Congress passed a bill last week closing a loop hole in the Dodd-Frank Act that gave the Securities Exchange Commission (SEC) broad exemption to the Freedom of Information Act (FOIA). The exemption gave the SEC the ability to deny a much greater number of requests for information and came to light after the SEC cited the exemption when it denied Fox Business News information it had requested.
The exemption was found in section 929I of Dodd-Frank and says, “The Commission shall not disclose records or information… if such records or information have been obtained by the Commission for use in furtherance of the purposes of this title, including surveillance, risk assessments, or other regulatory and oversight activities.” This new exemption came just as the SEC was gaining more regulatory power with oversight of hedge funds and other derivatives now coming under its jurisdiction.
To be fair, there is some information the SEC collects that should be kept confidential – namely individual identification information and proprietary information such as algorithms. But looking at the language of the bill, it is clear they are able to deny requests for more than just that type of information. The information Fox Business was refused was related to the SEC investigation into the multibillion-dollar Ponzi scheme operated by Bernard Madoff, an investigation for which the SEC has been heavily criticized.
Mary Schapiro, chairwoman of the SEC, met with the House Financial Services Committee on Sept. 16 to try and defend the provision. In the meeting, Schapiro said the exemption was intended to assure funds that when the SEC requested information, that information would be exempt from FOIA requests. She said the Commission had difficulties in the past obtaining information and this exemption would bypass many of those obstacles. "We felt that if we could not protect it from public exposure, they would suffer serious competitive harm," Schapiro said. "It's their trade secret; it's their formula for Coca Cola. If that information is made public, then other firms can trade on that information."
The SEC had released guidelines to its staff outlining how its members are to use this new exemption, but lawmakers, civil rights advocates and journalism societies have jumped to point that the guidelines themselves acknowledge that too much power had been granted. An exemption for “financial institutions” already existed in Exemption 8 of FOIA, unfortunately that had not been defined and so Schapiro asked for the exemption. Later, some lawmakers admitted ignorance to even knowing the exemption existed in the over 2,300 page law.
The bill to eliminate this exemption was sent to President Obama on Sept. 24. Although it is likely to be the first piece of Dodd-Frank to meet the garbage bin, it makes you wonder what it was doing in the bill in the first place, seeing as how the whole idea of financial reform was to increase transparency in all parts of the financial system. You would think that would include the regulators.