Can Regulators Compel Banks To Disclose Privileged Documents?

by Clifford Weber

The examiners are in your bank conducting a compliance exam. They’ve focused on your overdraft program and your Regulation O reports on insider transactions. Now they’re asking you to produce all of your materials pertaining to these matters, including bank counsel’s legal analyses and opinions. Bank files on both matters contain your attorney’s written legal analyses, including advice that some of the bank’s practices are non-compliant. The bank has not yet corrected these practices, but the failure to correct is explainable-the bank has finite resources and had to prioritize its Dodd-Franck compliance efforts. Still, you’re pretty certain the examiners won’t sympathize.

You remember that communications from bank counsel are confidential and protected by the attorney-client privilege from disclosure to third parties without the client’s consent. What do you do? Will you turnover counsel’s memoranda pointing out that the bank can’t process checks in high-low order to maximize fee income or the advice pointing out that a loan to a director’s affiliate should have been reported? Must you deliver it? Can you invoke the attorney-client privilege to resist disclosure?

Bankers routinely comply with regulators’ demands for counsel’s opinions. They may believe the privilege doesn’t apply to regulators or they may not want to risk the possible consequences of refusing the request. Invoking the attorney-client privilege poses a real dilemma-the privilege may shield a smoking gun from scrutiny, but what’s the cost? Is the benefit of protection worth souring the relationship with the regulators, a rating downgrade, or worse?

Must You Disclose Your Lawyer’s Advice?

The attorney-client privilege is a pillar of our legal system. It serves to safeguard the bond of trust between lawyer and client and promote the candid communication between them vital to effective legal representation. Without the protection of the privilege, disclosure might be compelled, exposing the client to embarrassment, possible civil liability or even criminal prosecution. Those threats could shade the content and reduce the value of a lawyer’s advice and thereby jeopardize the client. Does the regulator’s need for access to the bank’s books and records, in the service of safety and soundness and regulatory compliance, trump the attorney-client privilege? The regulators think it does.

In 1991 guidance, the OCC’s Deputy Chief Counsel, citing the agency’s congressionally mandated mission to thoroughly examine national banks, opined that national banks must comply with the OCC’s requests for privileged materials. In 2012 testimony before the House of Representatives Committee on Financial Services, the Federal Reserve’s General Counsel stated that the Federal Reserve “has complete and unfettered access to an institution’s most sensitive information and processes, including information that would otherwise be privileged and not subject to public disclosure”.  Also in 2012, the Consumer Financial Protection Bureau directly addressed the subject in its rule entitled “Confidential Treatment of Privileged Information”. In this rule, the CFPB stated flatly that “The Bureau continues to adhere to the position that it can compel privileged information pursuant to its supervisory authority.”

This position may reflect regulatory policy, but, as commentators have noted[1] no statute or judicial decision supports it. There is simply no legal basis for the notion that the regulators’ need to know supersedes the attorney client privilege and its protection of client confidences. Regulators may have other persuasive tools-like long memories-but, at this writing, they cannot use the courts to compel disclosure of bank counsel’s memoranda.

What If You Do Disclose To Your Regulator?

Ordinarily, a client’s disclosure of privileged material to third parties waives the attorney-client privilege. Once the privilege is waived, the client cannot regain its protection. So, if you decide to furnish bank counsel’s opinions to your regulator, has the bank waived the privilege and opened the door to compulsory disclosure to plaintiffs in civil litigation and other potentially adverse third parties? Thankfully, the answer is no.

Section 18 of the Federal Deposit Insurance Act provides “The submission by any person of any information to the Bureau of Consumer Financial Protection, any Federal banking agency, State bank supervisor, or foreign banking authority for any purpose in the course of any supervisory or regulatory process of such Bureau, agency, supervisor, or authority shall not be construed as waiving, destroying, or otherwise affecting any privilege such person may claim with respect to such information under Federal or State law as to any person or entity other than such Bureau, agency, supervisor, or authority.”

This “selective waiver” law is peculiar to depository institutions and non-bank financial service providers regulated by the CFPB. It enables banks to share privileged information with regulators without waiving the privilege vis-à-vis third parties, which would be the traditional result, absent the statute. Ironically, as one writer has asserted,[2] this statute may have emboldened regulators to demand protection of otherwise privileged materials because it strips banks of their concern regarding waiver with respect to third parties. Moreover, while the CFPB has announced a policy of “selective disclosure” of confidential materials to other regulators,[3] the extent of the privilege in the event of such disclosure is unclear.

Should You Disclose?

Like other important management decisions, considering whether to waive the attorney-client privilege in response to a regulatory demand involves balancing the risks and benefits of the available choices. In most situations, bankers will probably conclude that the risk of refusing a demand (damage to the regulatory relationship and possible related consequences) is not worth the rewards of maintaining confidentiality (uncensored legal advice), especially because the FDIC Act preserves the privilege as to third parties (except perhaps other regulators). But in some cases, resistance may be the better choice, not to vindicate an abstract legal principle, but because the unimpeded flow of candid legal advice is critically important. Like other tough decisions, such as fighting a meritless fair lending enforcement action, the choice to resist disclosure may best serve the bank in the long run. And at least for now, a regulator seeking to compel disclosure of communications shielded by the attorney client privilege would face an uphill court battle.

 

Clifford Weber is a partner in Hinman, Howard & Kattell, LLP.  His practice focuses on regulatory, corporate, securities, advisory and transactional work for financial institutions.  His clients include commercial banks, thrift institutions and their holding companies, credit unions, mortgage bankers, licensed check cashers and insurance companies.

 

[1]   Bruce A. Green, Professor Fordham University, “The Attorney Client Privilege-Selective Compulsion Waiver and Selective Disclosure: Is Bank Regulation Exceptional?”, Journal of the Professional Lawyer (2013)

[2]   Thomas Vartanian, Esq., “Do Financial Institutions Have Any Attorney-Client Privilege Left”,  American Banker, 28 August 2015

[3] “[T]he Bureau will not routinely share confidential supervisory information with agencies that are not engaged in supervision. Except where required by law, the Bureau’s policy is to share confidential supervisory information with law enforcement agencies, including State Attorneys General, only in very limited circumstances and upon review of all the relevant facts and considerations.” CFPB Bulletin 12-01, at 5.


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