Ted Kaufman - United States Senator for Delaware

Kaufman Discusses Provision in Dodd-Frank Bill Exempting SEC from FOIA Action

July 29, 2010

Mr. President, I rise to discuss a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act, section 929I, that is attracting a lot of attention today, and for good reason. The SEC cited it yesterday in seeking to block a Freedom of Information Act, FOIA, action brought by Fox Business News.

Press freedom is a subject that is very important to me and many other Members of Congress, and one which our country is keen to stress as important around the world. It would be ironic if the Dodd-Frank bill substantially diminished our own press freedoms. This is particularly the case in the aftermath of a devastating financial crisis when we now hope that greater transparency into our financial institutions, markets and regulatory agencies will help ensure that systemic risks do not emerge and grow undetected.

Section 929I deals with ``records of registered persons,'' that is, information received by the SEC in the course of its oversight duties with respect to any person or entity registered under the Securities and Exchange Act and other applicable laws, such as the Investment Company Act and Investment Advisers Act. I am concerned that this provision has been written far too broadly. Indeed, it appears to have the effect of exempting from FOIA requests virtually all information received by the Securities and Exchange Commission from ``registered persons.'' An overbroad exclusion from public disclosure undermines the strong public interest in transparency. Narrowing or eliminating this new exclusion should be at the top of the list for a bill designed to amend the Dodd-Frank Act.

The Commission shall not be compelled to disclose records or information obtained pursuant to section 17(b), or records or information based upon or derived from such 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.

Let me repeat: The Commission shall not be compelled to 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 provision is overly broad. 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.

For example, the provision fails to differentiate between proprietary information that might be turned over to the SEC during an examination, financial information a firm may simply prefer not to provide, and market data collected through standard surveillance activities by the Commission. It is not difficult to imagine why hedge funds and other trading firms would be reluctant to turn over proprietary algorithms: Quite simply, those computer programs likely contain loads of historical data, analysis, pattern recognition code and other tools that comprise a trading firm's ``special sauce.'' Just as Coca-Cola and Heinz 57 have strong motivations to keep their recipes a secret, and have done so for generations, so too do proprietary traders have strong incentives to guard their carefully written algorithms.

But data collected by the SEC as part of everyday surveillance activities, including the data set to be collected pending the Commission's approval of ``large trader'' tagging and a consolidated audit trail, should fall into an entirely different category.

And as the Financial Crisis Inquiry Commission and the Senate's Permanent Subcommittee on Investigations have learned, financial companies are often reluctant to turn over extensive financial records that permit the public to better understand complex financial transactions and accounting practices.

As written, the exemption throws a cloak over all information received by the Commission from the entities the SEC regulates. It is too broad; it does not serve the public interest; it is not consistent with the general goal of greater transparency, as President Obama has emphasized both with respect to FOIA and financial regulatory issues, and it should be reevaluated by the SEC and Congress.

As I understand it, the SEC has a legitimate concern now that it must examine thousands of additional entities, including private equity and hedge funds that must for the first time must register under the Investment Advisers Act. In the course of those examinations, a hedge fund may be reluctant to turn over information of a proprietary nature because it is concerned that despite the existing exemptions written into the FOIA statute, the hedge fund cannot be certain whether a judge will uphold the exemption. And so the hedge fund will be reluctant to turn over the information, and the SEC examiner may be stymied from receiving it unless he or she turns the matter into an enforcement action.

It may be that Congress needs to give the SEC some additional ability to compel documents in such a situation, or perhaps provide some narrowly tailored clarification to a FOIA exemption for financial information of a particularly sensitive proprietary nature. But this provision as signed into law drops a net over such information that is far too wide.

Indeed, in writing such a broad provision, Congress may have inadvertently encouraged registered entities to seek even more FOIA protection before cooperating with the SEC. That is because the logical corollary of protecting confidential information is to insist on a wider scope of confidential information, which, in turn, further erodes both our press freedoms and market transparency.

In addition, the SEC may be legitimately concerned that it could be required to turn over sensitive proprietary information in response to a third-party subpoena issued in litigation to which the SEC is not even a party. Once again, however, Congress should carefully examine the appropriate contours of third-party discovery requests to the SEC. It should not categorically exclude information held by the SEC based only upon its status as having been obtained from a ``registered person.''

Over the last few years, the credibility of our markets has been damaged. Only transparency can best restore that credibility; any exemptions to transparency should hence be narrowly crafted. Section 929I needs a ``do-over.'' In the coming weeks, I hope to work with the SEC and other Senators to craft a more reasonable approach that satisfies the legitimate concerns of the SEC without sacrificing the goals of transparency and public accountability.

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