Audits and Bank Regulatory Exams Preserving Confidential Information - - PowerPoint PPT Presentation

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Attorney-Client Privilege for Financial Institutions in Internal Investigations, Audits and Bank Regulatory Exams

Preserving Confidential Information and Work Product, Navigating the Bank Examination Privilege and Section 1828 Selective Waiver

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, MARCH 16, 2016

Paul Bond, Partner, Reed Smith, Princeton, N.J. Travis Nelson, Counsel, Reed Smith, Princeton, N.J.

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Attorney-Client Privilege for Financial Institutions in Internal Investigations, Audits, and Bank Regulatory Examinations

Travis P. Nelson

New York, NY / Princeton, NJ (212) 549-0236 / (609) 524-2038 tnelson@reedsmith.com

Paul J. Bond

Princeton, NJ (609) 520-6393 pbond@reedsmith.com

Key Issues

• Causes of internal investigations, audits, and examinations.
• Attorney-client privilege and work product protection.
• Conducting internal investigations.
• Whether to provide a written report to the regulators.
• Utilization of outside consultants in an internal investigation.
• Preparing for an examination.
• Dealing with regulatory examinations and investigations.
• What to do and not to do when the examiners come calling!

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What causes the need for an internal investigation, audit, or examination problem?

• Consumer complaints.
• Examiner inquiry.
• Interagency referrals.
• Private litigation.
• Examples of examination issues giving rise to investigations:
• Customer Ponzi scheme.
• BSA/AML; safety and soundness; internal controls.
• Debit/credit add-on products.
• Third-party relationships management and monitoring.
• Robo signing/horizontal foreclosure review.
• Third-party relationships management and monitoring.

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Discussion

• Overview of the law regarding the attorney-client privilege and work product

doctrine, particularly in a corporate context.

• Practical considerations for in-house counsel.
• Q & A
• Keep in mind:
• basic purpose of the privilege: to encourage full and candid

communication between client and counsel.

• basic purpose of the work product doctrine: attorney’s need for privacy

in his or her work and the benefits that privacy brings to an adversary system.

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• The Rule: Applies to communications made in confidence between a

client and his or her attorney for the purpose of obtaining legal advice.

• Assume nothing is privileged, then ask:
• Is it a communication that fits the definition?
• Does an exception apply?
• ERISA/fiduciary exception
• Crime/fraud
• Have we done everything we can to prevent a waiver?

The Attorney-Client Privilege

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Work Product Protection

Three-part test for fact and opinion

work product (FRCP 26(b)(3)):

• The materials or communications are of a nature

that qualifies for protection;

• They were prepared or obtained in anticipation
• f litigation; and
• They were prepared by or for the party asserting

the protection, or that party’s attorney or other qualifying representative.

Rule 26 - protection includes work of agents.

Work Product 10

Work Product Protection (continued)

Key determination: anticipation of litigation,

• r “an identifiable specific claim or impending

litigation at the time the materials were prepared”

• Some courts require that a specific claim be

asserted before the privilege applies. Leonen v. Johns-Manville Corp., 135 F.R.D. 94 (D.N.J. 1990).

• Others hold that litigation need not be imminent,

provided there is “more than a remote prospect

• f future litigation.” United States v. El Paso

Co., 682 F.2d 530 (5th Cir. 1982).

Work Product 11

Work Product Protection (continued)

Key determination: was the material produced because of the

prospect of litigation or for another purpose in the ordinary course of business?

• Majority Rule – “Because of” test developed in Second Circuit extends work product

protection with respect to mixed purpose documents (business/legal)

• Extends to “documents containing analysis of expected litigation” whose “primary,

ultimate, or exclusive purpose is to assist in making the business decision.” United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998).

• As long as the document was not “prepared in the ordinary course of business” and

would not “have been created in essentially similar form irrespective of the litigation,” the “fact that the document’s purpose is business related appears irrelevant to the question of whether it should be protected.” Id.

• Minority Rule – “Primary motivation” test: If the primary motivation for creating the

materials is any purpose other than to assist in preparation for litigation, the work product privilege is inapplicable. See United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982).

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Challenge: Legal Advice v. Business Advice (or anything else)

• Commingled communications.
• Wearing two hats: a dilemma for in-house attorneys.
• Common 3-part analysis:
• For what purpose was the lawyer contacted?
• Could a non-lawyer perform this function?
• Did the client or lawyer acknowledge the nature of the in-house counsel’s

role?

• Making the in camera review easy.

13

Recommendation

• Segregate legal and business advice to the extent practicable. If not

possible, signal that legal advice is being given:

• “You asked for my legal advice about X. Here it is: . . .”
• Avoid over-designating communications as privileged.
• Avoid reflexively “copying” in-house counsel.
• Does not automatically make a communication/document privileged.
• Do so only purposefully.
• Be cognizant that acting in a business capacity may compromise the

privilege.

14

Challenge: Internal Investigations – Ordinary Course of Business or Legal Advice?

• Companies in heavily regulated industries (finance, healthcare, government

contractors) – need for compliance departments and/or “Code of Business Conduct”.

• Compliance department often separate from legal department.
• Use of non-lawyers for investigations.
• Litigation imminent?

15

Recommendation

• Establish processes to identify “privileged” investigations.
• Involve a lawyer, preferably outside counsel.
• Clearly document investigation is for obtaining legal advice/anticipating

actual or potential litigation.

• Be mindful of implications for document preservation.
• Communicate privileged nature of investigation to employees when

applicable:

• Use Upjohn warnings.
• Enhanced Upjohn warnings after the Yates Memorandum.
• Confidentiality agreements disclose legal nature of investigation.
• Use findings in first instance to obtain/provide legal advice, not directly drive

business decisions.

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Challenge: Waiver and Regulatory/Government Investigations

• Disclosing privileged information as part of a regulatory/government

investigation can result in a waiver.

• Once waived, always waived: the decline of the doctrine of selective

waiver.

• Nota Bene: The bank regulator privilege under 12 U.S.C. § 1828(x)(1).
• Side agreements regarding confidentiality are generally ineffective.
• Government’s recent use of crime-fraud exception – Madoff investigation.

17

Codification of Selective Waiver as to Bank Regulators

• “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.” – 12 U.S.C. 1828(x).

• Impact of the law.
• Challenges and concerns.

18

Bank Examination Privilege

A qualified privileged designed to protect communications between banks and their examiners

• Effective supervision/regulation depends on candor by banks
• Limited to deliberative process material and does not cover factual documents

Who owns the privilege? Scope of the privilege?

• 12 C.F.R. 4.32 (definition of “non-public OCC information”).
• Documentary evidence.
• Testimonial evidence.
• OCC materials and materials that would not have been generated but for an

OCC request.

• What about internal discussions of OCC materials?

19

Bank Examination Privilege

Duties of persons served with a request for production of privileged materials.

• “Any person, national bank, Federal savings association, or other entity served with a

request, subpoena, order, motion to compel, or other judicial or administrative process to provide non-public OCC information shall . . .” – 12 CFR 4.37(b)(3).

• 3 duties of persons served.
• Privilege log issues.
• What do you list as the reason for withholding responsive material?

Courts are permitted to override the privilege in response to a showing

• f good cause by the requesting party.
• Five factor balancing test…
• See e.g., Lutzeier v. Citigroup, 2015 WL 7306443 (E.D.Mo. Nov. 19, 2015); Wultz v.

Bank of China Ltd., 61 F.Supp.3d 272 (S.D.N.Y. 2013). 20

Examiner requests for privileged materials.

OCC’s guidance on examiner requests for privileged information

• Examiners must consult with OCC Law Department before making any

request for privileged information.

• Examiners may request privileged documents “only where there is a material

risk exposure to the bank’s earnings and capital.”

• Examiners must limit the form and scope of request for privileged documents.
• Only that which is necessary to explore material risk exposure to

earnings and capital.

• Exchanges of privileged information must:
• Set forth the precise identity of the materials being provided.
• Confirm that the materials are being requested pursuant to OCC

examination authority – the production is not entirely voluntary.

• Confirm that confidentiality will be maintained.

21

Recommendation

• Control the decision - minimize surprise:
• Never assume the nature of review/investigation fails to implicate

privilege.

• Make waiver decision with appreciation for content of communications

to be disclosed.

• Review documents, segregate privileged documents and log them.
• Know who can waive: directors and officers. CFTC v. Weintraub.
• Outside of Ds & Os, typical agency principles apply.
• Investigations involving fair lending risk and/or fraud:
• Clearly document internal investigation is for obtaining legal

advice/anticipating actual or potential litigation.

22

Challenge: Waiver and Disclosures to Outside Consultants and Auditors

• Sharing privileged information with outside advisers may result in waiver of

privilege.

• The “interpreter” standard: Is the individual’s participation necessary to explain

concepts to the lawyer? See, e.g., U.S. v. Kovel, 296 F.2d 918 (2d Cir. 1961).

• The “functional equivalent” doctrine: Privilege extends to counsel’s

communications with corporate consultants who are de facto employees. See, e.g., In re Bieter Co., 16 F.3d 929 (8th Cir. 1994); In re Copper Market Antitrust Litigation, 200 F.R.D. 213 (S.D.N.Y. 2001).

• Disclosures to outside auditors – U.S. v. Deloitte
• Extended work product protection to auditor-created document prepared in

course of determining appropriate reserves.

• Consistent with “agency” approach in Rule 26, court not concerned with who

created document; rather, focused on content and “because of” test. 23

Recommendation:

• Ask if the function can be handled internally?
• Make consultants part of the “team.”
• Establish relationships with consultants through legal department or outside

counsel.

• Require confidentiality agreements.

24

Challenge: Waiver and Inadvertent Disclosure

• Turning over documents by mistake may result in a subject matter waiver of

the privilege.

• Fed. R. Evid. 502 – the middle-ground approach.

25

Recommendation

• Institute protocols to avoid inadvertent disclosure (e.g., use a separate

server and different e-mail addresses for the in-house group).

• Identify in-house staff connected with issue.
• Clearly state your intent to maintain confidentiality on documents and e-mail

prior to sending.

26

Challenge: Waiver Through Broad Dissemination

• Losing the privilege by publishing a privileged communication beyond those

who have a “need to know.”

• Some state laws (e.g., Illinois) maintain control group test.
• The Exxon and Merck examples.

27

Recommendation

• Educate clients on risks of dissemination beyond protected group.
• Sensitive documents should be marked “attorneys’ eyes only.”

28

Challenge: Communications with Former Employees

• Communications between company and former employees are privileged if

they concern information obtained during the course of employment. Weber

• v. Fujifilm Med. Sys., 2011 WL 3163597 (D. Conn. July 27,2011).
• When in communicating with former employee, counsel discloses trial

strategy, mental impressions, and/or legal conclusions, work product protection might prevent disclosure.

• However, adversity with former employee may compromise privilege claims.

29

Recommendation

• Determine whether there is any adversity or potential for adversity with

former employee.

• Advise former employee that you – as counsel – represent the employer,

not the former employee.

• Limit interview discussion to matters within scope of former employees

employment.

30

Challenge: Waiver and Communications Among Affiliated and Non-Affiliated Defendants

• Communications with co-defendants, even if affiliated companies, can waive

privilege.

• Mere status as co-parties in litigation does not always permit the sharing of

confidential information.

31

Recommendation

• Consider entering into a common interest or joint defense agreement.
• Understand the differences.
• Watch out for divergence of interests.

32

Protecting Privileged Information in Due Diligence

Treat Like Document Production –

Review, Segregate and Log.

Risk of Waiver Affects All Parties to

Transaction.

• Confidentiality agreements do not protect

against waiver.

Privilege is Not Avoidance Device. Great Hill (Del. Ch.) – Privilege passes

from target corp. to surviving corp. in a merger.

Privileged Information 33

Preparing for an Examination

• What are the primary stages of an examination?
• Discovery: Examiners gain a fundamental understanding of the condition of the

bank, the quality of management, and the effectiveness of the risk management systems.

• How? Document requests and interviews.
• Correction: Examiners seek bank management’s commitment to correct

supervisory concerns and verify that the bank’s corrective actions have been successful.

• Periodic reporting pursuant to outstanding enforcement documents.
• Monitoring: Examiners respond promptly to risks facing individual banks and the

industry as a whole.

• Who are the players and their roles?
• Examiner-in-Charge.
• Supervisory Office.
• Law Department substantive areas.

34

Preparing for an Examination (continued)

• What type of examination is the OCC conducting?
• Full-scope examination.
• Targeted examination.
• Is there a particular issue that has sparked the OCC’s interest?
• Specialty consideration examination.
• Information technology examination.
• Asset management examination.
• BSA/AML examination.
• Consumer compliance examination (fair lending).
• CRA examination.
• Review policies and procedures regarding the relevant area of the

examination.

• Compare policies and procedures to OCC examiner handbooks and

examination checklists.

• Self-identify problems before the OCC notices them.

35

Dealing with Regulatory Examinations/Investigations

• Designate a central point of contact

to coordinate examination matters and deliver requested information – the “Examination Manager”.

• Manage the message.
• Avoid obstruction of the

examination.

• Examination manager is the chief

liaison with agency examiners.

• Designate a management official

who can provide an overview of the institution’s operations and can direct operational units under exam review.

• Should include someone from the IT

function and the head of the BSA compliance function.

• Make sure that the examiners’

requests are promptly and properly met.

• Is the deliverable in the proper format?
• Does it convey your message – the right

message?

• Defending your position vs. educating

the examiners – What’s the difference?

• What about privileged material? Drafts?
• Have a plan for responding to

requests for privileged material

• Consult outside regulatory counsel
• Clearly document minutes of

meetings and forward to regulatory counsel 36

What to do and not do when the examiners come calling!

Know the rules: Must be familiar with the examination policies and informal guidelines of the regulators. Involve counsel immediately: Comments in meetings or supervisory

• correspondence. Protection of privilege

and document control. Review comparable enforcement actions: What remedies have the regulators sought in the past? Consider comparable corrective action. Do not overreact: Sometimes more regulators/enforcement counsel are brought than are necessary – Shock and Awe! Know the players: Learn the relative authority and roles of the supervisory staff. The examiners do not just “go away” – remember their unique role. 37

• Member of the Financial Services Regulatory Group
• Former Enforcement Counsel with the Office of the Comptroller
• f the Currency, U.S. Treasury Department, Washington, D.C.
• Focuses his practice on financial services regulation,

enforcement defense, internal investigations, and litigation matters

• Represents clients before federal law enforcement and

regulatory agencies, including the OCC, FRB, FDIC, CFPB, and HUD, as well as various state authorities across the country

• Adjunct faculty teaching Regulation of Financial Institutions at

Villanova University School of Law

• Editor-in-Chief of the ABA’s Banking Law Committee Journal
• Vice-Chair, Banking Law Section, NJ State Bar Association
• Editor of the Reed Smith Financial Services blog –

www.financialregulatoryreport.com

Travis P. Nelson

tnelson@reedsmith.com Counsel (609) 524 2038 Princeton, NJ (212) 549 0236 New York, NY

38

• Co-practice leader of the Information Technology, Privacy & Data

Security Group

• Focuses his practice in the areas of data security, privacy, and

management

• Counsels clients on how to meet their obligations under, e.g., the

Gramm-Leach-Bliley Act (GLBA), the Fair Credit Reporting Act (FCRA) and its Identity Theft Red Flags regulations, the Drivers Privacy Protection Act (DPPA), Video Privacy Protection Act (VPPA), and the dozens of other federal and state privacy laws and regulations

• Chair, Privacy & Cyber Security Committee, Labor and Employment

Law Section, New Jersey Bar Association

• Member, International Association or Privacy Professionals

(CIPP/US)

• Board of Directors, Identity Theft Resource Center
• Instructor in Information Security Law, CISO Executive Education

and Certification Program, Carnegie Mellon University’s Heinz College

Paul J. Bond

pbond@reedsmith.com Partner (609) 520 6393 Princeton, NJ

*

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