One of the most controversial provisions of the Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank Act), recently signed into law by President Obama, is Section 929I, which allows the Securities and Exchange Commission (SEC) to withhold documents requested by the public pursuant to the Freedom of Information Act (FOIA). The provision became a hot-button issue earlier this summer when journalists and lawmakers described it as an affront to governmental transparency and accountability, which FOIA was intended to promote. Pursuant to the Investment Company Act of 1940, the SEC has historically been exempt from disclosing “any internal compliance or audit records” to the public. This limited exemption was grafted into FOIA in 1960. The trouble with the Dodd-Frank Act is that the language in 929I goes further and exempts the SEC from disclosing “any records…if such records or information have been obtained by the commission for…surveillance, risk assessments or other regulatory and oversight activities.”
Late in the evening on September 23, 2010, Congress passed Senate Bill 3717, which effectively repeals the FOIA exemption granted to the SEC in 929I. The Congressional repeal was extremely quick. Congressional hearings on the subject held on September 17, Senate Bill 3717 was passed in the Senate on September 21, with the final approval by the House of Representatives on September 23. The repeal was approved over continued insistence by SEC Chariman Mary Shapiro that her staff needed the broad authority to withhold documents from the public in order to effectively examine registrants. In letters to the House Financial Services Committee and the Senate Banking Committee, Chairman Shapiro stated:
“I am writing to address recent assertions that section 929I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was “hidden” in the financial reform legislation and “exempts” the SEC from the Freedom of Information Act (FOIA). As you know, these assertions are false….In order for our efforts to be successful, it is important that registered entities be able to provide us with access to confidential information without concern that the information will later be made public….This provision does not provide a ‘blanket’ SEC exemption from FOIA and is not designed to protect the SEC as an agency from public oversight and accountability…”
In her letter, Chairman Shapiro also stated the SEC would publish guidelines on its website to ensure Section 929i would be used only as intended.
The 929I controversy reached an interesting zenith last August when U.S. Administrative Court Judge James Kelly, in a case brought by the SEC against brokerage firm Morgan Keegan, ruled that the 929I does not apply retroactively. Morgan Keegan had been charged by the SEC with intentionally misleading investors regarding funds managed by the firm that were allegedly subject to excessive risk based on investments in subprime mortgages. Morgan Keegan had issued a subpoena to the SEC requesting documents that might be helpful to their defense, but the SEC refused to produce the documents and filed a motion to quash the subpoena, citing Section 929I of the Dodd-Frank Act. Judge Kelly went on to state in his decision that Section 929I applied prospectively, and so the case provided a spectacularly relevant view into how the SEC intended to exercise its new rights to withhold documents from the public, as well as from defendants in cases brought by the SEC. About a month earlier, the SEC had also invoked Section 929I in denying a FOIA request made by FOX Business Network to obtain documents relating to the Bernie Madoff case.
During the House hearings on September 16, 2010, Chairman Barney Frank (D-MA) began by citing bipartisan concerns regarding Section 929I, referred to the SEC’s staff guidance as a “step in the right direction,” but went on to note that the SEC was free to change its interpretation or use of Section 929I at any time. Chairman Frank went on to describe the language of Section 929I as too broad and that it “allows the SEC to keep secret virtually any information it obtains under its examination authority.” Another committee member, Rep. Edolphus Towns (D-NY), cited the SEC’s actions in the Morgan Keegan case as proof that, notwithstanding the SEC’s staff guidelines, “the SEC has already indicated its willingness to exploit this loophole.”
In a press release following the Congressional repeal of Section 929I, Senate Judiciary Committee Chairman Patrick Leahy (D-VT), a co-sponsor of Senate Bill 3717, stated:
“I commend the House of Representatives for promptly following the Senate’s action, and passing legislation to repeal exemptions to the Freedom of Information Act (FOIA) for the Securities and Exchange Commission (SEC) that were enacted in the Wall Street reform bill. This new law will ensure that the Freedom of Information Act (FOIA) remains an effective tool to provide public access to information about the stability of our financial markets. The Freedom of Information Act has long recognized the need to balance the government’s legitimate interest in protecting confidential business records, trade secrets and other sensitive information from public disclosure, and preserving the public’s right to know. To accomplish this, care must always be taken to ensure that exemptions to FOIA’s disclosure requirements are narrowly and properly applied. The bill passed by the House today accomplishes this important goal. I commend the Congress for working in a bipartisan manner to eliminate these overly broad FOIA exemptions.”
With the repeal of Section 929I, the SEC’s obligations to comply with proper FOIA requests revert to what they were prior to the enactment of the Dodd-Frank Act.