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Fed and OCC Assert Bank Examination Privilege in Mortgage-Backed Securities Class Action
On March 23, the Federal Reserve and the Office of the Comptroller of the Currency – both non-parties in the suit – filed briefs requesting that a district court reject a motion to compel discovery of over 30,000 documents held by a large bank. Arguing that the documents contain confidential supervisory information, the regulators asserted the bank examination privilege – “a qualified privilege that protects communications between banks and their examiners in order to preserve absolute candor essential to the effective supervision of banks.” As for scope, the regulators argued that the privilege covers the documents because they provide agency opinion, not merely fact, and that any factual information was nonetheless “inextricably linked” with their opinions. Additionally, they contended that the privilege is not strictly limited to communications from the regulator to the bank – instead, it may also cover communications made from the bank to the regulator and communications within the bank. As for procedure, the regulators claimed that a plaintiff is required to request the disclosure of privileged documents through administrative processes before seeking judicial relief, a requirement they contend exists even where a defendant bank also holds copies of the documents. Finally, the regulators argued in the alternative that the lead plaintiff has not shown good cause to override the qualified privilege, as the interests of the government in protecting the supervisory information outweighs the interest of the plaintiffs in production.
Federal District Court Denies OCC's Motion Seeking Reconsideration of Order Compelling Production of Materials Subject to Bank Exam Privilege
On May 23, the U.S. District Court for the Southern District of New York denied the OCC’s motion for reconsideration of an April 2013 order in which the court compelled a bank and the OCC to produce various investigative files and regulatory communications over the OCC’s objection that the bank examination privilege protected such production. Wultz v. Bank of China, No. 11-1266, 2013 WL 2284881 (S.D.N.Y. May 23, 2013). In support of its motion to reconsider, the OCC argued that (i) the court failed to properly weigh long-standing principles; (ii) the decision “will be construed as an erosion of the bank examination privilege that ultimately will undermine the bank supervisory process;” and (iii) the OCC never waived the privilege and appropriately and in good faith relied upon the procedures set forth under its Touhy regulation. The court disagreed and explained that, although the OCC argued that it did not waive its right to assert privilege over the documents, the OCC never affirmatively asserted privilege over any of the specific materials at issue, or even over clearly specified categories of documents. The court also reasoned that the OCC failed to support its positions that the Second Circuit’s approach to Touhy regulations should not apply in this case and that the court failed to properly weigh the risk of a chilling effect in overriding the bank examination privilege, stating that it is “not necessary for every judicial consideration of the chilling effect to be accompanied by a lengthy paean to the virtues of candor in regulatory communications.”
OCC Seeks Reconsideration of Order Requiring Disclosure of Non-Public Documents related to Bank's AML/CTF Compliance
On April 24, the U.S. District Court for the Southern District of New York stayed an order that would have required a bank to disclose non-public supervisory information subject to the bank examination privilege. Wultz v. Bank of China, No. 11-1266 (S.D.N.Y. Apr. 24, 2013). The case was brought by the family of victims of a suicide bombing attack who claim that failures in the bank’s anti-money laundering and counter-terrorism financing compliance program aided and abetted international terrorism. On April 9, 2013, the court compelled the bank and the OCC to produce various investigative files and regulatory communications over their objection that the bank examination privilege protected such production. The court relied in part on a recent and unrelated Senate investigative report’s description of the OCC oversight process. The court reasoned that the OCC’s ideal supervision process, on which it based its claim of privilege, diverges from the actual process described in the Senate report, and that the actual process undermines assumptions on which other courts have relied about the likely effects of overriding the bank examination privilege. The court added that “the OCC’s supervisory mission might in some cases be helped as much as hindered by the intervention of private litigants.” In support of its motion to reconsider, the OCC argued that the court failed to properly weigh long-standing principles and that its decision “will be construed as an erosion of the bank examination privilege that ultimately will undermine the bank supervisory process.” The OCC also asserted that it never waived the privilege and appropriately and in good faith relied upon the procedures set forth under its Touhy regulation, which is designed to provide the OCC with the opportunity to review non-public OCC information in the possession of regulated entities prior to production. The OCC asked the court to vacate its prior order and order the plaintiffs to submit a Touhy request for all materials withheld on the groups of bank examination privilege. The court agreed to stay its prior order and established a briefing schedule on the motion for reconsideration, which will be completed by May 10, 2013.