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SEC Inspections and Privilege Considerations

Saturday, September 10, 2016

Attorney-client privilege protects confidential communications between clients and attorneys for the purpose of rendering or obtaining legal advice. The privilege provides an avenue for clients to consult with legal counsel without fearing that they might be forced to disclose their conversations and discussions to third-parties, including the government and the opposition in litigation. Inspections conducted by Securities and Exchange Commission (“SEC”) staff present complex privilege issues that should be considered by registrants in advance of those inspections.

While the doctrine of attorney-client privilege provides protection surrounding communications between clients and their attorneys, all communications with attorneys are not necessarily privileged. The following requirements must be met in order for the attorney-client privilege to be invoked: “(i) The holder of the privilege is, or sought to become, a client; (ii) The person to whom the communication was made is a member of the bar or a subordinate of a member of the bar and was acting as a member of the bar or a subordinate of a member of the bar and was acting as a lawyer in connection with the communication; (iii) The communication relates to a fact of which the attorney was informed by the client, outside the presence of strangers, for the purpose of obtaining primarily either an opinion of law, legal services or assistance in a legal proceeding, and not for the purpose of committing a crime or tort; and (iv) The privilege has been claimed and not waived by the client. Attorney-client privilege can be waived by disclosure to a third party.” The work product doctrine specifically covers “notes, memoranda, briefs, and similar documents prepared by or at the direction of counsel in preparation for litigation.”

The SEC is granted inspection power by statutes that do not expressly recognize privilege claims. SEC registrants should be aware, however, that the SEC generally recognizes privilege claims as legitimate grounds for refusing to produce documents or provide information in an inspection. Nevertheless, records of routine compliance monitoring and reports of annual compliance reviews required under the SEC’s compliance rules in addition to other reports required under federal securities laws, are not privileged in the SEC’s view. The SEC posits that such records are not privileged as they “were ‘meant to be available to the SEC staff for examination.’”

Privilege issues often arise with respect to the annual compliance review and report and mock audits. While the SEC has decided that a CCO’s annual reports and related compliance reports cannot be withheld from the SEC staff due to privilege protections, there are steps SEC registrants can take to preserve privileged material. Chief Compliance Officers may consult with and obtain privileged legal advice from counsel, including advice related to the annual compliance review and compliance procedures. The advice rendered to the CCO by legal counsel regarding the scope of the review and adequacy of review procedures, should be protected by privilege. To preserve privilege, those communications with counsel for the purpose of obtaining legal advice should be documented separately from work papers and reports related to the annual review process which are expected to be provided to SEC staff.

It should be noted that attorney-client privilege does not apply in those instances in which a registrant engages a firm other than a law firm to perform a mock audit. Attorney-client privilege does apply in most situations in which a law firm is hired to conduct a mock audit even if it then engages a non-law firm entity to assist in conducting audit procedures. If a registrant conducts a mock audit with its internal compliance team or a non-legal consulting firm, however, attorney-client privilege would apply to communications with legal counsel for the purpose of obtaining legal advice related to specific issues identified during the mock audit. However, privilege might be waived if the registrant discloses the existence or the results of the mock audit to third parties, including third parties other than the SEC.

Please contact us if your firm is in need of ongoing compliance and/or mock audit services.

Information paraphrased from Christopher S. Petito’s article “Handling Privilege Issues in SEC Inspections,” Practical Compliance & Risk Management for the Securities Industry (March-April 2008).

Christopher Petito is counsel in the Corporate and Financial Services Department of Willkie Farr and Gallagher LLP. He practices corporate and securities regulatory law involving investment company, investment adviser, and broker-dealer matters, including advising on all aspects of the design, organization and registration of investment companies and related insurance products, as well as providing regulatory and compliance counseling.

About Red Oak Compliance Solutions

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