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Legislation Would Narrow SEC Dodd-Frank FOIA Exemption as Key Senators Urge SEC to Act

By Jim Hamilton

Leading members of the Senate Judiciary Committee introduced legislation (S 3717) to strike Freedom of Information Act (FOIA) exemptions for the SEC that were included in the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.. The bipartisan legislation is sponsored by Senators Patrick Leahy (D-Vt.), John Cornyn (R-Texas), Ted Kaufman (D-Del.), and Chuck Grassley (R-Iowa). At the same time, the senators wrote a letter to the SEC Chair Mary Schapiro urging the Commission to issue guidelines interpreting the FOIA exemption in Section 929I of the Dodd-Frank Act in a manner that is consistent with both the congressional intent of restoring transparency and accountability to the financial system and with the President's January 21,2009, Executive Memorandum on
FOIA.

In his FOIA Memorandum, President Obama stated that democracy requires accountability, and
accountability requires transparency. Agreeing with this sentiment, and noting the overwhelming public interest in restoring stability and accountability to the financial system, the senators urged the SEC to narrowly interpret and apply the FOIA exemption in Section 929I. The senators are concerned that Section 929I, as written, could undermine the very important goal of bringing more transparency to Wall Street if improper interpreted and implemented.

The senators also told the SEC Chair that The Freedom of Information Act has long been the people's window into their Government, showing where the Government is doing things right, but also where Government can do better. Moreover, The FOIA has also long recognized the need to balance the Government's legitimate interest in protecting confidential business records, trade secrets and other sensitive information from public disclosure and the public's right to know. To accomplish this, care must always be taken to ensure that exemptions to FOIA's disclosure requirements are narrowly and properly applied.

The legislation would eliminate the FOIA exemption for certain records provided to the SEC under Section 929I of the Act. The legislation would also clarify that hedge funds and other new entities that the SEC will regulate under the Wall Street reform law will be considered financial institutions for the purposes of applying FOIA Exemption 8. The legislation would ensure that the SEC can treat sensitive information provided by hedge funds to the Commission in connection with the SEC?s examination and surveillance activities in the same manner as the Commission treats such information when it is provided by other financial institutions.
When Congress enacted these FOIA exemptions, noted Judiciary Committee Chair Patrick Leahy, it sought to ensure that the SEC had access to the information that the Commission needed to carry out its new enforcement powers and to protect investors, not to shield information from the public. Senator Leahy said that he has been troubled by the sweeping interpretation that the Commission has expressed, to date, that these xemptions would shield all information provided to the Commission in connection with its broad examination and surveillance activities.

In an earlier letter to Senator Chris Dodd and Rep. Barney Frank, SEC Chair Mary Schapiro said that Section 929I is critical to the Commission?s ability to develop a robust examination program that better protects investors by allowing the SEC to gain timely access to information that it otherwise may not receive, thereby further enhancing its ability to identify fraud. Sec. 919I does not provide a blanket SEC exemption from FOIA, she noted, and the statute is not designed to protect the SEC as an agency from public oversight and accountability.

Rather, Section 929I is designed to ensure that the Commission can gather the information it needs to perform its required examination, enforcement and oversight duties, including proprietary and customer information. In addition, specific statutory carve-outs clarify that the SEC may not use the provision to withhold information from Congress, other federal agencies or from a court in response to an order in an action brought by the Commission or the United States. In order to address any uncertainty about how the SEC will use Section 929I, the Chair will ask the Commission to issue and publish on the SEC website guidance to staff that ensures the provision is used only as it was intended.

The SEC Chair also noted that Dodd-Frank mandates a number of new responsibilities for the SEC to protect investors, including new authority over hedge funds, private equity funds and venture capital funds. Fulfilling these responsibilities will require the SEC to expand and improve its examination and surveillance capabilities in order to provide the type of risk-focused regulatory oversight investors deserve. In order for these efforts to be successful, said the Chair, it is important that registered entities be able to provide the SEC with access to confidential information without concern that the information will later be made public.

Full post as published by Jim Hamilton's World of Securities Regulation on August 12, 2010 (boomark / email).