SEC chairman defends disclosure exemption for inspection data on financial firms

SEC head defends public records exemption

WASHINGTON — The head of the Securities and Exchange Commission said Thursday the public shouldn’t be able to see details of the SEC’s policing of financial firms because it could make the agency’s job more difficult.

SEC Chairman Mary Schapiro told a House panel that the agency needs the exemption for some cases because firms won’t provide information voluntarily if they know it could be viewed by anyone, including competitors.

Lawmakers want to close a loophole in the new financial overhaul law that allows the SEC an exemption to the Freedom of Information Act. Those records are related to its monitoring of firms such as hedge funds and investment advisers.

Legislation is moving through Congress and is backed by open-government advocates, including the American Civil Liberties Union, the Society of Professional Journalists and the U.S. Public Interest Research Group.

The Senate Judiciary Committee approved a bill unanimously on Thursday. The House Financial Services Committee held a hearing to examine the exemption, and is likely to follow the Senate panel’s lead.

“I am convinced that it went too far,” Rep. Barney Frank, D-Mass., chairman of the House panel, told Schapiro at the hearing. “It is clear that legislation is required.”

The exemption allows the SEC to hold back a range of data it collects from financial firms during its inspections. In most cases, financial firms voluntarily provide the information.

Proponents of closing the exemption say the public should have a right to review the data because firms could be making risky moves. They cite the case of Bernard Madoff, who is serving a life sentence in federal prison for conducting a multi-billion dollar Ponzi scheme, as a reason for making the data public.

But Schapiro said firms are concerned that competitors could exploit the public records laws to review proprietary information, such as their investment strategies or trading formulas. That would lead many firms to stop volunteering the information and that could damage the SEC’s ability “to obtain in a timely manner the sensitive or confidential information needed for comprehensive examinations” of firms, Schapiro said.

The FOIA law is aimed at promoting openness and transparency in government. It requires that government records be released to anyone who asks, unless they fall under one of nine exceptions to the law. The financial overhaul law enacted in July broadened the SEC’s ability to invoke those exceptions.

Lawmakers from both parties are concerned about exempting the SEC from oversight just as it flexes new powers it gained under the landmark overhaul. The law gives the SEC new authority to oversee hedge funds, derivatives and other aspects of the financial industry.

The proposed fix to the FOIA exemption would be the first change to the financial regulatory law.

Schapiro tried to assuage lawmakers’ concerns by saying she’s directed her staff to apply the exemption in limited cases.

But Angela Canterbury, director of public policy at the Project on Government Oversight, said, “We do not believe that internal SEC guidance is sufficient to allay the risks to the public interest.”

An audit commissioned by the SEC inspector general, released a year ago, found that the agency had inadequate or incorrect FOIA procedures for determining whether responsive documents exist and how exemptions from disclosure are applied.

The report found that the agency was more inclined to withhold information from public view than share it when requested. The SEC’s rate of compliance with FOIA rules was “significantly lower” than the average of those for federal agencies, it said.

The inspector general made 10 recommendations in the report. Schapiro noted in her testimony that the agency has carried out nine of them since then.