SEC's ‘black-box' status could further shield Finra, critics say

Exemption from FOIA means regulator's reports relating to regulator must remain private; momentum gaining to repeal the exemption

Sep 16, 2010 @ 4:18 pm

By Dan Jamieson

The SEC's controversial new powers to keep inspection and other records private could help the Financial Industry Regulatory Authority Inc. stay further under the radar as well, critics say.

That's because self-regulatory organizations like Finra are considered to be “financial institutions” under the Freedom of Information Act. As a result, SEC oversight reports and other records relating to Finra don't have to be made public.

The FOIA exempts from disclosure any "examination, operating or condition reports" of financial institutions.

This exemption, No. 8 under the FOIA statute, was intended to protect shaky banks from depositor runs by keeping oversight reports private, in addition to fostering cooperation with regulators, according to the Department of Justice, which interprets the FOIA statute for government agencies. A 1997 decision by a federal court found that Exemption 8 also applied to Finra, then known as the National Association of Securities Dealers.

The Dodd-Frank law has expanded FOIA exemptions to include SEC records produced from "surveillance, risk assessments or other regulatory and oversight activities."

In a hearing of the House Financial Services Committee today, Chairman Barney Frank, D-Mass., said that within about two weeks he wanted the House to pass legislation amending a section of the regulatory overhaul legislation that would allow the SEC to avoid disclosing information it obtains while conducting examinations.

“I am concerned it went too far,” Mr. Frank said. “On the other hand, we don't want to make it harder for the enforcement people to get what they need.”

Meanwhile, on the other side of Capitol Hill, the Senate Judiciary Committee passed a bill that would repeal the new FOIA exemption.

Critics of the expanded exemptions under Dodd-Frank said that it would undermine SEC accountability by allowing it to decline Freedom of Information Act requests.

Likewise, Finra's long-established exemption from public disclosure has drawn fire, with some observers wondering why the private regulator's records should be deemed off-limits.

"The records of Finra, SROs and SEC exam reports should all be transparent," said Lynn Turner, managing director at LECG LLC, a forensic and economics consulting firm, and the former chief accountant at the SEC.

"One can only wonder what they are trying to hide by keeping these documents from the public," he said.

"If you claim some governmental immunity, or you clothe yourself with the authority of government" like Finra does, "you ought to be held to the same standards" of transparency as government agencies are, said Kevin Carreno, a securities attorney and founder of Experts Counsel Inc., who has sued Finra for document production.

Mr. Carreno has urged Mr. Frank, to end the FOIA exemption for SROs.

Exempting Finra-related records from disclosure "is just another one of the concerns about the ambiguous nature of SROs," said Angela Canterbury, director of public policy for the Project On Government Oversight, a government watchdog group.

Finra is "given enormous authority to regulate, yet they have very little accountability across the board," she said.

Ms. Canterbury testified today before the House committee.

"Congress recognized that if details from examinations were made available to the public or to competitors of financial institutions, those institutions might 'cooperate less than fully with federal authorities,'” SEC spokesman John Nester, wrote in an e-mail, citing a legal precedent.

"There is a strong public interest in effective SEC examinations" of Finra, he wrote.

SEC spokesman John Heine declined to comment further.

Critics of governmental secrecy have derided the cooperation argument.

"We're not convinced the agency should have to defer to the entities it regulates" for cooperation, Ms. Canterbury said today in her testimony, "especially when it has the power of subpoena."

Nancy Condon, a Finra spokeswoman, did not have an immediate comment.

Despite the concerns, the FOIA exemption for SROs is not under attack. Pending legislation in Congress to repeal the SEC's new powers under Dodd-Frank would do nothing to remove the exemption for SROs.

[Additional reporting by Mark Schoeff Jr.]

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