Federal Reserve Board officials are becoming alarmed because a small but growing number of institutions is refusing to turn over documents to examiners.
The banks are contending that the documents are covered by attorney- client privilege. Under current law, once bank documents prepared by lawyers are shown to outsiders, including examiners, the privilege is lost.
For example, a bank hires a lawyer to investigate the sales practices of its broker-dealer subsidiary. If that lawyer's report is given to examiners, it would be accessible to anyone suing the subsidiary.
Stephen C. Schemering, the Fed's deputy director for banking supervision and regulation, explained the situation in a letter to examiners.
"Should a banker refuse to provide a document needed by an examiner, the board could issue subpoenas," Mr. Schemering wrote. "An argument can be made that the system's statutory authority to conduct on-site examinations overrides any legal privilege the financial institution has to not disclose the information."
Mr. Schemering said examiners must get in touch with lawyers at the nearest Federal Reserve Bank any time a banker refuses to make a document available. The lawyers will then notify Herbert A. Biern, the deputy associate director for banking supervision and regulation at the Federal Reserve Board, who will resolve the dispute.
The letter, dated June 6, was posted on the Fed's web site June 16.
James D. McLaughlin, director of regulatory and trust affairs at the American Bankers Association, said there was always tension between examiners and bankers over attorney-client privilege.
"It is always unfortunate when it gets to the level where the examiner feels he has got to have the document and the bank feels that giving it would eliminate attorney-client privilege for litigation down the road," he said. "Fortunately, most of the time it can be worked out."
The warning comes at the same time that an American Bar Association committee is pushing for legislation to allow banks to give documents to examiners without hurting their position in pending lawsuits.
The legislation would "basically say if information is given to examiners, then it does not constitute a waiver of attorney-client privilege," said Robert B. Serino, deputy chief counsel at the Office of the Comptroller of the Currency and co-chairman of the bar association committee. The committee is still looking for a lawmaker to sponsor the bill.
The committee also wants to force litigants to seek examination reports directly from a bank's regulatory agency, rather than by subpoenaing the institution. If the agency refused the request, the question would go to the local federal appeals court.
