Saturday, February 25, 2012

In Letter to Senate Leaders, ABA Urges Legislation Preserving Confidentiality of Privileged Information Provided to CFPB

The American Bar Association supports legislation expressly extending protection for privileged materials submitted to the Consumer Financial Protection Bureau. In a letter to Senator Tim Johnson (D-SD), Chair of the Banking Committee, and Senator Richard Shelby (R-Ala), the Committee’s Ranking Member, the ABA urged swift passage of S 2099 or similar legislation to create a single and consistent standard for the treatment of privileged information submitted to all federal agencies that supervise banks, including the CFPB. S 2099 is co-sponsored by Senators Johnson and Shelby.

Recently, the House Financial Services Committee unanimously approved bi-partisan legislation fixing the omission in the Dodd-Frank Act that opens the door for third parties to obtain privileged information provided by financial institutions to the Consumer Financial Protection Bureau. The legislation, HR 4014, would require the CFPB to preserve the confidentiality of privileged information it receives from financial institutions, as other banking regulators do.

The ABA, working through its Task Force on Financial Markets Regulatory Reform, has developed key principles for financial regulatory reform. S 2099 advances three of those principles: 1) the regulation of financial intermediaries, products, and services should be integrated and comprehensive to protect investors and consumers; 2) functionally similar products and services should be subject to the same or essentially equivalent regulation; and 3) the regulation of the financial services industry should operate in a complementary and coordinated manner.

Currently, privileged materials shared with federal banking agencies remain privileged as to all other parties. Under 12 U.S.C. § 1828(x), the submission by any person of any information to any federal banking agency must 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.

The creation of the Bureau requires that this statute be updated, said the ABA letter. The term federal banking agency is defined in the Federal Deposit Insurance Act, and that definition does not include the CFPB. Although the CFPB issued guidance asserting that 12 USC 1828(x) applies to its receipt of privileged materials, Bureau Director Richard Cordray has acknowledged that there is real concern over the issue. He expressed support for legislation to resolve any doubt. See testimony of Richard Cordray before the House Subcommittee on TARP, Financial Services and Bailouts, Jan. 24, 2012 and the Senate Banking Committee, Jan 31, 2012.

By explicitly applying the same privilege standards to information submitted to the CFPB that currently apply to any submissions to a federal banking agency, said the ABA, S. 2099 fosters a more integrated, consistent and coordinated approach to the regulation of financial services providers. In particular, the legislation would align current law with past practices by promoting uniform treatment of privileged materials by the Federal banking regulators and the CFPB.

Prior to the creation of the Bureau, noted the ABA, the Federal banking agencies examined depository institutions for compliance with consumer protection laws and such examinations could include the review of privileged materials without causing a waiver of the privilege. See 12 U.S.C. § 1828. Unfortunately, when the Bureau examines the same institutions today for compliance with the same consumer protection laws, there is uncertainty over whether the examination may include the review of privileged materials without causing a waiver of the privilege. S. 2099 would place CFPB examinations on the same footing as prior consumer protection examinations conducted by Federal bank regulators with regard to privilege.

S. 2099 also takes the important step of adding the Bureau to the list of agencies that may share privileged information without causing a waiver. Under 12 U.S.C 1821(t), a covered agency, in any capacity, must not be deemed to have waived any privilege applicable to any information by transferring that information to, or permitting that information to be used by, any other covered agency or any other federal agency.

However, unlike the Federal banking agencies, the Bureau is not yet included in the definition of a covered agency. S. 2099 would make the Bureau a “covered agency” and thereby place it on the same footing as the prudential regulators when it shares privileged information with other covered agencies or other federal agencies referenced in the statute.

According to the ABA, this change makes particular sense in light of the existing statutory requirement that the Bureau and prudential regulators share draft reports of examination with each other. Absent legislation, privileged information within a draft CFPB report could lose its privileged status when shared with the prudential regulators, while privileged information in the draft report of a prudential regulator would remain privileged even after being received by the CFPB. The ABA said that S. 2099 would eliminate this inconsistency.