POGO has learned that the U.S. Chamber of Commerce is shopping another legislative proposal to give the Securities and Exchange Commission (SEC) the ability to hide information on wrongdoing by brokerage firms, hedge funds, financial advisors, and all other financial entities it regulates.
When Angela Canterbury testified at last Thursday's House Financial Services hearing she was encouraged to learn that both Rep. Barney Frank, D-Mass., and Chairman Schapiro agree that the SEC secrecy provision enacted in the new Dodd-Frank law, Section 929I, is too broad. Rep. Frank further committed to fixing it legislatively. Ms. Canterbury testified that the best fix is to simply repeal the secrecy provision.
But the Chamber's bill would create another accountability shield by gutting the due process in civil discovery and allowing the SEC to block subpoenas that could reveal wrongdoing by financial firms—and the Commission.
We are troubled that Rep. Frank expressed interest in seeking a solution to a problem that has not been shown to exist: The SEC has not offered any examples of instances where confidential proprietary information has been made public through a subpoena served to the SEC by a civil litigant.
And yet, there is great potential harm to whistleblowers, defrauded investors, and others who may rely upon and have a right to information at the SEC if the SEC is given more power to block this information. The SEC has already shown it will aggressively use FOIA exemptions and its new secrecy provision in cases where its own incompetence might be revealed, as when it fought requests for information regarding its botched investigations of the Madoff and Stanford Ponzi schemes, its inexcusable delays in bringing insider trarding charges against Pequot Capital Management, and its retaliation against whistleblowers such as Gary Aguirre, Julie Preuitt, and Joel Sauer.
But the Chamber wants Congress to allow the SEC to have more secrecy. The Chamber's proposal would allow the SEC to do an end run around the civil justice system where the courts normally weigh a litigant's need for information against the interests that privilege is designed to protect. If instead the SEC can apply the broad exemptions to FOIA to subpoenas, there will be no meaningful judicial review and no concern given to the requester's need as a whistleblower or defrauded investor.
In addition, limits to discovery for one agency could cause a host of unintended consequences. Existing standards in common law and administrative law give the SEC and other agencies for refusing subpoenas. Why does the SEC need a blanket shield?
We strongly urge Congress to resist placing additional limits on access to SEC information until evidence of a problem has been presented, and even then more study is needed. If there is existing evidence of a problem with proprietary information being revealed through lawsuits exists, this is an issue that the judiciary committees should carefully review.
Meanwhile, Congress needs to pass legislation to repeal 929I, such as the bipartisan Leahy-Towns bill (H.R. 6086 and S. 3717), which would also address the SEC's request that newly regulated entities be designated as financial institutions for the purposes of FOIA Exemption 8.
The Senate Judiciary Committee has already passed S. 3717, choosing not to alter pre-existing standards for civil discovery. We hope that Chairman Frank will ignore the U.S. Chamber and the SEC's call for more secrecy and pass H.R. 6086, H.R. 5924, or similar legislation to simply repeal 929I.