WASHINGTON - The House Financial Services Committee is scheduled to vote Wednesday on legislation that would better protect communications between regulators and financial institutions.
"The confidence that exists between bank examiners and depository institutions is important to making sure examiners get a true understanding and true picture of what is going on at an institution to be able to evaluate it," said Kevin Petrasic, director of congressional affairs at the Office of Thrift Supervision, which, like bank regulators, supports the measure.
Though courts have traditionally guarded the relationship between regulators and financial institutions, there is no national standard for confidentiality. As a result, both regulators and bankers say, they are concerned that an increasingly litigious society will erode these protections.
"It used to be that this material was considered pretty sacrosanct, but that is being worn away with time," said Lisa McGreevy, director of government affairs at the Financial Services Roundtable. "More and more, material that regulators gathered in exams is being requested by courts."
Regulators and industry officials could not give examples of the release of sensitive communications. Their concern, they said, is that only a handful of courts have addressed the matter.
A uniform national rule "would codify and expand the privilege that some courts have already recognized," said Jeff Lischer, a legislative counsel at the OTS.
For example, in 1993 the Court of Appeals for the District of Columbia Circuit recognized OTS documents as privileged communications in a case involving Society for Savings Bancorp Inc. of Boston.
But as courts began to make more frequent requests for material that supervisors obtained during exams in the mid-1990s, regulators began pressuring Congress to codify the protection of such material. The House adopted a formal protection in 1998 as part of an end-of-session regulatory relief package, but it was too late to be considered by the Senate.
This year lobbyists for large financial services companies, including the Roundtable's members, urged the Financial Services committee to revive the 1998 provisions and expand them to include not just federal bank examiners but also the Securities and Exchange Commission and state banking, insurance, and securities regulators. The measure has bipartisan backing in the House but so far has no sponsor in the Senate.
The provision is part of a larger underlying bill, the Financial Services Antifraud Network Act, which would establish a computer network for federal and state financial regulators to share information on industry professionals who have been convicted of fraud or have been the subjects of enforcement actions by regulators.
Under the bill, the regulators and federal and state law enforcement agencies would have six months to craft a data-sharing policy and two years to carry it out.
"The purpose of this legislation is to protect consumers by facilitating communication between financial regulators about bad actors.
The supervisory privilege provision is consistent with that purpose," said the bill's sponsor, Rep. Mike Rogers, R-Mich.
"The provision protects information prepared or collected by financial regulators as part of their responsibilities from unauthorized disclosure. This protection assists regulators, and by extension consumers, as it seeks to foster an environment in which regulated entities will fully cooperate in providing information."
