Reed Smith's Travis Nelson recently wrote a pithy dissection of the CFPB's proposed rule to justify its argument that regulated entities be compelled to disclose to it material that is subject to attorney-client privilege. Coming on the heels of the recent FDIC "advice" that officers and directors of banks in distress, and their legal counsel, have only a limited ability, and apparently no right, to review and retain copies of records that might aid them in defending themselves against claims by the FDIC, the CFPB's proposal adds fuel to the fire of critics of federal regulatory overreaching.
The proposal is an attempt to codify the doctrine of "selective waiver."
Under the selective waiver doctrine, the disclosure of otherwise privileged materials to a party outside the attorney-client relationship (in this case the government) would not act as a waiver of applicable privileges to other third parties. Under the Proposal, the provision of documents to the CFPB that are otherwise subject to the attorney-client privilege or work product doctrine, would retain their privileged nature. In other words, the Proposal would provide that the act of producing such materials to the CFPB would not prevent the disclosing party from asserting the privilege as to other potential adversaries, including other governmental agencies. As discussed below, the Proposal raises several important concerns.
As Nelson explains, there's a slight preliminary problem with this "doctrine."
The vast majority of courts have rejected selective waiver.
Well, Travis, it's a brand new day in D.C. The forces that know what's good for the consumer even when he or she does not aren't going to be stopped, or even slowed down, by the speedbump of "judicial precedent." As long as there's a thin reed of plausibility to grasp, the CFPB is hanging on and pushing forward.
Travis takes apart the "legal reasoning" used by the CFPB to support its position.
As the primary basis for its purported authority to promulgate the Proposal, the CFPB claims that the ability to demand otherwise privileged materials from a supervised entity is part of the general examination “powers and duties” transferred from the prudential regulators.
However, the CFPB fails to recognize an argument that the ability to demand production of privileged materials without destroying the privilege may never have been a “power” of the prudential regulators that could have been transferred.
Citing the national Bank Act, Travis argues that if the OCC already had the power to compel privileged information, why was it necessary to codify that power in the Dodd-Frank Act.
It may be argued that the ability to review an institution’s privileged materials without destroying the privilege never existed prior to the FSRRA, and therefore it could not have been among the “powers” that transferred to the CFPB.
Even scarier is the position of the CFPB that the codification of the selective waiver doctrine in Dodd-Frank somehow created a new power to compel production of privileged material.
The FSRRA provides in pertinent part: “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)(1).
The CFPB appears to take the position that under FSRRA, an agency may demand, and the supervised entity may not refuse to provide, privileged materials.
The CFPB’s view does not appear to be supported by the plain language of the FSRRA. Rather than create a new power of the agencies, this provision only creates a layer of additional protection for the disclosing party. In other words, it does not vitiate the ability of a supervised entity to assert applicable privileges.
Obviously, you can see why those of us who represent banks are concerned. There appears to be a lack of appreciation on the part of the government for the need for banks, their officers and directors, to have "effective" legal representation. The government prefers its subjects abject and supine. I understand that. It's simply that there exist these pesky impediments called the Fifth and Sixth amendments to the US Constitution, one guaranteeing due process and the other assistance of counsel. We know they're a pain to those in power and have been for a couple of hundred years. Nevertheless, we're constitutional junkies and we simply can't kick the habit.
Nelson states that a legislative fix may be on the way. We'll see. We'll also see if November changes anything. If not, there's always the advice of former UN Secretary-General Butros Butros-Ghali: "The best way to deal with bureaucrats is with stealth and sudden violence."