It is amazing to think that it has been only about 2 weeks since the Dodd Frank bill became the law of the land, and already its provisions are immersed in controversy. The first problem caused by the new bill started last week, when Fox Business Channel reported on July 28 that the SEC was citing section 9291 of the Dodd-Frank bill as a reason not to provide subpoened documents to the Fox Business Channel.
The battle between Fox Business Channel and the SEC apparently began in March of 2009 when FBC sued the SEC for failing to produce documents relating to the Bernie Madoff scandal and the specific involvement of the SEC with Madoff and R. Allen Stanford. The SEC had investigated both men prior to their arrests but had not discovered the Ponzi scheme. FOX Business Channel made a request in February of 2009 under the Freedom of Information Act regarding information covering the agency's investigations into Stanford's behavior.
Apparently, on Tuesday, attorneys for the SEC notifed attorneys for Fox Business Channel that with the passage of the Dodd Frank bill, the suit is moot because under the provisions of Section 9291, the SEC no longer has to release documents under FOIA.
For the last week, there has been increasing attention on Section 9291, which states that the SEC cannot be compelled to respond to most requests for information. Under the old rules, the SEC did not have to release documents under the Freedom of Information Act for ongoing investigations, but under the new rules, the SEC does not have to turn over documents collected during "risk assessments or surveillance...or other regulatory or oversight activities," even for cases that are closed. This language could be interpreted to mean that the SEC is no longer subject to FOIA since they are a regulatory agency.
On July 30, the Washington Post published two letters written by SEC chairman Mary L. Shapiro, one addressed to Barney Frank and the other addressed to Chris Dodd, defending the language that now protects the SEC and arguing that the new provisions do not exempt the SEC from FOIA. In her letter to Dodd and Frank as published in the Post, Shapiro writes, "Section 9291 addresses a significant and longstanding impediment to the agency's ability to quickly obtain important information from entities registered with the SEC when performing examinations. In our examination and surveillance efforts, we often seek to gather highly sensitive and proprietary information and records from regulated firms including, for example, customer information, trading algorithms, internal audit reports, trading strategy information, portfolio manager trading records, and exchanges' electronic trading and surveillance specifications and parameters....Prior to the Dodd Frank Act, regulated entities not infrequently refused to provide Commission examiners with sensitive information due to their fears that it ultimately would be disclosed publicly. Existing FOIA exemptions were insufficient to allay concerns due in part to limitations in FOIA, (including that certain existing exemptions may not apply to all registrants) and the fact that FOIA exemptions are not applicable when the SEC must respond to a subpoena...The Commission's resulting inability to obtain this information hindered our capacity to enforce the securities laws and protect investors." Shapiro's letter goes on to say that it is more difficult to detect insider trading when complying with FOIA because management at trading firms often requires that SEC investigators review the documents on the trading companies' premises rather than providing sets of documents which could later be subject to FOIA.
In an interview with Fox News on Thursday morning, July 29, California Congressman Darrell Issa (R.CA) promised to introduce legislation to remove section 9291 from the Dodd Frank bill, although obviously such an effort would be met with a lot of resistance from the SEC. Shapiro argues that the new provisions do not skirt FOIA because Congress and other regulatory agencies can still demand to see the information, even though the public cannot. But as Issa pointed out in his interview, in real world terms, an investor hurt by Bernie Madoff's Ponzi scheme would not be able to request the SEC investigation through FOIA to use in his civil law suit, which might mean that he ultimately he would not win his suit.
The irony about this whole thing is that the Dodd Frank act was supposed to bring increased transparency and accountability to Wall Street. One of the Senate bills which ultimately became the Dodd Frank Bill can be found on line under the name "The Wall Street Transparency and Accountability Act of 2010." The opening text of this bill summary states, "This is landmark reform legislation that will bring 100% transparency to an unregulated $600 trillion market." Making the SEC virtually exempt from the Freedom of Information Act does not look much like 100% transparency to me. How can we hope for transparency or accountability in either Wall Street or our government if everybody is allowed to operate in secrecy with only Congress and other regulatory bodies allowed to see what is happening?
But, to me, there is a bigger issue here than the Madoff case, or the Fox Business Channel's suit, or even the SEC itself. The justification for the new exemptions from FOIA is that the SEC has been given broad new regulatory authority and responsibility. What about the newly created Orderly Liquidation Authority, which has been created and given broad new regulatory authority to take private companies before a panel of bankruptcy judges and dissolve them? Should their activities be exempt from FOIA? We also have the brand new Consumer Financial Protection Bureau, which will have regulatory authority over banks and mortgage companies and consumer credit companies. This agency certainly has broad regulatory authority. Should they be exempt from FOIA? Who decides when one agency is powerful enough that they should not have to release any documents to the public or to the press? Where do we as a society draw the line?
It is too early to say, but we may just have seen the death of the Freedom of Information Act as a meaningful tool for obtaining information about our government and the companies that it investigates. And that will produce neither greater transparency nor accountability.
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