Congress is rapidly advancing bipartisan legislation to strike language from the financial overhaul legislation that gave the Securities and Exchange Commission (SEC) sweeping new powers to withhold records from the public.
Yesterday, the Senate Judiciary Committee unanimously approved a bill to remove the blanket Freedom of Information Act (FOIA) exemptions for the SEC contained in Section 929I of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The legislation approved yesterday (S. 3717) was introduced by Senators Patrick Leahy, D-Vt.; Charles Grassley, R-Iowa; John Cornyn, R-Tex; and Ted Kaufman, D-Del.
Section 929I introduced three blanket FOIA exemptions that will enable the SEC to withhold a wide range of records related to its examinations of regulated entities. S. 3717 would repeal the three blanket exemptions, and clarify that an existing FOIA exemption will protect against the release of confidential information contained in the records of any entity that falls under the SEC’s regulatory authority. A companion bill, H.R. 6086, has been introduced by House Oversight and Government Reform Committee Chairman Edolphus Towns, D-N.Y.
In a statement released yesterday, Senator Leahy expressed his concern that the blanket FOIA exemptions “could be interpreted and implemented in a way that undermines the important goal of restoring transparency and accountability in our financial system,” and called on the Senate to “pass this important legislation without delay.” Senator Grassley pointed out that Section 929I is “particularly troubling given the SEC’s terrible record on complying with FOIA and the clear intent of Congress on this issue.”
Meanwhile, the House is also taking action to address the blanket FOIA exemptions in Section 929I. Yesterday, POGO’s Angela Canterbury testified at a House Financial Services Committee hearing on “Legislative Proposals to Address Concerns Over the SEC’s New Confidentiality Provision.” (You can review our live Twitter coverage of the hearing here. We’ll also post a video of Angela testifying as soon as it’s available).
Angela’s testimony raised concerns that the SEC could use its expanded withholding authority in Section 929I to hide its own mistakes from public scrutiny. Given the SEC’s botched investigations of the Madoff and Stanford Ponzi schemes, its inexcusable delays in bringing insider trading charges against Pequot Capital Management, and the colossal failures of its program to supervise firms such as Bear Stearns and Lehman Brothers, there is clearly a need for more—not less—transparency and accountability at the agency. Former SEC enforcement attorney Gary Aguirre—who was retaliated against when he challenged the agency’s bungled investigation of Pequot, as detailed in investigative reports by the SEC Office of Inspector General and the Senate Finance and Judiciary Committees—has raised concerns that Section 929I would have prevented him from obtaining many of the records he used to show how the agency was falling down on the job.
Angela also argued that the existing FOIA exemptions have stood the test of time in protecting truly confidential business records, and that the SEC shouldn’t have to defer to regulated entities’ requests for secrecy in order to collect records that can be obtained through subpoena. She urged Congress to review the SEC’s use of the existing FOIA exemptions, to see if the agency is already withholding records that should be made available to the public.
In addition, she raised a concern that Section 929I will enable the SEC to refuse subpoenas form civil litigants such as defrauded investors, whistleblowers who suffered retaliation, the media seeking to uncover corruption, or any other party attempting to access records that could make the difference in holding the agency accountable, even though the SEC already has plenty of tools at its disposal to quash subpoenas.
Finally, she pointed to an alarming audit released last year by the SEC Office of Inspector General, which found that the agency’s improper FOIA practices had created a presumption in favor of withholding—despite the Administration’s guidance calling for a presumption of disclosure—and that the agency had one of the worst FOIA release rates of any agency in the federal government. She called for additional audits to ensure that the SEC is fully implementing the OIG’s recommendations and complying with FOIA and the Administration’s guidance.
Also testifying at the hearing were Representatives Edolphus Towns, D-N.Y., and Darrell Issa, R-Calif., the Chairman and Ranking Member of the House Oversight and Government Reform Committee. Both have introduced legislation to strike the blanket exemptions in Section 929I.
Rep. Towns pointed out that the SEC has already tried to abuse Section 929I by arguing that the blanket exemptions should apply retroactively and shield the agency from complying with a subpoena in an administrative law case. He also argued that the internal guidance on Section 929I released yesterday by SEC Chairman Mary Schapiro is “not sufficient because the Commission can change its interpretation at any time.” As he pointed out, “the fact that guidance is needed at all is evidence itself that this provision is too broad and subject to abuse.”
Rep. Issa testified that the SEC is an “agency that knows how to say ‘no,’ has the power to say ‘no,’ and says ‘no’ most of the time,” pointing to the fact that, in one recent year, the agency only granted around 13 percent of all FOIA requests.
Earlier this week, Rep. Issa sent another letter to Chairman Schapiro challenging her on the need for the blanket exemptions in Section 929I (their previous correspondence is available here and here). In his latest letter, Rep. Issa argued that 1) Section 929I’s scope is unprecedented, since it protects “records or information based upon or derived from” records obtained from registered entities, and information used in furtherance of the SEC’s “other regulatory and oversight activities;” 2) the blanket exemptions give the SEC far too much discretion and authority to decide whether or not to comply with FOIA requests or subpoenas; 3) the existing FOIA exemptions are sufficient to protect confidential records provided by the SEC’s regulated entities; and 4) there might be a way for Congress to clarify that truly confidential business information will be protected from third-party subpoenas without destroying the public’s ability to access key records needed to hold the agency accountable.
Overall, Members on the Financial Services Committee seemed to agree that legislation would be needed to address the overly broad and unnecessary blanket exemptions in Section 929I. Chairman Barney Frank, D-Mass., also expressed frustration with Chairman Schapiro’s claim that the agency shouldn’t have to release the remaining documents from its Madoff and Stanford investigations since it had already made tens of thousands of related documents available to the public. He even suggested that the SEC’s enforcement staff should meet with the Committee in a private briefing to discuss the records it is continuing to withhold from the Madoff and Stanford cases.
Chairman Frank indicated that the Committee would be moving quickly to consider a legislative response. We hope the Chairman will move HR 6086 or HR 5924 to repeal the secrecy measure instead of amending it or codifying the agency's guidance, which is still an accountability shield. As Rep. Issa said at the hearing, we need to "unring the bell."
-- Michael Smallberg
Image: Angela Canterbury, middle, before the House Financial Services Committee.