Open government advocates have raised serious concerns over a little-noticed provision in the new financial reform legislation that severely restricts the public's access to records held by the Securities and Exchange Commission (SEC). The new provision exempts certain SEC records from the Freedom of Information Act (FOIA). The aim of the new legislation is to increase transparency in the financial sector, but without access to enforcement records and other regulatory documents, the public loses a vital tool for holding our financial system regulators accountable.

The offending provision, found in Section 929I of the Dodd-Frank Wall Street Reform and Consumer Protection Act, was first flagged by Fox Business Network. The news network sued the SEC last year for failing to produce documents related to SEC's investigation of Bernie Madoff. According to Fox, the SEC recently cited the new law in its FOIA response.

The new financial reform law protects from FOIA disclosure "such records or information [that] 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" (see page 482 of the 848-page bill).

In response to the new provision, one former SEC attorney-turned-whistleblower remarked, "It allows the SEC to block the public's access to virtually all SEC records." The whistleblower had accused the agency of thwarting an investigation into a hedge fund in 2005 and had relied heavily on FOIA in a lawsuit against the SEC.

Considering the economic destruction wrought by the financial sector's poor behavior and equally poor regulations and enforcement, both companies and the public would benefit from as much transparency and accountability as possible.

In a letter to Rep. Barney Frank and Sen. Christopher Dodd, SEC chairman Mary Schapiro asserted that FOIA has hindered the SEC's ability to obtain information needed to enforce securities law and protect investors. Regulated entities "not infrequently refused to provide Commission examiners with sensitive information due to their fears that it ultimately would be disclosed publicly."

In their own letter to Rep. Frank and Sen. Dodd, eleven good government groups (including OMB Watch) counter that the provision is unnecessary to protect sensitive information and that the SEC's poor record implementing FOIA does not warrant being rewarded with even more authority to withhold information from the public.

In response to Chairman Schapiro's defense of the provision, the letter states, "These arguments do not adequately describe the SEC's existing regulatory authority, and they fail to acknowledge that the Freedom of Information Act (FOIA) already provides sufficient exemptions to protect against the release of sensitive and proprietary information."

An audit last year by the SEC's Office of Inspector General (OIG) revealed a wide range of problems related to the SEC’s FOIA operations. Among the OIG's findings: there are few written policies available to guide FOIA officers, the SEC Chief FOIA Officer was not operating in compliance with Executive Order 13392 or the OPEN Government Act, and the SEC's FOIA release rate was "significantly lower when compared to all other federal agencies." Moreover, the OIG's recommendations for fixing FOIA at SEC are yet to be implemented. It would seem additional restrictions on disclosure at SEC are needed like a hole in the head.

The open government advocates also note that SEC can subpoena records, so allegations that public disclosure laws dissuade regulated businesses from providing needed documents fail to recognize that the agency can demand the records it needs whether the businesses want to comply or not. SEC seems to think it needs expansive new exemptions from disclosure laws "to gain access in a timely fashion to information and data that it otherwise may not receive" from those it regulates. According to OMB Watch and the others, "We think such a blanket exemption fosters an environment that defers to the entities it regulates and is unadvisable."

The good government organizations call on the bill's sponsors "to repeal the unnecessary FOIA exemption in Section 929I, examine the SEC's current record on withholding information, and take whatever steps are necessary to ensure that the SEC isn't given any additional authority to keep its records under a veil of secrecy."

UPDATE: On Aug. 10, 35 good government groups, including OMB Watch, sent a letter to Sen. Patrick Leahy (D-VT) in support of S. 3717, a bill that would strike the troubling FOIA exemption provisions from the Wall Street Reform and Consumer Protection Act. The groups said that S. 3717 "sends a clear message that public access is vital to accountability and that ... existing FOIA exemptions can adequately protect confidential business information provided by newly regulated entities." The groups concluded, "In the aftermath of the recent financial crisis, the need for greater transparency in our financial system and in regulatory oversight is all too apparent."