Recent events involving the potential liability of financial consultants for their work in advising regulated institutions underscore the fact that the boundaries of the attorney-client privilege are under attack. What is needed at this point is certainty about the situations in which privilege applies. If institutions, regulators and advisors are clear on this point, they will all be to conduct themselves accordingly.
Regulators and financial institutions have debated for decades whether the regulator's examination powers trump the attorney-client privilege. Regulators routinely assert that they may demand access to privileged materials and communications between a company and its attorneys, including any financial advisors engaged by their attorneys, under their statutory right to examine the institution's books and records. The courts, however, have not so readily recognized an agency's plenary power to vitiate the attorney-client privilege.
Our system of American jurisprudence is built, in part, on the sanctity of the attorney-client privilege. When a company asks its lawyer if it is in compliance with the law, the advice it receives should be privileged, no matter how helpful it might be to the examination of the institution. If it is not privileged, the company may not ask the question, or may ask it in a different way. That benefits no one, and may even perpetuate more compliance deficiencies. Without such a privilege, the scales of justice are even more tilted in favor of the regulator, which under federal law, is already the examiner, prosecutor, judge and jury in administrative enforcement actions.
There have been challenges to regulatory demands for privileged materials, most notably a case in 1992, Clarke v. American Commerce National Bank. There, the U.S Court of Appeals for the 9th Circuit reviewed the bank's challenge to the Office of the Comptroller of the Currency's request to review the billing records of the institution's outside law firm. The Court concluded that the billing records, which contained information that could reveal litigation strategy, may remain privileged.
Unfortunately, regulators still proceed as if their examination authority is dominant and will demand legal memoranda, communications and emails where they believe they can gain insight into an issue that they are examining. Even in cases where banks are willing to share privileged communications with their regulators, such sharing could have constituted a waiver of the privilege with regard to third-party litigants, who could then also get access to those materials. That issue has been largely resolved — but it has also opened the door to new regulatory demands.
The American Bar Association's Banking Law Committee took up the third party waiver issue and finally proposed an amendment to the Federal Deposit Insurance Act that was enacted into law in 2006. It provides that when institutions share privileged communications or materials with their regulator, which now includes the Consumer Financial Protection Bureau, it does not constitute a waiver of the privilege. Thus, this amendment resolved one of the concerns regarding access to privileged communications.
It did not, however, relieve the pressure on the issue of whether institutions could be required to disclose privileged materials to regulators. In some ways, it reinforced just the opposite. Regulators saw the new law as bolstering their authority to seek privileged materials under their examination authority because institutions would no longer be able to argue that they might lose the privilege as to third parties.
The fact is that the new law was meant to protect against a waiver of the privilege, not create a new affirmative right of regulators to compel the production of privileged materials. Nevertheless, regulators continue to demand privileged materials from banks and/or their attorneys and financial consultants.
In the latter case, an institution's outside attorneys and any financial consultants hired by them are not permitted to disclose privileged communications unless their client — the institution — waives the privilege. Regulators frequently request that institutions do just that so that they can examine the attorney's or consultant's files. Given the choice between waiving the privilege and battling with its regulator, particularly where the battle is over the protection of the interests of a financial institution's lawyer or consultant, financial institutions have significant incentives to waive the privilege.
In short, in such cases, all communications between the institution and its attorneys and their consultants before or during a compliance or enforcement action may theoretically be examined by the regulators either through access to the institution's files or their advisors' files.
Clarity as to the boundaries of the privilege is the critical issue today, given the uncertainties created by regulatory penetration of the privilege. Acting as if there is a privilege, when in fact there may be none, can lead to an institution's unvarnished legal analysis, conclusions and communications being accessible to the very regulators that are instituting an enforcement action against it. Normally, in our system of jurisprudence, parties expect that such communications with their attorney will not be disclosed, so that they can be as frank as possible with them and obtain the very best legal advice and advocacy. If institutions know the ground rules applicable to the privilege in regulatory contexts, they can then fairly determine how to conduct themselves in a situation that may subject regulatory examination.
Beyond the practical issues, there are significant regulatory and legal policies to be concerned about however. When the boundaries of fairness and jurisprudence are obscured for the benefit of the government, it can become easier to deliver retribution than justice. That is a bad business result.
Thomas Vartanian is chairman of the financial institutions practice at the law firm of
Dechert LLP in Washington. He is a former general counsel and
senior trial attorney with two different federal banking agencies and represents financial
institutions, directors officers and financial advisors in enforcement and FDIC receivership actions.