing questions from concerned investors, they may also be called to respond to inquiries from enforcers like the NYAG.

• In early January 2023, the NYAG filed a civil complaint (the “Complaint”) against Alex Mashinsky, the former CEO of Celsius, a now-bankrupt cryptocurrency exchange alleging that Mashinsky has defrauded investors by promising high yields on cryptocurrency assets placed on deposit with Celsius. More specifically, the Complaint alleges that, when unable to generate sufficient returns to pay the yields promised to investors, Celsius began making riskier investments and failed to disclose those risks to investors. The NYAG further claims that Mashinsky continued to recruit investors despite knowing that Celsius’ liabilities far surpassed its assets. The Complaint alleges violations of New York’s securities law, specifically, the Martin Act. The Complaint also claims that Mashinsky illegally failed to register as a securities dealer and a commodities broker‑dealer and salesperson. The Complaint seeks damages and restitution on behalf of investors and to bar Mashinsky from working in the cryptocurrency industry.

3. Attorneys General Continue to Be Active on Data Privacy Issues

State attorneys general have remained active at the intersection of consumer protection and data privacy. In certain jurisdictions, recently enacted legislation has expanded the scope of their enforcement authority. Additionally, attorneys general have used their existing authority to combat what they believe are misleading or deceptive practices to initiate investigations and litigations and reach settlements aimed at data privacy issues. The broad scope of these actions makes plain that companies in a diverse array of industries and sectors may face scrutiny from state enforcers on data privacy issues.

• In 2023, consumer privacy laws that empower attorneys general in each respective state to enforce violations of individual consumers’ privacy rights will take effect in Colorado (July 1, 2023), Connecticut (July 1, 2023), Virginia (in effect as of Jan. 1, 2023), and Utah (Dec. 31, 2023).
• On January 27, 2023, the California Attorney General announced an “investigative sweep,” for alleged non-compliance with the California Consumer Privacy Act. The “sweep” targeted businesses in the retail, travel, and food service industries that may have failed to comply with consumer “opt‑out” requests or to offer a mechanism for users to halt the sale of their data.
• The Texas Attorney General has continued to litigate two lawsuits, commenced in 2022, against Google LLC (“Google”) and Meta Platforms, Inc. (“Meta”), alleging that the companies violated Texas’s “Capture or Use of Biometric Identifier Act,” by allegedly obtaining users’ biometric data without consent. The suit against Meta also alleges that the company misled consumers about the company’s biometric data collection practices.
  • Each company has challenged the claims. In a January 2023 filing, Google moved to strike allegations in the Texas suit based on the conclusory nature of those allegations. In February 2023, Meta moved for partial summary judgment, arguing that the suit impermissibly sought damages for individuals who were not Meta users.
• In November 2022, Google entered into a multi-state settlement with 40 states relating to its location‑tracking practices. The participating attorneys general alleged that Google’s communications to its customers about the storage of location data and the users’ control of privacy settings were misleading. While Google admitted no wrongdoing as part of the settlement, the company paid $391.5 million to resolve the matter and agreed to make certain changes to its user interfaces and to provide an annual report to the attorneys general detailing its compliance with the resolution for the next four years.

4. State Attorneys General Take Opposing Positions on the Federal Consumer Financial Protection Bureau (“CFPB”)

Since its inception in 2011, the CFPB has been active in an array of areas from debt collection to consumer finance practices. The CFPB also has been a lightning rod for controversy and repeatedly has been the subject of litigation challenging the scope of its regulatory authority. The recent Fifth Circuit decision in Community Financial Services Association of America Ltd. v. CFPB (the “Decision”) addressed the constitutionality of the CFPB’s funding mechanism. The court concluded that the CFPB’s funding mechanism constituted an unconstitutional violation of the Appropriations Clause, and that this unconstitutional structure was a sufficient basis to invalidate the payday lending rule challenged by the plaintiff in the underlying suit. The reverberations of the Decision have been far reaching. For financial institutions regulated by the CFPB, the Decision creates a roadmap for additional litigation challenging other CFBP rules and regulations. More broadly, the challenge to the CFPB’s authority creates a measure of regulatory uncertainty in the highly regulated financial sector.

Seeking to address this uncertainty, two sets of Attorneys General have urged the U.S. Supreme Court to grant certiorari and review the Decision, with each group urging the high court to reach a different outcome.

Twenty-two Attorneys General[2] filed an amicus brief urging the Supreme Court to find that the CFPB’s funding mechanism is constitutional. They further asked that the Court to reverse the Decision’s vacatur of an “an otherwise lawfully promulgated regulation,” noting that any question regarding the CFPB’s funding stream was an insufficient basis to challenge the enforcement and regulatory authority. Sixteen distinct state Attorneys General[3] simultaneously filed an amicus brief on the same day, urging the Supreme Court to grant the petition for certiorari and affirm the Decision and focusing on the potential conflict between the Decisions and a prior ruling from the Court of Appeals in the District of Columbia. These 16 Attorneys General argued that the circuit split on the issue “complicates state efforts to regulate financial markets and protect consumers and businesses alike” and has left states operating under conflicting guidance while “determin[ing] how to engage with an agency whose constitutionality is a matter of open dispute.” On Monday, February 27, 2023, the Supreme Court granted certiorari but declined to fast-track the proceeding. The case likely will be argued in the fall with a decision to follow sometime in 2024.

5. State Attorneys General Weigh In on Consumer Protection and the Airline Industry

In recent months, the airline industry has come under increasing scrutiny about its performance and, more specifically, its treatment of consumers. The public outcry and related media attention have spurred state attorneys general to action. On December 16, 2022, a bipartisan coalition of 34 state Attorneys General sent a letter urging the U.S. Department of Transportation (“USDOT”) to strengthen regulations on flight cancellations and customer refunds. Responding to USDOT’s proposed rules relating to additional protection for airline customers and ticket refunds, the Attorneys General urged more aggressive action and set forth additional policy recommendations aimed at providing relief to airline passengers whose flights are canceled and reducing the rate of airline cancellations overall. The Attorneys General further noted that issues surrounding the airlines’ cancellation and refund practices were not new and have been the subject of repeated communications to the USDOT from individual attorneys general and larger bipartisan groups, including the requests for federal legislation to empower state attorneys general “to enforce state and federal consumer protection laws governing the airline industry.”

• The Attorneys General’s letter requested that USDOT take the following actions: (1) institute a new framework that ensures it promptly responds to concerns by state attorneys general; (2) require airlines to improve how they respond to consumer complaints; (3) implement further measures to reduce the rate of flight cancellations; and (4) provide compensation to consumers whose flights have been canceled or significantly delayed. The Attorneys General further recommended consideration of the following issues in future rulemaking:
  • USDOT should require airlines to advertise and sell only flights that they have adequate personnel to fly and support and USDOT should perform regular audits of airlines to ensure compliance and impose fines on airlines that do not comply;
  • USDOT should make clear that it will impose significant fines for cancellations and extended delays that are not weather-related or otherwise unavoidable;
  • USDOT should prohibit airlines from canceling flights while upselling consumers more expensive alternative flights to the same destinations; and
  • USDOT should require that credits and vouchers for future travel that are provided by airlines in the event of cancellation can be used easily without inappropriate limitations.

The advocacy by attorneys general for new consumer protections and additional regulation is significant to industry participants for multiple reasons. The regulations proposed by the state Attorneys General in their letter would create significant new compliance costs for industry participants, both by creating new compensation rights for consumers and new reporting requirements to the attorneys general. Moreover, airline consumer protection is traditionally the province of the federal government through the Department of Transportation and the push from these attorneys general may expand the limited authority of state attorneys general in holding airlines accountable towards consumers. Further, even if state attorneys general are unsuccessful in their push to broaden their own enforcement power in regulating the airline industry, they have considerable “megaphones” at their disposal, which can create public and political pressure for the USDOT to further strengthen its proposed regulations (and for industry participants not to oppose those regulations).

[1] The other Attorneys General plaintiffs in the suit are Alabama, Alaska, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, South Carolina, Tennessee, Texas, Utah, Virginia, Wyoming, and West Virginia.

[2] Attorneys General in New York, California, Colorado, Connecticut, Delaware, the District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, North Carolina, Oregon, Pennsylvania, Rhode Island, Washington, and Wisconsin signed the brief in support of the CFPB.

[3] Attorneys General in Alabama, Arkansas, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, and West Virginia signed the brief urging the Supreme Court to affirm the Fifth Circuit’s holding.

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