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SDNY Holds That Compliance Communications Are Not Protected Work Product's picture
Commentary by Stephen Weiss

In a case concerning violations of the Investment Advisors Act, the U.S. District Court for the Southern District of New York ("SDNY") held that compliance communications are not protected by attorney-client privilege or the work-product doctrine, and that the SEC can force an investment adviser to produce such communications.

According to the June 10, 2019 Opinion and Order, former employees of Brite Advisors USA, Inc. ("DVU") allegedly misrepresented the tax consequences of an investment option the firm was offering. DVU argued that the SEC was not entitled to either (1) the tax opinions that were prepared by DVU's outside counsel or (2) communications between DVU and attorneys at a compliance consulting firm.

The Court determined that the tax opinions were not protected from disclosure by the work-product doctrine, and that DVU waived any attorney-client privilege by voluntarily disclosing the opinions to a third party (i.e., the compliance consulting firm).

Second, the Court ruled that the attorney-client privilege did not shield DVU's communications with the consulting firm. The firm assisted with compliance questions on federal securities laws, but did not perform traditional legal services even though it was staffed with attorneys. Moreover, the fate of DVU's attempt to assert privilege was overcome by its own agreement with its consultants, which disclaimed privilege over the parties' communications.


This case demonstrates courts' unwillingness to stretch the privilege to cover communications with compliance personnel. Under Second Circuit case law, regulatory compliance and legal advice can be mutually exclusive because the attorney-client privilege generally applies only where legal advice is (1) sought, (2) from an attorney acting in his or her capacity as a legal advisor (or an agent of the attorney), (3) made in confidence, (4) by the client, and (5) protected from disclosure.

The referenced Opinion turned on the company's agreement with a compliance consulting firm that specifically stated that its services should not be deemed legal advice. Because that agreement disclaimed privilege over the parties' communications, it created a "strong presumption" that the attorney-client privilege did not protect documents the SEC sought. Unsurprisingly, the company unsuccessfully tried to argue that an attorney-client relationship formed over time, either by express agreement or by the consulting firm providing traditional legal services.

Privilege determinations can be one of the most important elements of a case. Maximizing the likelihood that communications are privileged and protecting that privilege is a balancing act, and the outcome can turn on a dime. Therefore, to help bolster sound privilege claims, companies should consider the circumstances in which it is prudent to engage external counsel to obtain legal advice, (properly) define the scope and purpose of the engagement, clearly indicate that the actions and advice be kept confidential, and maintain attorney oversight throughout the engagement.

When using in-house counsel, privilege determinations may depend on the range of duties that in-house counsel undertake. If a company's internal attorneys are serving in roles that go beyond lawyering, e.g., acting in either a compliance or a business capacity, then it will be more difficult to persuade a court that any particular communication is privileged because it was made in a purely lawyering capacity. Where internal lawyers serve in a mixed role, consideration should be given on how to establish lines between their lawyering and their other activities.

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