United States: Dodd Frank Update: CFPB Treatment Of Privileged Information

In response to industry concerns about the treatment of confidential information to be provided to the US Bureau of Consumer Financial Protection (the "CFPB"), the CFPB issued CFPB Bulletin 12-01 (January 4, 2012) regarding The Bureau's Supervision Authority and Treatment of Confidential Supervisory Information ("Bulletin 12-01") to provide guidance regarding its collection of information through the supervisory process and the confidentiality protections that the process provides to CFPB-supervised institutions.

WITHHOLDING INFORMATION TO PROTECT THE ATTORNEY-CLIENT PRIVILEGE

In Bulletin 12-01, the CFPB also warned "supervised institutions" against selectively withholding documents from the CFPB as a means to protect the attorney client-privilege. The CFPB asserted that providing privileged information to the CFPB would not waive the privilege, and warned that failure to provide such documents as a means to protect the privilege would lead to an enforcement action:

In support of its position, the CFPB cites a Federal district court in Hawaii² and a 1991 OCC interpretive letter for the proposition that an involuntary disclosure of privileged information pursuant to examination authority does not waive the attorney-client privilege. In addition, the CFPB cites 12 U.S.C. 5581³ arguing that Congress intended the CFPB's authority to be the same as the other prudential supervisors such as the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Federal Deposit Insurance Corporation (the "FDIC") and the Office of the Comptroller of the Currency (the "OCC"). The CFPB essentially asserts that it has the same authority that the Federal Reserve, the FDIC and the OCC have under the Federal Deposit Insurance Act, 12 U.S.C. 1828(x), which provides that:

The submission by any person of any information to 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 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 agency, supervisor, or authority." Id. (Emphasis added).

While the CFPB's attempts to provide a self-declared regulatory safe harbor are helpful to CFPB-supervised institutions and may reduce the risk of losing the attorney-client privilege, those attempts are not a substitute for amending the Federal Deposit Insurance Act to expressly include the CFPB as a Federal banking agency, which would provide certainty.

CONCERNS RAISED BY BULLETIN 12-01

The CFPB's Position Does Not Appear to Be Grounded in Statutory Language

An initial concern with the CFPB's position is that the CFPB's position does not appear to be grounded in statutory language because the Federal Deposit Insurance Act (the "FDIA") does not include the CFPB in the definition of appropriate Federal banking agency. For example, 12 U.S.C. 1813(q) defines "appropriate Federal banking agency'' to expressly include the OCC, the Federal Reserve, the FDIC, and the Director of the Office of Thrift Supervision, but does not include the CFPB. Similarly, there is also at least an issue regarding whether the CFPB will disclose privileged information pursuant to a Freedom of Information Act⁴ request. This issue arises in the context of information provided to the CFPB outside of the examination context. While Federal banking agencies such as the Federal Reserve, the FDIC and the OCC have long standing regulations that limit access to confidential information, including in the face of a subpoena, it is not clear that the CFPB will follow the same practices of those banking agencies.

The CFPB's Position Does Not Appear to Be Grounded in Banking Case Law

A second concern is that the CFPB's position does not appear to be grounded in banking cases. There is a body of banking case law supporting the refusal of the OCC and other Federal banking agencies to permit a bank to disclose examination information, including when a court requires the disclosure. By way of illustration, in a 1997 interpretive letter,⁵ the OCC prohibited First National Bank of Florida from disclosing examination reports in camera asserting that to do so would violate Federal law,⁶ and be inconsistent with Federal appellate courts.⁷ The OCC reached the same conclusion in a 2003 interpretive letter⁸ when it asserted that examination reports are afforded a bank examination privilege that frees them from disclosure to third parties without the consent of the OCC. In the same case, the OCC argued that third parties must exhaust their administrative remedies with the OCC before they may seek relief in court for the disclosure of documents subject to the bank examination privilege. The OCC also cited two other cases.⁹

Bulletin 12-01 Missed an Opportunity to Safeguard the Privilege

A third concern is that Bulletin 12-01 missed an opportunity to safeguard the attorney-client privilege. When financial institutions raised the concern about the potential to lose the attorney- client privilege, the concern was raised in the context of maintaining their litigation position or at least not weakening their litigation position. Bulletin 12-01's warning about improperly withholding information from the CFPB and a possible enforcement action is likely to be understood by financial institutions as reflecting the CFPB's lack of understanding about the dilemma Bulletin 12-01 causes. The CFPB missed an opportunity to show balance and promote cooperation by focusing on the safeguards the CFPB will provide. This could have been achieved by explaining in more detail the instructions the CFPB will provide to its examiners to assist financial institutions in safeguarding the privilege. For instance, the OCC indicates to its examiners:

Equally importantly, the OCC also instructs examiners to "take certain precautions to safeguard these privileges."¹¹ Those precautions include, when possible, obtaining "needed information from sources that are not privileged," "limiting the form and scope of a request for privileged information," and "exchanging written communications with the bank setting forth the precise identity of the materials being provided, confirming the OCC's and bank's expectation that the privileged materials are being provided pursuant to the agency's examination authority, and confirming that the confidentiality of the materials will be maintained to the extent required or permitted by law."¹²

The CFPB Could Share Privileged Information with Attorneys General

A fourth concern is the extent to which the CFPB will share privileged information with state attorneys general,¹³ and the impact such sharing would have on the privilege. A primary argument made by the CFPB in Bulletin 12-01 is that it needs the information to carry out its supervisory authority and that it will use the information for those purposes. The CFPB also asserts that the information provided to the CFPB is not voluntary and the involuntary nature of the disclosure protects the privilege. Even if the CFPB's assertion were true, state attorneys general are not banking agencies, do not need the information to carry out any supervisory authority, and a disclosure by the CFPB to state attorneys general might be a voluntary disclosure, which could cause a waiver of the privilege.

Where the CFPB Seems to See Certainty, Many Courts Do Not

A fifth concern is that while the CFPB is certain that a waiver of the privilege will not occur, courts have taken both sides of the issue. This concern is rooted in the case law addressing the question of whether voluntary disclosure of privileged information to a government agency will waive the privilege in other litigation and what is "voluntary". Notwithstanding the CFPB's intention that there be no waiver in other proceedings, that question will have to be resolved by a court in the context of a subsequent dispute, and any given court may or may not follow the CFPB's guidance. In other contexts, courts have reached inconsistent results in their analysis of whether disclosure to a federal agency may waive the privilege as to the same information in a subsequent civil case. Indeed, a majority of courts that have addressed that issue have concluded that "voluntary disclosure of privileged materials to the government waives the privilege."¹⁴ Courts of Appeal for the First, Third, Fourth, Sixth, and D.C. Circuits tend to reject privilege claims following such disclosures.¹⁵

The leading case upholding the assertion of privilege following disclosure to the government is Diversified Industries, Inc. v. Meredith.¹⁶ In Diversified, the company had disclosed to the Securities and Exchange Commission, in response to an administrative subpoena, the report of outside counsel to the company's independent audit committee regarding certain alleged foreign corrupt practices. Later, the company asserted the privilege when the same report was sought by litigants in a civil suit. The Eighth Circuit upheld the privilege claim:

Id. at 611.

Several district courts have followed Diversified to find that voluntary disclosures to a government agency, most often the SEC, does not waive the attorney-client privilege.¹⁷ A third approach, which one court has called a "compromise" between the majority rule and the Diversified decision, will find a limited waiver only where the discloser has secured a confidentiality agreement with the government. The leading case in this camp is Teachers Insurance & Annuity Assoc. v. Shamrock Broadcasting Co.,¹⁸ which held that "disclosure to the SEC should be deemed to be a complete waiver of the attorney-client privilege unless the right to assert the privilege in subsequent proceedings is specifically reserved at the time the disclosure is made."

Later, in In re Steinhardt Partners, L.P.,¹⁹ while the Second Circuit noted that "selective assertion of privilege should not be merely another brush on an attorney's palette, utilized and manipulated to gain tactical or strategic advantage," the court "decline[d] to adopt a per se rule that all voluntary disclosure to the government" waives privilege. Since then, the Teachers Insurance rationale has been followed by some courts.²⁰

SNR DENTON OBSERVATIONS

Based upon Federal statutory law and case law, and the absence of an examination privilege granted to the CFPB by the FDIA, financial institutions must take proactive measures to protect the privilege.

First, at a minimum, CFPB-supervised financial institutions must establish measures to protect the disclosure of confidential information. Those measures should include requiring the CFPB to provide a written directive ordering the disclosure of the privileged information. The written directive must, among other things, recite that the CFPB was unable to obtain the information from sources that are not privileged, that the information is requested as a part of the examination process and that the CFPB will not further disclose the information to third parties without the consent of the financial institution or a court order compelling the CFPB to do so.

Second, Financial institutions should insist that the CFPB limit the form and scope of a request for privileged information and exchange written communications with the financial institution setting forth the precise identity of the materials being provided, confirming the CFPB's and the financial institution's expectation that the privileged materials are being provided pursuant to the CFPB's examination authority and confirming that the confidentiality of the materials will be maintained to the extent required or permitted by law.

Third, the state attorneys general are not banking agencies for purposes of Federal law. Thus, CFPB-supervised financial institutions also should seek a commitment from the CFPB that it will not share with the state attorneys general any privileged information provided by a financial institution to the CFPB in the absence of a court order requiring the CFPB to do so.

Fourth, the CFPB should instruct the financial institution to promptly notify the CFPB should a disclosure request be made so that the CFPB may intervene to prevent the disclosure.

Fifth, Bulletin 12-01, if unchanged, could lead to a difficult situation for both CFPB-supervised institutions and the CFPB itself. On the one hand, CFPB-supervised institutions want to fully cooperate with the CFPB in order to establish a trusting relationship that is mutually beneficial. Without a mutually beneficial trusting relationship, the examination process will not succeed because examiners cannot possibly check every file and every transaction and CFPB-supervised institutions cannot possibly eliminate all risks or build a cost prohibitive infrastructure that makes every product and service cost prohibitive. On the other hand, in many cases, the loss of the attorney-client privilege could provide a significant advantage to plaintiffs in litigation against CFPB-supervised institutions. In some of these cases, especially in class action cases, the likely cost to a CFPB-supervised institution, and, if the CFPB-supervised institution is a part of a banking group, the likely cost to the banking group itself, could put the entire banking group at risk. The clearest example of this situation could be seen by a review of the litigation spawned by subprime mortgage lending and the foreclosure crisis.

Sixth, the CFPB could have avoided the dilemma and created goodwill within CFPB-supervised institutions by adopting the existing practices and positions of the Federal banking agencies such as the Federal Reserve, the OCC and the FDIC. If the CFPB had done so, then the CFPB would have sent a clear signal that its supervisory practices would provide CFPB-supervised institutions at least as much protection as the Federal banking agencies provide with respect to the attorney-client privilege and other privileges.

Seventh, like many of the CFPB's actions and communications, Bulletin 12-01 is likely to draw a response from policy makers who feel the CFPB must be reformed and who question the legitimacy of the "recess" appointment of Ohio Attorney General Attorney General Richard Cordray. We anticipate significant congressional oversight of the CFPB throughout the year. Given November's congressional and presidential elections, CFPB actions will also likely be framed in a political context throughout the year.

Eighth, the CFPB's actions may force the Federal Banking agencies to review their positions on the protection of confidential information because the CFPB's actions could, in some cases, increase litigation risk and the cost of litigating not only for CFPB-supervised institutions, but also for other financial institutions within the banking group. The increase in litigation risk and the cost of litigating could have safety and soundness implications that the Federal Banking agencies may have to address. Certainly, counsel for the financial institutions will advise their clients that Bulletin 12-01 is not a safe harbor. Under the circumstances, given the possibility that a court could conclude that the CFPB does not have the protection provided by the FDIA, it is possible that a financial institution could be put in the position where the best way to protect the interest of the financial institution is to withhold the information and challenge the CFPB in court, if necessary.

Footnotes

1 Financial institutions and their counsel have traditionally sought protection from disclosure by asserting one or more of four privileges: (1) Attorney-client privilege, which protects communications between a client and its attorney, made without third parties present, for the purpose of securing an opinion on the law or legal services. This privilege also protects the attorney's oral or written legal advice to the client and focuses on communications between attorneys and their clients. The privilege may be waived if the client discloses the content of the communication to any third-party; (2) Work-product privilege, which protects documents prepared in anticipation of litigation by an attorney or person hired by the attorney or client to assist in rendering legal services. Disclosure to any adversarial party generally waives the privilege as to all adversarial parties; (3) Self-assessment privilege, which is found under the laws of some states, where disclosure of self-assessments is protected from disclosure to third parties. See Banks v. Lockheed-Georgia Corp., 53 F.R.D. 283 (N.D. Ga 1971); Troupin v. Metropolitan Life Insurance Co., 169 F.R.D. 546 (S.D.N.Y. 1996). Federal courts, however, generally do not recognize any privilege for self-assessments that are conducted by an institution without attorney participation. The Equal Credit Opportunity Act, however, provides a limited privilege for any lender that conducts an adequate self-test, identifies discriminatory practices, and takes appropriate action, 12 C.F.R. 202.12(b)(6) and 12 C.F.R. 202.15; (4) Accountant-client privilege, which is found under the laws of some states such as Florida, Pennsylvania, Colorado and Missouri, protects an accountant's work from disclosure to third parties. Federal courts, however, generally do not recognize any privilege for an accountant's work that is conducted directly for a financial institution.

2 Boston Auction Co., Ltd. v. Western Farm Credit Bank, 925 F. Supp. 1478, 1482 (D. Hawaii 1996).

3 12 U.S.C. 5581 relates to the transfer of certain consumer financial protection functions from the Federal banking agencies and others to the CFPB.

4 Examination reports are exempt from disclosure under the Freedom of Information Act. 5 U.S.C. 552(b) (8). Banking agencies, however, come into possession of confidential information outside of the examination context. For example, banks routinely provide confidential information to examiners to seek guidance from examiners and during communications where banks bring certain matters to the attention of examiners as a means of keeping examiners informed.

5 OCC Interpretive Letter 788 (June 18, 1997).

6 12 C.F.R. 4.32(b).

7 To support its position, the OCC cited In re Subpoena Served Upon the Comptroller of the Currency, 967 F.2d 630, 634 (D.C. Cir. 1992) and First Eastern Corp. v. Mainwaring, 21 F.3d 465, 468 (D.C. Cir. 1994).

8 OCC Interpretive Letter 972 (August 12, 2003).

9 Raffa v. Wachovia Corp., 242 F.Supp.2d 1223, 1225 (M.D. Fla. 2002) and Raffa v. Wachovia Corp., No. 8:02-CV-1443-T-27EAJ, 2003 WL 21517778 (M.D. Fla. May 15, 2003).

10 Comptroller's Handbook: Litigation and Other Legal Matters (February 2000). Id. at page 7, under Evaluating Other Legal Matters.

11 Id. at 8

12 Id.

13 On April 11, 2011, the CFPB and the Presidential Initiative Working Group of the National Association of Attorneys General announced agreement on a Joint Statement of Principles to protect consumers of financial products and services. Among other things, in the Joint Statement of Principles the parties agree to share information, data, and analysis about conduct and practices in the markets for consumer financial products or services to inform enforcement policies and priorities; engage in regular consultation to identify mutual enforcement priorities that will ensure effective and consistent enforcement of the laws that protect consumers of financial products or services; and support each other, to the fullest extent permitted by law as warranted by the circumstances, in the enforcement of the laws that protect consumers of financial products or services, including by joint or coordinated investigations of wrongdoing and coordinated enforcement actions.

14 Neal v. Honeywell, Inc., No. 93C 1143, 1995 WL 591461, *7 (N.D. Ill. 1995).

15 See, e.g., United States v. Billmyer, 57 F.3d 31, 37 (1st Cir. 1995) (affirmative use of privileged information by voluntary disclosure to the government waived privilege); Westinghouse Electric Corp. v. Republic of the Philippines, 951 F.2d 1414 (3d Cir. 1991) (voluntary disclosures to investigating governmental agencies waived protections of both attorney-client privilege and attorney work-product doctrine); In re Martin Marietta Corp., 856 F.2d 619 (4th Cir. 1988) (company's disclosure of privileged matters to government in effort to settle criminal investigation constituted subject matter waiver as to actual disclosures and underlying data); In re Columbia/HCA Healthcare Corporation Billing Practices Litigation, 293 F.2d 289 (6th Cir. 2002) ("we reject the concept of selective waiver, in any of its various forms"); Permian Corp. v. United States, 665 F.2d 1214 (D.C. Cir. 1981) (disclosure of documents to SEC constituted waiver of privileges as to other federal agencies).

16 572 F.2d 596 (8th Cir. 1978).

17 E.g., In re Grand Jury Subpoena, 478 F. Supp. 368, 373 (D. Wis. 1979) ("cooperation [with the SEC] should be encouraged, and therefore I will not treat the release of the Quarles & Brady report to the Securities and Exchange Commission, Internal Revenue Service, or the New York grand jury as a waiver of the corporation's attorney-client privilege with regard to the notes"); Byrnes v. IDS Realty Trust, 85 F.R.D. 679, 689 (S.D.N.Y. 1980) ("voluntary submissions to agencies in separate, private proceedings should be a waiver only as to that proceeding").

18 521 F. Supp. 638 (S.D.N.Y. 1981).

19 9 F.3d 230 (2d Cir. 1993).

20 See Fox v. California Sierra Financial Services, 120 F.R.D. 520, 527 (N.D. Call. 1988) ("where, as here, information has been voluntarily and selectively disclosed to the SEC without attempts to protect the privileged nature of such information, fairness requires a finding that the attorney-client privilege has been waived as to the disclosed information and all information on the same subject"); In re M & L Business Machine Co., 161 B.R. 689 (D. Col. 1993) (finding no waiver of privilege, despite disclosure to U.S. Attorney investigating bankruptcy of entity, based on steps taken to ensure confidentiality and the fact that disclosure was not made by bank "for the purpose of obtaining some benefit for itself").

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