Updates to our Terms of Use

We are updating our Terms of Use. Please carefully review the updated Terms before proceeding to our website.

Tuesday, June 18, 2024 | Back issues
Courthouse News Service Courthouse News Service

SEC Doesn’t Have to Give Lawyer Group the Goods

WASHINGTON (CN) - Securities arbitration lawyers cannot access regulatory records on the oversight of the Financial Industry Regulatory Authority, a federal judge ruled.

The Public Investors Arbitration Bar Association is a group of attorneys who represent public investors in securities arbitrations. It wanted the Securities and Exchange Commission to release audits and reviews conducted into the FINRA arbitrator-selection process. It also wanted to know how FINRA appoints replacement arbitrators and how it decides challenges to an arbitrator's appointment.

Though the SEC claimed to have located 65 boxes of potentially responsive documents, it declined to release pursuant to an exemption under the Freedom of Information Act.

U.S. District Judge Beryl Howell sided with the agency Thursday, noting that the language of the FOIA exemption is "very broad."

"The D.C. Circuit has held that, for purposes of Exemption 8, 'examination reports need not pertain to an institution that is regulated or supervised by the withholding agency,'" Howell wrote, citing Citizen v. Farm Credit Admin. "This means that agencies that do not directly regulate or supervise a particular financial institution may still withhold information about that institution under Exemption 8, so long as the withholding agency is one that is 'responsible for the regulation or supervision of financial institutions' more generally."

Howell rejected the group's argument that its sought-after records do not pertain to financial conditions or transactions within FINRA. The lawyer group had contended that application of Exemption 8 to its request "would create the unreasonable result in a reply brief that the SEC would act as a functional vacuum cleaner into which all manner of non-exempt documents would be shielded from scrutiny."

"The court is sympathetic to the plaintiff's parade of horribles, but the broad language of the FOIA, as well as Congress's recent amendment to the 1934 Securities Exchange Act, require the court to conclude that the documents sought by the plaintiff are exempt from disclosure," Howell wrote.

She continued: "The keystone of the plaintiff's argument is that Congress did not intend, through FOIA Exemption 8, to protect from disclosure records related to a regulatory agency's examination of a financial institution's administrative functions. Indeed, only if this proposition were true would the withholding of such documents be the 'unreasonable result' of which the plaintiff repeatedly cautions. Yet, it is clear that at least one purpose of Exemption 8, apparent from both the plain meaning of its text and the legislative history, is served by withholding the records at issue in this case. That purpose, as the D.C. Circuit has put it, is 'to safeguard the relationship between the banks and their supervising agencies.'"

While the association's interpretation of the FOIA exemption might make sense to prevent self-regulatory agencies like the SEC from becoming captives of the banking industry "from a policy perspective," the text of Exemption 8 makes no such limitation, the ruling states.

"Furthermore, the plaintiff's proposed limitation on the text of Exemption 8 does not appear to fit with the larger structure of the FOIA," Howell wrote. "Although the plaintiff would narrow Exemption 8 only to cover records related to 'a financial transaction or condition of the financial institution,' the FOIA already provides a separate exemption for 'commercial or financial information obtained from a person and privileged or confidential.' The plaintiff's reading of Exemption 8 would essentially render Exemption 4 superfluous, or at least would sap Exemption 4 of any meaning that is reasonably distinct from that of Exemption 8. Hence, the plaintiff's proposed interpretation of Exemption 8 does not comport with the court's obligation to 'strive to interpret a statute to give meaning to every clause and word, and certainly not to treat an entire subsection as mere surplusage.'"

Howell also took Congress to task for muddying the Exemption 8 waters, by making any agency the SEC regulates - including FINRA - a "financial institution" in its amendment of the Securities Exchange Act of 1934.

"This amendment, passed by Congress in 2010, was intended 'to improve transparency at the Securities and Exchange Commission, but it appears to have done just the opposite," Howell wrote. "Indeed, Congress's 2010 amendment to the Securities Exchange Act provides an even broader disclosure shield than [the previous version] did because Exemption 8 can be invoked by any 'agency responsible for the regulation or supervision of financial institutions,' not just the SEC. The court is skeptical that a self-regulatory organization like FINRA would logically qualify as a 'financial institution' as that term has traditionally been defined or as that term was understood when the FOIA was first enacted."

Howell added: "For this reason, the plaintiff may be correct that Exemption 8 is overbroad because it extends to records related to the oversight of self-regulatory organizations, but there is no escaping the conclusion that 'Congress has left no room for a narrower interpretation,' and therefore the plaintiff's arguments must be directed at Congress, rather than the courts. There is little question in the court's mind that Congress's amendment effectively expanding the definition of 'financial institution' was a well-intentioned legislative fix which, as this case demonstrates, has resulted in its own set of unintended consequences."

Categories / Uncategorized

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.