[Congressional Record (Bound Edition), Volume 156 (2010), Part 10]
[Senate]
[Pages 14554-14555]
[From the U.S. Government Publishing Office, www.gpo.gov]




                           SEC FOIA EXEMPTION

  Mr. KAUFMAN. 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.
  Section 929I reads in part:

       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

[[Page 14555]]

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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