Yesterday, the House Financial Services Committee held a hearing on the SEC’s broad exemption from requests under the Freedom of Information Act created by Section 929I of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). On Wednesday, the SEC issued guidance to its staff regarding the implementation of the Section 929I exemption, and that guidance was discussed in great detail at yesterday’s hearing.
Section 929I of Dodd-Frank exempts the SEC from being compelled to disclose any records or information provided to the SEC if the records or information were obtained by the SEC for use in an examination or investigation under the Securities Exchange Act of 1934, the Investment Advisers Act of 1940 or the Investment Company Act of 1940, “including surveillance, risk assessments, or other regulatory and oversight activities.” The controversy created by Section 929I’s broad exemption has resulted in the introduction of three separate bills seeking alteration or removal of the exemption. Separately, the Senate Judiciary Committee yesterday unanimouslye approved a bill eliminating the FOIA exemptions from Dodd-Frank, and Chairman Frank, arguing that “we want to give protection to private information,” stated that he hoped his committee would reach a consensus at the hearing.
Appearing before the Committee were the following witnesses:
- Edolphus Towns (D-NY), Member of Congress
- Darrell E. Issa (R-CA), Member of Congress
- Mary L. Schapiro, Chairman, U.S. Securities and Exchange Commission
- Harvey L. Pitt, Chief Executive Officer, Kalorama Partners, LLC
- Angela Canterbury, Director of Public Policy, Project On Government Oversight
- Rick Blum, Coordinator, Sunshine in Government Initiative
- Steven Mintz, Partner, Mintz & Gold LLP
- Susan Merrill, Partner, Bingham McCutchen LLP, on behalf of the Securities Industry and Financial Markets Association (SIFMA)
Chairman Barney Frank (D-MA) opened the hearing by addressing the bipartisan concerns regarding Section 929I and acknowledged the guidance issued by the SEC. Rep Towns called the SEC’s guidance “a step in the right direction,” but warned that the SEC was free to change its interpretation at any time. He noted that “the language [of Section 929I] is too broad” and “allows the SEC to keep secret virtually any information it obtains under its examination authority.” As an example, he cited a ruling issued Tuesday by an administrative law judge in an action by the SEC against Morgan Keegan, in which the SEC invoked Section 929I to avoid complying with the administrative law judge’s subpoena. Rep. Towns stated flatly that “the SEC has already indicated its willingness to exploit this loophole.” Mr. Mintz agreed, stating that “by not complying with this records request, [the SEC] is hampering in this case the ability for the defendants from defending themselves.”
SEC Chairwoman Mary Schapiro argued that the Section 929I exemption “strikes an appropriate balance” while improving the ability of the SEC to fulfill its mission “in a manner that is consistent with the principles of open government.” She further stated that the prior exemptions available to the SEC for FOIA requests regarding “financial institutions” subject to an SEC examination are insufficient. “With respect to FOIA Exemption 8, neither the text nor the legislative history of FOIA defines the term ‘financial institution’ or otherwise sheds light on what Congress intended that term to encompass,” stating Chairwoman Schapiro. She stated that the controversy created by Section 929I and the resulting criticism “doesn’t recognize the extraordinary changes” that have taken place recently at the SEC. She referred the Committee to the guidance (described in greater detail below) limiting the ability of the SEC staff to invoke Section 929I.
Former SEC Chairman Pitt agreed with Chairwoman Schapiro, noting that Dodd-Frank established jurisdiction over a variety of entities that were not previously subject to SEC jurisdiction or regulation. The Committee could not assume that, given Dodd-Frank’s scope, existing FOIA exemptions would enable the SEC to protect confidentiality and private parties’ data. Section 929I, noted former Chairman Pitt, “has nothing to do with transparency or accountability,” and the fact that Dodd-Frank includes Section 929I as a means to protect the confidentiality of private parties’ proprietary data “is neither unusual or surprising, although some opponents of Section 929I have claimed otherwise.” Rep. Issa disagreed, stating that “the SEC is not an enforcement agency first ... it is not the FBI” but “exists only to ensure transparency” and to provide “public confidence, trust and the free flow of investments.” Rep. Spencer Bachus (R-AL) stated that the SEC “must be more transparent,” and noted the SEC’s recent failure in proper oversight in the Bernard Madoff scandal as an example of providing too much discretion to the SEC. Ms. Canterbury agreed, voicing support for the bill sponsored by Messrs. Issa, Towns and Bachus and noting that Americans are currently suffering from a financial crisis created by systemic regulatory failures, and Section 929I would remove accountability from the SEC in future financial crises.
Mr. Blum agreed with Rep. Bachus, stating that “the statute gives too much discretion to the SEC to decide what should be disclosed or withheld.” He noted that Section 929I “allows the SEC to withhold records or information provided to [the SEC] or information ‘based or derived from’ such information.” “Section 929I,” he stated, “is overbroad and should be rewritten” and only Congress can remedy Section 929I’s flaws. He warned that “even the most disclosure-friendly guidance is not sufficient to address this problem,” and that he and the Sunshine in Government Initiative “remain[ed] deeply skeptical that the SEC’s plan to issue guidance to staff can fix this problem.”
Ms. Merrill, the chief enforcement official at FINRA, argued against repealing Section 929I, claiming that it was imperative to create a “harmonious relationship” between the SEC and the organizations it regulates. Chairman Frank noted the she was “over-arguing,” and given the controversy Section 929I inspired, it was not realistic that the bill would create “a wonderful, cooperative relationship” between financial institutions and the SEC.
The guidance issued to the SEC staff recognized the importance of both the principles of open government and the need for an effective examination process. The guidance instructs the staff on a proper invocation of the Section 929I exemption in five specific circumstances:
- FOIA requests – FOIA Exemption 8 protects matters that are “contained in or 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.” However, as Chairwoman Schapiro noted, the term “financial institution” is not defined. The guidance instructs the staff to invoke Section 929I only if the request seeks information obtained from an entity subject and pursuant to the SEC’s examination authority, but only for an entity that is not clearly recognized as a “financial institution” under Exemption 8, and where Exemption 8 would protect the information if the entity were clearly deemed a “financial institution.”
- Discovery requests where the SEC or United States government is a party - The SEC staff is instructed not to invoke Section 929I in non-FOIA litigation in which either the SEC or the U.S. government is a party because Section 929I was intended to protect information obtained pursuant to the SEC’s examination authority from a requesting party using the discovery process to obtain information about competitors, not in actions against the SEC.
- Discovery requests in which the SEC or United States government is not a party - The SEC staff is instructed to invoke Section 929I only if the information sought was obtained from an entity subject and pursuant to the SEC’s examination authority, would be withheld if sought in a FOIA request, and the requesting party has not demonstrated a substantial need sufficient to overcome the need to maintain confidentiality of the information. The staff is also instructed to consider various factors, including the relationship of the information to the issues raised and the availability of the information elsewhere, in determining whether a substantial need exists.
- Administrative proceedings brought by the SEC or the United States government - The SEC staff is instructed to interpret an administrative proceeding as being equivalent to that of a court of the United States, and therefore confirmed that the SEC staff may not use Section 929I as a basis for refusing to comply with an order by a tribunal in an administrative proceeding (including one brought by another division of the SEC), just as it would not invoke Section 929I as a basis for refusing the comply with an order of a court of the United States.
- Discretionary disclosures - The SEC staff is instructed that Section 929I and FOIA do not require the SEC to withhold information, and therefore the staff should make disclosures, where permitted by law, when the need for confidentiality is outweighed by the public’s interest in transparency and accountability.