secIn a speech a few days ago hailing passage of financial regulatory reform, Securities and Exchange Commission chairwoman Mary Schapiro said the bill "brings greater public transparency and market accountability to the financial system." That's largely true, except for one little provision that could potentially exempt a huge portion of the SEC's paper trail from the Freedom of Information Act, the most important governmental tool for transparency we have.
As Fox Business' Dunstan Prial first reported on Wednesday, the Dodd-Frank bill, which is now law, contains a section declaring that the SEC "shall not be compelled to disclose records or information obtained" in pursuit of its "surveillance, risk assessments, or other regulatory and oversight activities." It goes on to specifically exempt those records from the Freedom of Information Act. There's considerable debate online right now over what that exemption precisely means, but it could potentially have opened a bus-sized hole in the FOIA as far as the SEC is concerned. And would-be watchdogs of the financial sector's leading watchdog have only noticed the provision now, when Congress has already passed the law.
The SEC says it's just a tiny, minor adjustment to the FOIA, designed to "protect highly sensitive and proprietary information such as customer account information and trading algorithms from public disclosure."
And agency officials have a point. Part of the SEC's job is to vacuum up information and documents from financial institutions to make sure those institutions are complying with the law. It's undeniably true that the FOIA was not intended to allow citizens to lay hands on confidential business information like trading algorithms. As SEC spokesman John Nester explained in a statement, "The new legislation makes certain that we can obtain documents from registrants for risk assessment and surveillance under similar conditions that already exist by law for our examinations. Because registrants insist on confidential treatment of their documents, this new provision also removes an opportunity for brokers, investment advisers and other registrants to refuse to cooperate with our examination document requests." In other words, the SEC, which acknowledges that it asked for the FOIA provision to be added into the bill, simply wanted documents collected under the authority of the risk assessment and surveillance powers it has acquired in the legislation to be covered under the same exemptions from FOIA that it has always had.
But there are three problems with that argument. First, Fox Business didn't learn about the provision by reading the bill. They found out about it after lawyers for the SEC raised it in an ongoing FOIA lawsuit the network has filed against the Commission over access to records involving disgraced Ponzi schemer Allen Stanford. According to Fox's attorney Steven Mintz, SEC attorneys told the court during a conference call on Tuesday that they intended to argue that the case was largely moot now that financial regulatory reform had passed.
"They said they think they don't have to produce documents anymore," Mintz told Yahoo! News. "They said, 'the SEC cannot be compelled to produce the documents.' " An SEC source who asked that his quotes not be attributed because of the complicated nature of the litigation disputes Mintz's account, saying that the agency's lawyers raised the new law on "technical or procedural" grounds and that "nothing was said about a decrease in the availability of documents." But if the SEC's position -- that the new law only extends old FOIA exemptions to the SEC's new authorities -- is correct, it's hard to imagine what possible impact the exemption could have on the Stanford suit. That case seeks records from the past, before the SEC had the increased surveillance and risk-assessment authorities that it just now got. So if the FOIA provision is simply related to those new powers, it shouldn't have anything to do with the Stanford case, procedural or otherwise. Rather, by invoking the FOIA exemption here, SEC lawyers are apparently acting under the assumption that it provides new reasons to withhold old documents.
Another problem with the SEC's case for the FOIA exemption is that it erroneously assumes that the agency needs the cooperation of financial institutions to get documents. Nester said the exemption takes away a reason for financial institutions to "refuse to cooperate with our examination document requests." Financial institutions can't refuse to cooperate with the SEC's examination document requests -- for the simple reason that the agency has subpoena power. It can demand to see what it wants to see. Of course, firms can fight subpoenas in court, and life would be easier for the SEC if fewer firms fought its subpoenas. But the desire to avoid justifications of document requests in court provides no compelling rationale for undermining the FOIA in a bill that purports to increase transparency.
The third problem with the SEC's argument is that proprietary documents and confidential business records — in fact, virtually any kind of financial records — are already exempted from the FOIA. Exemption 4 says agencies don't have to turn over "trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential." That would seem to cover the "highly sensitive and proprietary information such as customer account information and trading algorithms" that SEC says the new provision will protect. FOIA's Exemption 8 says agencies can withhold any records "related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions." That is an extremely expansive exemption; it's hard to see how the SEC's increased risk assessment and surveillance authorities wouldn't be covered by it — wouldn't those qualify as "operating" or "condition" reports? Still, in spite of that generously worded provision, the SEC routinely relies on other federal laws limiting FOIA access to financial records, including laws limiting the disclosure of internal audits and client lists. In other words, the legal infrastructure that prevents citizens from obtaining financial information through the FOIA is already extensive, and placing an enormous loophole on top of all these other hurdles would seem to be overkill.
The trouble with the new language is that it doesn't just say, "the SEC doesn't have to turn over documents collected during risk assessments or surveillance" — it adds the rather broad phrase, "or other regulatory and oversight activities." The SEC is a regulatory body — which means that everything it does is a regulatory or oversight activity.
So if the language of the new law is interpreted broadly, it could potentially exempt every document that the SEC collects from the firms it regulates. Under that view of things, if you were interested in, say, finding out what the SEC asked Bernie Madoff to hand over as part of his efforts to fend off investigation into what turned out to be one of the greatest financial frauds in history, you'd be out of luck. California Republican Rep. Darrell Issa has promised to introduce legislation that would close the loophole.
There are no comments yet