Provision to exempt SEC from FOIA in Financial Regulation Law.

FOX Business Network is reporting today that a little known provision in the financial regulation legislation signed by President Obama exempts the Securities and Exchange Commission (SEC) from complying with information requests from the public, including Freedom of Information Act (FOIA) requests. The provision was cited in a suit FBN had filed against the SEC for documents relating to the investment frauds of Bernie Madoff and Allen Stanford.

On what the provision inhibits:

“In a FOIA action suit filed by FOX Business Network, the SEC cited Tuesday a provision under the new financial regulation legislation that it no longer has to comply with requests for information releases from the public. The law exempts the SEC from disclosing records or information derived from “surveillance, risk assessments, or other regulatory and oversight activities.”

“The provision covers almost every action by the agency, lawyers say. Congress and federal agencies can request information, but the public cannot.”


On FOX Business Network’s filing against the SEC in March 2009:

“FOX Business Network sued the SEC in March 2009 over its failure to produce documents related to its failed investigations into alleged investment frauds being perpetrated by Madoff and R. Allen Stanford. Following the Madoff and Stanford arrests it, was revealed that the SEC conducted investigations into both men prior to their arrests but failed to uncover their alleged frauds.”

“Last year, the network won a legal victory to force the release of documents related to New York University’s lawsuit against Madoff feeder Ezra Merkin.”



On criticism of the provision:

“ ‘It allows the SEC to block the public’s access to virtually all SEC records,’ said Gary Aguirre, a former SEC staff attorney-turned-whistleblower who had accused the agency of thwarting an investigation into hedge fund Pequot Asset Management in 2005. ‘It permits the SEC to promulgate its own rules and regulations regarding the disclosure of records without getting the approval of the Office of Management and Budget, which typically applies to all federal agencies.’ ”

In 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."

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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.' "

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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.

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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.

SEC. 929I. PROTECTING CONFIDENTIALITY OF MATERIALS SUBMITTED
TO THE COMMISSION.

(a) SECURITIES EXCHANGE ACT OF 1934.—Section 24 of the
Securities Exchange Act of 1934 (15 U.S.C. 78x) is amended—
(1) in subsection (d), by striking ‘‘subsection (e)’’ and
inserting ‘‘subsection (f)’’;
(2) by redesignating subsection (e) as subsection (f); and
(3) by inserting after subsection (d) the following:
‘‘(e) RECORDS OBTAINED FROM REGISTERED PERSONS.—
‘‘(1) IN GENERAL.—Except as provided in subsection (f),
the Commission shall not be compelled to disclose records or
information obtained pursuant to section 17(b), or records or
information based upon or derived from such records or
information, if such records or information have been obtained
by the Commission for use in furtherance of the purposes
of this title, including surveillance, risk assessments, or other
regulatory and oversight activities.
‘‘(2) TREATMENT OF INFORMATION.—For purposes of section
552 of title 5, United States Code, this subsection shall be
considered a statute described in subsection (b)(3)(B) of such
section 552. Collection of information pursuant to section 17
shall be an administrative action involving an agency against
specific individuals or agencies pursuant to section 3518(c)(1)
of title 44, United States Code.’’.

(b) INVESTMENT COMPANY ACT OF 1940.—Section 31 of the
Investment Company Act of 1940 (15 U.S.C. 80a-30) is amended—
(1) by striking subsection (c) and inserting the following:
‘‘(c) LIMITATIONS ON DISCLOSURE BY COMMISSION.—Notwithstanding
any other provision of law, the Commission shall not
be compelled to disclose any records or information provided to
the Commission under this section, or records or information based
upon or derived from such records or information, if such records
or information have been obtained by the Commission for use
in furtherance of the purposes of this title, including surveillance,
risk assessments, or other regulatory and oversight activities.
Nothing in this subsection authorizes the Commission to withhold
information from the Congress or prevent the Commission from
complying with a request for information from any other Federal
department or agency requesting the information for purposes
within the scope of jurisdiction of that department or agency, or
complying with an order of a court of the United States in an
action brought by the United States or the Commission. For purposes
of section 552 of title 5, United States Code, this section
shall be considered a statute described in subsection (b)(3)(B) of
such section 552. Collection of information pursuant to section
31 shall be an administrative action involving an agency against
specific individuals or agencies pursuant to section 3518(c)(1) of
title 44, United States Code.’’;
(2) by striking subsection (d); and
(3) by redesignating subsections (e) and (f) as subsections
(d) and (e), respectively.

(c) INVESTMENT ADVISERS ACT OF 1940.—Section 210 of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-10) is amended
by adding at the end the following:
‘‘(d) LIMITATIONS ON DISCLOSURE BY THE COMMISSION.—Notwithstanding
any other provision of law, the Commission shall
not be compelled to disclose any records or information provided
to the Commission under section 204, or records or information
based upon or derived from such records or information, if such
records or information have been obtained by the Commission for
use in furtherance of the purposes of this title, including surveillance,
risk assessments, or other regulatory and oversight activities.
Nothing in this subsection authorizes the Commission to withhold
information from the Congress or prevent the Commission from
complying with a request for information from any other Federal
department or agency requesting the information for purposes
within the scope of jurisdiction of that department or agency, or
complying with an order of a court of the United States in an
action brought by the United States or the Commission. For purposes
of section 552 of title 5, United States Code, this subsection
shall be considered a statute described in subsection (b)(3)(B) of
such section 552. Collection of information pursuant to section
204 shall be an administrative action involving an agency against
specific individuals or agencies pursuant to section 3518(c)(1) of
title 44, United States Code.’’.