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What does FOIA exemption for SEC in financial reform act mean?

By Flickr user hughelectronic

 We knew the 2,319-page “Dodd-Frank Wall Street Reform and Consumer Protection Act” would contain some interesting surprises once all the legal lingo was parsed.    

Well, the president’s signature was barely dry on the financial regulatory reform signed into law last week when a new stir erupted.      

Fox Business pronounced yesterday that the Securities and Exchange Commission is exempt under the Dodd-Frank act from responding to public requests for documents under the Freedom of Information Act (FOIA).  The news outlet said the SEC cited the new rule Tuesday in response to a Fox FOIA request.      

Sounds pretty draconian.  And public records experts say they need time to review the law and its implications for reporters and our watchdog function.      

For its part, the SEC said the rule doesn’t create a new exemption, it merely clarifies an existing one.  Here’s the statement from spokesman John Nester:      

“The new provision applies to information obtained through examinations or derived from that information.  We are expanding our examination program’s surveillance and risk assessment efforts in order to provide more sophisticated and effective Wall Street oversight. The success of these efforts depends on our ability to obtain documents and other information from brokers, investment advisers and other registrants. 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 is promising confidentiality to brokerage firms and other third parties whose competitive information, such as client records, it wants to collect in the course of keeping an eye on securities transactions via its examination office.  (Examination records have long been subject to FOIA exemption, the SEC said, unlike materials gathered by the SEC’s enforcement branch.)      

On July 30, SEC Chairman Mary Schapiro said flatly: “This provision does not provide a ‘blanket’ SEC exemption from FOIA and is not designed to protect the SEC as an agency from public oversight and accountability.”   

Lawyers on both sides of the issue are busy deciphering the legislation – which you can read here on page 531. “Section 552 of title 5″ is the Freedom of Information Act. The amendment to the Securities Act of 1934 appears to expand the exemption to “registered persons” as described above, but it’s very broadly written and could be construed to hide who-knows-what down the road.      

Lucy Dalglish, executive director of the Reporters Committee for Freedom of the Press, said it appears to “third-party companies the same protection the company under investigation gets.”  But, Dalglish adds, “I’ve got 15 people on this – we’re going to get to the bottom of it.”      

The imprecise wording also is of concern to Chris Carey, the enterprising journalist who is head of ShareSleuth.com and Bailout.com.  And he noted that FOIA requests to the SEC haven’t been all that successful to begin with.      

The FOIA blog by Washington FOIA attorney Scott A. Hodes is regularly posting media reports on the controversy. And here’s The Wall Street Journal’s take and that of Columbia Journalism Review.  On Aug. 4, Congressman Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said he would hold a hearing on Sept. 23 to explore concerns about the exemption

While we await the legal weigh-in on the new rule – which some say could thwart reporters on the trail of Bernie Madoff-scale fraud as well as local and regional watchdogging – you might want to take a look at the SEC’s annual reports regarding its FOIA responses.      

This one from 2009 indicates that of 8,285 requests processed last year, only 1,278 were granted in full and 374 were partially denied.  There were 544 full denials based on exemptions (where this matter would fall) and 6,089 denials in all.  Of those, the bulk were due to “no information found,” as well as cancellations, fee issues, lost records and other administrative matters.      

Trade secrets, confidential intraagency communication and privacy issues accounted for most of those 544 full denials.      

A recent audit by the agency’s inspector found that the SEC’s FOIA-response rate was significantly lower when compared to all other federal agencies, reports Zach Goldfarb of The Washington Post’s Market Cop blog. Goldfarb also says “it may not be time to take up arms over the latest charge by Fox.”      

The SEC has promised stricter oversight in the wake of harsh criticism about its inefficacy in preventing schemes and scandals that bilked investors out of billions.  Will this new tool to streamline its information gathering and “surveillance” of investment firms be worth the secrecy?      

Stay tuned.

In Beats, Featured, Investigation, Investing | Banking, Personal finance, Story ideas.

Comments (4)

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  1. Hal (GT) says:

    Of course the whole thing is predicated on whether or not you can trust that the SEC is just saying there is something confidential in the data when there isn’t. At this point most people on the Main Street don’t trust anything coming down for the gov.

  2. Linda Austin says:

    The Sunshine in Government Initiative, a coalition of media groups encouraging openness in government, is looking for journalists who have covered the SEC and can shed light on what this exemption is likely to mean: http://bit.ly/chScPz

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