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The impetus for the Securities and Exchange Commission to seek broader exemptions from public-disclosure law in the new Dodd-Frank financial-reform law came from a concern that the SEC must keep confidential the proprietary data it picks up in its examinations of financial concerns, SEC sources say. The SEC intends for the provision only to be used to protect the confidentiality of data the agency gets when it examines financial companies. The SEC sources say the clause is needed now because the Dodd-Frank bill forces the SEC to audit more financial companies than ever before—including new audits of hedge funds, private equity funds, and venture capital funds.
The fear is that these funds have threatened to not comply with their new SEC audits required under the Dodd-Frank bill if the SEC did not protect their proprietary trading information—and the SEC says it could not catch the “bad guys” if they balked. As first reported by FOX Business, the law, signed last week by President Obama, exempts the SEC from disclosing records or information derived from "surveillance, risk assessments, or other regulatory and oversight activities." Given that the SEC is a regulatory body, the provision could cover almost every action by the agency, some lawyers say. Congress and federal agencies can request information, but the public cannot. In letters to Sen. Christopher Dodd, (D-Conn.), and Rep. Barney Frank, (D-Mass.), SEC chairman Mary Schapiro said FOIA requirements needed to be tightened.
“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 (as either a party or non-party),” she wrote. “The Commission's resulting inability to obtain this information hindered our capacity to enforce the securities laws and protect investors.”
The provision has caused confusion on Capitol Hill about its reach. On Friday, Sen. Ted Kauffman, D-Del., became the latest lawmaker – and the most prominent Democrat – to call for it to be rewritten.
"This provision is overly broad,” Sen. Kauffman said. “I understand how it could help the SEC obtain information from the firms they examine when those firms are reluctant to turn over proprietary information that might later be subject to FOIA requests. But FOIA already has exemptions in it to deal with such concerns. If those exemptions need to be broadened, we should have done so with a scalpel."
The SEC has disputed this interpretation, saying it just wants to allay concerns that it won’t share information it gets in examinations of investment firms with rival firms.
The problem is, “everybody wants us to catch the bad guys, Congress, everyone. We do too,” an SEC source says. “But to catch the bad guys, we have to get the facts. And we could not get the facts from hedge funds and private equity funds because they refused to give info to us since they said they were not sure existing FOIA law protected the confidentiality of their proprietary trading information, the core of how they do their business,” the SEC source says.
Prior to the new Dodd Frank law, the SEC’s staff of more than 900 examiners had to audit 11,000 registered investment advisers, 5,000 broker dealers, all of the stock exchanges, as well as clearing agencies, and transfer agents. Now the new law says the SEC has to examine more than 2,000 hedge funds, private equity funds, and venture capital funds, which were previously not audited by the SEC. Still, critics say the SEC needs to be more transparent and allow the public more access to monitor whether the agency is doing its job and catching frauds that cost investors billions of dollars. It doesn't help investors for the SEC to put out reports about frauds it didn’t catch years after the fact that outline their mistakes—as in the Bernie Madoff fraud. And, in her letter to Dodd and Frank, Schapiro hinted the broadness of the provision calls for some further rulemaking. “To address any uncertainty about how we will use Section 9291, I am asking the Commission to issue and publish on our website guidance to our staff that ensures the provision is used only as it was intended,” Schapiro wrote. That speaks to a fundamental question in the controversy: Could the SEC now say any information it gets its examination information that it can’t disclose? The agency emphatically says no, but legal experts are not sure. And in a recent development in a FOIA lawsuit filed by Fox Business against the SEC shows the agency could move aggressively to try to assert the new law retroactively to exempt it from FOIA disclosures of data it picks up in its examinations of financial concerns. Lawyer Stephen Mintz says the SEC asserted just that in a phone conversation. An SEC source says that assertion has yet to be made in court. The new financial reform law says the SEC “shall not be compelled to disclose records or information obtained pursuant to section 17(b)” by the SEC “for use in its surveillance, risk assessments, or other regulatory and oversight activities.” Section 17(b) of the 1934 Securities Act only covers the SEC’s routine examinations of the books and records of a financial concern—so the Dodd Frank bill is only speaking here about the information the SEC gets in its examinations. Some legal experts say the phrase “other regulatory and oversight activities” means the SEC now doesn’t have to give FOIA information on anything it does, but the SEC says that’s wrong. It says the “regulatory and oversight activities” only pertains to its actual examinations. The new law goes on to say that “this subsection shall be considered a statute described in subsection (b)(3)(B) of section 552,” meaning, it will be considered as part of the FOIA law. “Both under the old and now the new law, any information we get with respect to an examination of a Wall Street firm is proprietary information and under existing FOIA law, a law that’s been around for decades, we were already not allowed to disclose that information,” an SEC official says. “The public could never get this examination info under the FOIA law anyway.” The SEC sources tell Fox Business that the Dodd-Frank bill simply reiterates what existing FOIA law, a law that has been on the books for decades, already says is exempt from disclosure--proprietary trading data and information the SEC obtains through the agency’s routine examinations of broker-dealers and investment advisers, meaning, its periodic or targeted SEC audits of financial firms. The SEC notes existing FOIA law, US code 552 section (b 8) says FOIA disclosure “does not apply to matters that are…contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.” An SEC source says: “In 2007 we asked for authority to have this exam data exempted under FOIA and asked for it again in 2009. Under old and current law anything we do with respect with an examination of a Wall Street firm is proprietary information that can’t be disclosed.” A spokesman for Rep. Frank says: “The Dodd-Frank law gives the SEC the power to not disclose under FOIA what current bank regulators already have under existing FOIA law that’s been around for decades when are dealing with examinations of companies and their proprietary information.”
Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.
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