Advisor cases question privilege

If 'done incorrectly,' a compliance consultant’s work can inadvertently chart a detailed course for SEC enforcement staff to air a firm’s 'dirty laundry.'

Even as some believe the legal stalwart of attorney-client privilege is under threat, greater concerns exist about whether you could seek the privilege for a compliance consultant’s work.

The question draws a spotlight in a new article in the ABA’s Journal of Securities Litigation. One of its authors, Brent Baker, shareholder with ClydeSnow in Salt Lake City, uses The Robare Group’s SEC enforcement case – and the investment advisor’s reliance on advice from a compliance consultant – to show the challenges of seeking privilege for a consultant’s work.

The “Robare decision has cast a shadow over engaging [compliance consultants] for corporate due diligence, internal investigations, contract management and corporate compliance initiatives, because firms seeking to limit their legal liability need to know for sure that they can rely on the advice of consultants if the advice they receive proves to be wrong or insufficient for SEC enforcement staff,” writes Baker and Joseph Watkins.

The best chance you have of receiving attorney-client protection for a compliance consultant’s work rests on having your attorney hire the consultant, Baker tells sister publication RCW.

Fundamental tenets

The article reminds that the “privilege protects communications (1) between a client and the client’s attorney (2) that are intended to be, and in fact were, kept confidential (3) for the purpose of obtaining or providing legal advice.”

In addition, you must have made “complete disclosure” to counsel, sought and received relevant advice and relied on the advice in good faith.

“At its core, the attorney-client privilege’s safety net attaches only to communications that are in fact for legal advice,” the article reads.

The use of a compliance consultant could fall under an exception to these rules when “the third party is assisting an attorney,” according to the report.

The question of whether attorney-client privilege can apply to a consultant’s work has been at the forefront of the years-long legal battle between the SEC and Louis Navellier of Navellier & Associates in Reno, Nevada.

Navellier got caught in the SEC’s F-Squared enforcement net. The advisor contends that reports provided by his compliance consultant should be protected by attorney-client privilege. So far, two courts have rejected this argument but Navellier has appealed.

Internal investigations

For support, Navellier’s attorneys cite a 2014 decision from the US Court of Appeals in Washington, DC in Kellogg Brown & Root. That decision, written by then appeals court judge and current Supreme Court justice Brett Kavanaugh, held that work papers tied to an internal investigation launched by in-house counsel could fall under the privilege.

Communications “made by and to non-attorneys serving as agents of attorneys in internal investigations are routinely protected by the attorney-client privilege…So long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies…the test boils down to whether obtaining or providing legal advice was one of the significant purposes of the attorney-client communication,” Kavanaugh wrote.

The ABA article warns that if “done incorrectly,” a compliance consultant’s work “can inadvertently chart a detailed course for SEC enforcement staff to air” a firm’s “‘dirty laundry’ or question its sincere attempts to achieve regulatory compliance.”

Given all of this, Baker and Watkins conclude it’s best to have the consultant’s work come through an attorney. This wouldn’t restrict the consultant from working directly with the adviser at times.

This article first appeared in sister publication Regulatory Compliance Watch