Banking and Finance Law Daily FDIC’s administrative subpoena in its capacity as receiver for bank
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Tuesday, October 27, 2020

FDIC’s administrative subpoena in its capacity as receiver for bank

By Nicole D. Prysby, J.D.

In its capacity as receiver, the FDIC was not the "appropriate Federal functional regulator" entitling it to receive otherwise confidential and privileged documents from the Public Company Accounting Oversight Board (PCAOB).

In an issue of first impression, the Fifth Circuit Court of Appeals held that the district court erred when it held that the Federal Deposit Insurance Corporation, in its capacity as a bank’s receiver, was "the appropriate Federal functional regulator," entitling it to receive otherwise confidential and privileged documents from the Public Company Accounting Oversight Board (PCAOB). After a bank failed, the FDIC began an investigation into an audit of the bank’s holding company and obtained the transcripts of an auditor’s deposition before the PCAOB. The FDIC then sought to depose the auditor, who argued that the FDIC committed a legal violation when it obtained documents from the PCAOB that the auditor believed were confidential. The court held that the FDIC, in its capacity as receiver, did not fit within an exemption to the law that testimony prepared for PCAOB proceedings is confidential. "The appropriate Federal functional regulator" for the purposes of the exemption in this case is the Federal Reserve, not the FDIC, because the the FDIC was not acting as the bank’s regulator, determined the court. Accordingly, it was improper for the PCAOB to disclose to the FDIC, acting in its capacity as receiver for the bank, transcripts of the auditor’s deposition testimony before the PCAOB (FDIC v. Belcher, Oct. 26, 2020, Stewart, C.).

The lawsuit is related to the collapse of First NBC Bank of New Orleans (the Bank). Ernst & Young was hired to audit the financial statements of First NBC Bank Holding Company (the Holding Company). The Holding Company’s only asset was the Bank. When the Bank began to struggle financially, the PCAOB initiated an investigation into the audits of the Holding Company. PCAOB requested numerous documents from the auditor, which turned them over under the impression that they were confidential and privileged under federal law. Among the auditors deposed by the PCAOB was Daniel Belcher. After the Bank failed, the FDIC began its own investigation into the audits of the Holding Company and obtained the transcripts of Belcher’s deposition before the PCAOB. After reviewing Belcher’s deposition testimony, the FDIC decided it also wanted to depose him and served him with a pre-suit administrative subpoena ordering him to submit to a deposition. Belcher refused to comply with the subpoena, on the grounds that the FDIC’s lawyers committed a legal violation when they sought and obtained documents from the PCAOB that the auditor believed were confidential and privileged under federal law. The FDIC responded by filing a complaint against Belcher in the district court seeking to enforce its administrative subpoena; Belcher responded with a motion seeking to quash the subpoena. The district court sided with the FDIC, reasoning that Belcher’s rights under federal law were not violated when the PCAOB shared transcripts of his deposition testimony with the FDIC. Belcher appealed.

The Fifth Circuit concluded that the district court erred by holding that the FDIC, in its capacity as the Bank’s receiver, was "the appropriate Federal functional regulator" in this case, entitling it to receive otherwise confidential and privileged documents from the PCAOB. The parties disagreed about whether the FDIC, in its capacity as receiver for the Bank, fit within an exemption to the rule that testimony prepared for PCAOB proceedings is confidential. The statute exempts "the appropriate Federal functional regulator" (15 U.S.C. section 7215(b)(5)(B)(ii)(II)). The court found that while the FDIC is a federal functional regulator, it is not the appropriate one when acting in its capacity as the Bank’s receiver, as opposed to its corporate or governing capacity. There can be only one "appropriate Federal functional regulator" for purposes of the exemption, and the FDIC’s argument would establish two: the FDIC, as the appropriate federal functional regulator of the Bank, and the Federal Reserve, as the appropriate federal functional regulator of the Holding Company. The FDIC’s argued that because the audit reports were "for" the Holding Company and the Bank, the statute permits multiple appropriate federal functional regulators in this case. But the court rejected that argument: even assuming that an audit report can be "for" multiple entities, the FDIC is not the "appropriate" federal functional regulator here, because the FDIC was acting in its capacity as the Bank’s receiver when it acquired the confidential documents from the PCAOB, not as the Bank’s regulator.

Judge Costa dissented, on the grounds that the question was moot, because Belcher already sat for the deposition, as ordered by the district court.

The case is No. 19-31023.

Attorneys: Duncan N. Stevens for the FDIC. Steven Michael Farina (Williams & Connolly, L.L.P.) for Daniel Belcher.

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