April 28, 2016 Articles

A Brief Introduction to the Bank Examiner Privilege

What counsel handling banking litigation need to know about this statutory privilege

by Mark M. Haddad

Financial institutions are highly regulated by federal and state agencies. Regulators are intimately involved with a financial institution’s operation, performance, and management. As a result, information obtained by regulators is often sought in litigation. The bank examiner privilege is one method of protecting confidential and sensitive information from discovery and disclosure.  

Generally, the bank examiner privilege protects information and communications between financial institutions (and their agents and employees) and certain regulators. The following regulators may invoke the privilege: the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Consumer Financial Protection Bureau (CFPB), and various state banking agencies. See 12 C.F.R. § 4.36 et seq. (OCC); 12 C.F.R. § 261.20 et seq. (Federal Reserve Board); 12 C.F.R. § 309.1 et seq. (FDIC); 12 C.F.R. § 1070.40 et seq. (CFPB); Mo. Rev. Stat. §§ 361.080, 610.032 (Missouri Division of Finance).  

The bank examiner privilege arises out of the practical need for transparency between certain regulators and financial institutions. Courts recognize that the privilege is necessary to preserve the integrity of the regulatory process and the absolute candor essential to the effective supervision of financial institutions, and find that it is “firmly rooted in practical necessity.” See In re Subpoena Served upon Comptroller of Currency & Sec’y of Bd. of Governors of Fed. Reserve Sys., 967 F.2d 630 (D.C. Cir. 1992); see also Wultz v. Bank of China Ltd., 61 F. Supp. 3d 272 (S.D.N.Y. 2013). Information protected by the bank examiner privilege includes documents, communications between financial institutions and regulators, and other information reflecting the opinions, deliberations, or recommendations of regulatory agencies.  

As the D.C. Circuit has explained, bank safety and soundness supervision is an iterative process of comment by the regulators and response by the bank. The success of the supervision therefore depends on the quality of communication between the financial institution and its regulators. This relationship is both extensive and informal. It is extensive in that regulators concern themselves with all manner of a bank’s affairs—not only the classification of assets and the review of financial transactions but also the adequacy of security systems and of internal reporting requirements. Even the quality of managerial personnel is of concern to the regulators. See In re Subpoena, 967 F.2d at 634.  

The Information Protected by the Privilege Is Broad

While the bank examiner privilege originated in the common law, it has since been codified in various regulations, which has created broad definitions of what is covered by the privilege. See, e.g.,12 C.F.R. § 4.36 et seq. (OCC); 12 C.F.R. § 261.20 et seq. (Federal Reserve Board); 12 C.F.R. § 309.1 et seq. (FDIC); 12 C.F.R. § 1070.40 et seq. (CFPB); Mo. Rev. Stat. §§ 361.080, 610.032 (Missouri Division of Finance). For example, the Federal Reserve Board broadly defines “confidential supervisory information,” which generally is information subject to the bank examiner privilege, as “reports of examination, inspection and visitation, confidential operating and condition reports, and any information derived from, related to, or contained in such reports.” 12 C.F.R. § 261.2. It also includes all information gathered in the course of any investigation and any documents prepared by or for the use of a banking regulator. Id. Likewise, the CFPB includes in its definition of “confidential supervisory information” all “reports of examination, inspection and visitation, non-public operating, condition, and compliance reports, and any information contained in, derived from, or related to such reports.” 12 C.F.R. § 1070.2; see also 12 C.F.R. § 4.32 (OCC); 12 C.F.R. § 309.2 (FDIC).  

The bank examiner privilege is not absolute, but because the definition of confidential supervisory information contained within the regulations is very broad, counsel often take an expansive approach in identifying documents that could be subject to the bank examiner privilege. By way of example, the regulations clearly cover the actual examination report and communications between the financial institution and regulators. See, e.g., 12 C.F.R. § 261.2 (“reports of examination”); 12 C.F.R. § 1070.2 (“[a]ny communications between the CFPB and a supervised financial institution”). However, although not specifically referred to in the regulations,some litigants may assert that internal communications of bank officers discussing an ongoing examination and references to the findings of a bank examination in a financial institution’s minutes are covered by the privilege. See, e.g., In re Countrywide Fin. Corp. Sec. Litig., 2009 WL 5125089 (C.D. Cal. Dec. 28, 2009) (“The Court recognizes, however, that there is a question as to whether Countrywide’s internal emails discussing the examination reports are privileged.”). 

Case law interpreting the bank examiner privilege demonstrates that the facts and circumstances of a particular case ultimately govern the potential scope of application of the privilege. See, e.g., Rockwood Bank v. Gaia, 170 F.3d 833 (8th Cir. 1999); In re Bankers Tr. Co., 61 F.3d 465, 471 (6th Cir. 1995) (request for “any and all documents relating to any and all regulatory reports of examination and inspection” may be subject to the privilege); In re Subpoena, 967 F.2d 630(court erred in ordering production of privileged bank examination information because the bank regulatory agencies had made it available to the bank); Wultz,61 F. Supp. 3d 272; Shirk v. Fifth Third Bancorp, 2008 WL 2661955 (S.D. Ohio July 2, 2008) (two five-inch-thick binders consisting of approximately 1,528 pages protected by privilege); Merchs. Bank v. Vescio, 205 B.R. 37 (Bankr. D. Vt. 1997) (holding all documentation relating to investigation of bank, no matter who generated it, to be protected by privilege). Each time it is asserted, the court must undertake a “fresh balancing of the competing interests,” which will frequently require it to examine the disputed documents in camera. See In re Subpoena, 967 F.2d at 634. It is intended to protect “opinions and deliberative processes” as opposed to “purely factual material.” See Merchs. Bank, 205 B.R. at 42 (“purely factual material falls outside the Privilege, whereas opinions and deliberative processes do not”); but see Shirk, 2008 WL 2661955 (“factual and deliberative information is largely inextricably intertwined . . . and the mixture of facts and deliberative indications is not amenable to being segregated). In weighing the competing interests, courts have generally considered, at a minimum, the following five factors: 

1. the relevance of the evidence sought to be protected;

2. the availability of other evidence;

3. the “seriousness” of the litigation and the issues involved;

4. the role of the government in the litigation; and

5. the possibility of future timidity by government employees who will be forced to recognize that their secrets are violable.

See In re Bankers Tr. Co., 61 F.3d at 471; Schreiber v. Soc’y for Sav. Bancorp, Inc., 11 F.3d 217, 220 (D.C. Cir. 1993); In re Subpoena, 967 F.2d at 634; In re Franklin Nat’l Bank Sec. Litig., 478 F. Supp. 577, 583 (E.D.N.Y. 1979). 

Disclosure of Confidential Supervisory Information

Each regulator has its own procedure for requesting disclosure of confidential supervisory information, as well as its own procedures that a financial institution should follow when presented with a request for the same. See, e.g., 12 C.F.R. § 261.22 (Federal Reserve Board); 12 C.F.R. § 4.36 (OCC); 12 C.F.R. § 1070.47 (CFPB); 12 C.F.R. § 309.6 (FDIC); Mo. Rev. Stat. § 361.070 (Missouri Division of Finance). Financial institutions and their counsel should follow these procedures to avoid unnecessary disclosure of protected information. Moreover, there may be criminal penalties for unauthorized disclosure. See, e.g., Mo. Rev. Stat. § 361.080. For example, the Federal Reserve Board will only allow disclosure with its explicit permission. See 12 C.F.R. § 261.20; see also Schreiber, 11 F.3d 217 (examination reports and related correspondence are records of the agency and may be obtained from a bank only with the agency’s permission). Except in very limited circumstances, no financial institution, supervisory agency, person, or other party to whom confidential supervisory information is made available should disclose the information without the prior written permission of the Federal Reserve Board’s general counsel. See 12 C.F.R. § 261.20. 

A litigant seeking information held by the Federal Reserve Board may request access to confidential supervisory information for use in litigation by filing a written request directly with the Federal Reserve Board’s general counsel identifying the confidential supervisory information sought, the relationship of the information to the issues in the litigation, the litigant’s need for the information, and the reason it cannot be obtained from another source. See 12 C.F.R. § 261.22(b). The litigant must also commit to obtain a protective order preserving the confidentiality of the information. With this information, the Federal Reserve Board’s general counsel can decide whether the litigant “has shown a substantial need for confidential supervisory information that outweighs the need for confidentiality.” 12 C.F.R. § 261.22(c). Absent such a request and absent permission from the board’s general counsel, financial institutions are prohibited from producing confidential supervisory information. See 12 C.F.R. §§ 261.20(g), 261.23(b). For specific requirements for requesting disclosure from the other federal agencies discussed in this article,see 12 C.F.R. § 4.36 (OCC), 12 C.F.R. § 1070.47 (CFPB), and 12 C.F.R. § 309.6 (FDIC). 

Confidential supervisory information is commonly requested in litigation. These requests are typically directed to the financial institution and not to the regulator. Although the privilege belongs solely to the regulator, the regulator must be allowed the opportunity to assert the privilege and the opportunity to defend the assertion. See In re Bankers Tr. Co., 61 F.3d 465. Accordingly, if presented with a request to produce confidential supervisory information, a financial institution must act quickly to notify the regulator of the request and consider withholding such information until the regulator has had an opportunity to respond. See, e.g.,12 C.F.R. § 261.23. In most instances, the regulator, upon notice that its information has been requested, will intervene in the action to protect the information. It is therefore incumbent on the financial institution (or counsel) to recognize the information being sought as potentially covered by the privilege and immediately take action to protect it from disclosure. 

Conclusion

The bank examiner privilege is one method of protecting confidential and sensitive information. Case law interpreting the privilege demonstrates that the facts and circumstances of a particular case ultimately govern the potential scope of application of the privilege. However, because the information covered by this privilege is broad, counsel should consider taking an equally broad approach in identifying information that could be subject to the privilege. In addition, financial institutions (and their counsel) should keep their regulators informed when requests for examination-related information are made in order to give the regulators an early opportunity to object and assert the privilege. 

Keywords: litigation, commercial, business, banking, lender liability, privilege, bank examiner privilege  

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