An Examination of the Bank-Examination Privilege (I): Overview of an Enigma

The evidentiary privilege known as the “bank-examination privilege” is a bit of an enigma.  Its name may lead you to believe the privilege belongs to banks but that’s not true.  The privilege covers a bank-examination report, but not all of it, and more than that. It is a common-law creature but has statutory and regulatory roots. Depending on your jurisdiction and choice of law, a requesting party may have to exhaust administrative remedies before invoking discovery mechanisms in civil-procedure rules, or perhaps state law nullifies the privilege altogether.  And even if the privilege covers requested documents, the requesting party may still override the privilege and obtain otherwise protected material.

In this first of a three-part series, I provide an overview of the bank-examination privilege, including its origin and scope.  In An Examination of the Bank-Examination Privilege (II): Burden-Shifting and Good Cause, I discuss the procedural hurdles for seeking or protecting covered materials.  And in An Examination of the Bank-Examination Privilege (III): Putting it All Together, I end the series by reviewing a sample case.  And of course, I supply authorities so that you may dig deeper if this issue crosses your desk.

Why is this a Thing?

Banks are the primary part of the highly regulated financial-services industry, and multiple federal and state agencies have overlapping oversight.  At the federal level, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation compose the “prudential regulators” that have primary regulatory authority over financial institutions. The Federal Reserve oversees member banks of the Federal Reserve System. 12 USC § 483.  The OCC oversees national banks. 12 USC § 481.  And the FDIC supervises and examines insured depository institutions. 12 USC § 1820.  The Federal Reserve and the FDIC may also regulate state-chartered banks. 12 USC § 1813.  And state agencies regulate state banks independently or in conjunction with a federal regulator.

These regulatory agencies conduct periodic examinations of banks that include on-site visits, interviews of management and employees, and a review of the bank’s operations. The examinations assess the overall safety and soundness of the bank, including the bank’s financial condition, policies and procedures, regulatory compliance, internal controls, and risk exposure. The agencies and bank management engage in significant back-and-forth communications about information, findings, and the like.  The agency concludes the examination by issuing an examination report detailing its findings, conclusions, opinions, and recommendations.

As you can imagine, a regulatory agency’s findings, opinions, and recommendations contain a treasure trove of information about a bank’s operations that civil litigants would find attractive in an adversary proceeding.  Materials that a bank adversary could request include the agency’s bank-examination reports, a bank’s internal communications about an agency’s examination, internal agency communications, and communications between bank personnel and regulators.

Regulations Mandating Confidentiality

Because of the sensitivity associated with a bank’s internal operations and financial condition, the prudential regulators have issued regulations mandating the confidentiality of the examination process.  For example, the OCC defines “non-public OCC information” to include examination reports, 12 CFR § 4.32, and declares them to be “confidential and privileged.” 12 CFR § 4.36(b).  The Federal Reserve similarly declares as “confidential and privileged” a list of materials qualifying as “confidential supervisory information,” including examination reports. 12 CFR §§ 261.2; 261.23.

Despite their bold language, an agency’s “privileged” declarations do not create an evidentiary privilege.  That task is left to legislatures through statute and judges through the development of common law.

Bank Examination Privilege–Origins

At the federal level, the Supreme Court and Congress separately attempted to codify a bank-examination privilege without success.  The Court’s proposed Federal Rules of Evidence included a list of evidentiary privileges, including Proposed Rule 509 that would have made “official information” of federal regulatory agencies privileged and non-discoverable in certain situations. See 56 F.R.D. 183, 251–54 (1972).  But Congress rejected a specific privilege list and instead adopted our current Rule 501 that leaves privileges to common-law development.

In 1999, Representative Bill McCollum of Florida introduced the Bank Examination Report Protection Act in the House of Representatives. Claiming that banks were hesitant to provide candid information to their regulators, Rep. McCollum declared that “the issue of privilege is one that must be addressed,” (transcript available here).  BERPA would have made bank-examination reports and related material privileged from discovery, but the bill died in committee.

In the 1990s federal courts began to adopt, define, and employ a federal common-law bank-examination privilege.  In 1992, the D.C. Circuit relied upon sporadic decisions applying the deliberative-process privilege or official-information privilege to declare that an evidentiary privilege protects disclosure of bank-examination reports.  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).  And in an influential opinion, the Sixth Circuit similarly declared that the privilege “does exist” and protects from disclosure a regulatory agency’s opinions and a bank’s response to those opinions.  In re Bankers Tr. Co., 61 F.3d 465 (6th Cir. 1995).  Other circuit courts and several federal district courts have since applied a common-law bank-examination privilege.

The bank-examination privilege is a variation of the governmental deliberative-process or official-information privilege.  Just as, say, the deliberative-process privilege protects an environmental agency’s deliberative, non-final opinions from disclosure, the bank-examination privilege protects a bank regulatory agency’s opinion from discovery.

Bank-Examination Privilege—Purpose and Scope

Courts generally identify two reasons for the recognition and application of the bank-examination privilege. First, drawing from Dean Wigmore’s instrumentality theory, more prominently recognized as a basis for the privilege between lawyers and their clients or psychotherapists and their patients, courts argue that the privilege promotes a more full and candid back-and-forth between banks and their regulators. Second, courts recognize that publicizing a regulatory agency’s adverse findings of a bank’s soundness could cause a public panic and significant withdrawal of funds that would doom the bank to failure.

The privilege’s scope is incapable of a specific definition and leads to decisions on a case-by-case basis.  The privilege protects the regulatory agency’s findings, conclusions, and opinions.  The agency’s bank-examination report almost certainly contains these items, but one may also find them in the agency’s communications with a bank, a bank’s internal communications, or the agency’s internal communications.

The privilege does not protect from disclosure purely factual material, but discerning between facts and opinions in a report or communications is often a difficult task.  For example, one court noted that every bank-examination report is either entirely or partially factual.  In re Wilmington Tr. Sec. Litig., 2016 WL 9753979, *6 (D. Del. Aug. 16, 2016). Courts are likely to ask for an in camera review of the putatively protected materials to distinguish between facts and opinions.

State Law

While the federal bank-examination developed through common law, many state legislatures have codified a bank-examination privilege for examination reports and related materials.  For example, an Indiana statute declares as privileged the state agency’s examinations, findings, and recommendations.  For a list of similar statutory privileges in other states, see Eric Epstein’s excellent book, The Bank Examination Privilege published by the American Bar Association in 2017.

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There is more to this story, so check out An Examination of the Bank-Examination Privilege (II): Burden-Shifting and Good Cause, where I discuss the privilege’s limits and procedural hurdles.

Sources

I recommend reading the following books, articles, and cases for a closer and more detailed review of the bank-examination privilege.  Eric B. Epstein, et al., The Bank Examination Privilege (Am. Bar Ass’n 2017); Randall I. Marmor, Obtaining Bank Examination and Suspicious Activity Reports in the Investigation of Financial Institution Bond Claims, 39 Tort Trial & Ins. Practice L.J. 947 (2004); Lisa Chalidze, Discovery of Bank Examination Reports and Use of Bank Examiner Privilege or Bank Examination Privilege in Federal Civil Proceedings, 151 A.L.R. Fed. 643 (1999); Eric B. Epstein, Why the Bank Examination Privilege Doesn’t Work as Intended, 35 Yale J. Regulation Bulletin 17, 19 (2017); Eric B. Epstein, David A. Scheffel, and Nicholas A.J. Viletstra, Ten Key Points about the Bank Examination Privilege, Bus. L. Today, at 1 (Am. Bar Ass’n, Feb. 2017); In re United States, 678 Fed. Appx. 981 (Fed. Cir. 2017); In re Bankers Trust Co., 61 F.3d 465 (6th Cir. 1995); In re Subpoena Served Upon the Comptroller of the Currency, and Secretary of the Bd. of Governors of the Fed. Reserve Sys., 967 F.2d 630 (D.C. Cir. 1992); Southeast Pa. Transp. Auth. v. Orrstown Fin. Servs., Inc., 367 F. Supp. 3d 267 (M.D. Pa. 2019); Erhart v. BofI Holding, Inc., 2018 WL 5994417 (S.D. Cal. Nov. 15, 2018); In re Wilmington Tr. Sec. Litig., 2016 WL 9753979 (D. Del. Aug. 16, 2016); Wal-Mart Puerto Rico, Inc. v. Zaragoz-Gomez, 152 F. Supp. 3d 67 (D.P.R. 2016); United States ex rel. Fisher v. Ocwen Loan Servicing, LLC, 2016 WL 3172774 (E.D. Tex. June 7, 2016); Fed. Home Loan Mortgage Corp. v. Deloitte & Touche, LLP, 2015 WL 12766388 (S.D. Fla. Aug. 4, 2015); Lutzeier v. Citigroup Inc., 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); Federal Housing Finance Agency v. JPMorgan Chase & Co., 978 F. Supp. 2d 267 (S.D.N.Y. 2013).

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