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From Securities Regulation Daily, November 14, 2014

SEC not required to release exam records for FINRA arbitrations

By Rodney F. Tonkovic, J.D.

The D.C. Circuit has held that the SEC can invoke the Freedom of Information Act to withhold documents collected from examinations of FINRA arbitrations. The Commission relied on Exemption 8 to FOIA, which protects records related to examinations by agencies responsible for the regulation of financial institutions. The court found that the exemption applied to the records at issue because they implicated relevant Commission examinations and related to specific reports stemming from those examinations (Public Investors Arbitration Bar Association v. SEC, November 14, 2014, Tatel, D.).

Background. The plaintiff, the Public Investors Arbitration Bar Association (PIABA) is an organization that represents investors in disputes with securities brokers. PIABA also promotes the arbitration-related interests of its constituents. To that end, PIABA sent a FOIA request seeking the Commission's records related to its audits, inspections, and reviews of FINRA’s arbitration program.

The Commission identified 65 boxes of potentially responsive material, mainly responses to consumer complaints about FINRA's arbitration process. The Commission, however, refused to turn over this material, citing Exemption 8 and denied the FOIA request and PIABA's subsequent administrative appeal. PIABA then sued the Commission in the U.S. District Court for the District of Columbia.

Exemption 8. Exemption 8 protects from disclosure records "contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions" (5 U.S.C. § 552(b)(8)). The Exchange Act spells out in Sec. 24(e) that the SEC, and FINRA, as an entity under its supervision, is "responsible for the regulation or supervision of financial institutions."

Before the district court, PIABA contended that Exemption 8 protects only information related to financial examinations and thus does not apply to the Commission's administrative oversight of FINRA's arbitration program. PIABA argued further that the Commission failed to identify any specific examination report to which any contested document related.

The district court rejected both arguments, concluding that the requested records were protected because they related to "examinations" of FINRA. According to the court, the plain meaning of the exemption showed no distinction between a regulated entity’s financial and administrative activities. Also, applying the exemption in this case would serve the purpose of "protecting the cooperative relationship between the Commission and the entities it regulates." The court found further that nothing in the exemption requires the Commission to point to any particular report. In any event, the Commission's investigations had in fact resulted in reports or memoranda.

Appellate analysis. On appeal, the circuit court stated that it needed to determine only whether the records at issue were "contained in or related to" an “examination report” covered by Exemption 8. At issue was whether the records implicated a relevant Commission "examination" and, if so, whether they related to a specific "report." The court found that the answer to both counts was "yes."

The court concluded that documents collected by the Commission while examining any organization it regulates are exempt from disclosure. "This is true," Judge David S. Tatel, writing for the court, said, "no matter the records’ substance so long as they relate to a resulting report." In reaching this conclusion, the court found that the exemptions plain meaning "is all but conclusive." The court also pointed to Sec. 24(e), enacted in 2010, which further clarified Exemption 8's application to the Commission.

As to whether the records related to particular reports, PIABA based its argument on a statement of a Commission staffer leaving, it said, open the possibility that some documents related only to customer complaints, and not reports stemming from an examination. The court observed that the staffer clarified her statement, saying that all of the documents related to an examination and some could also implicate customer complaints. Even so, the court explained that an "examination report" is any report arising out of an inspection or inquiry, which also encompasses responses to customer complaints.

Judge Brown concurs. Judge Janice Rogers Brown concurred in the opinion, noting, however, her "disquiet" with the court's conclusion. Judge Brown remarked the financial world has changed since Exemption 8 was enacted, and the public now has "good reason to doubt the rigor of our financial systems’ reliability and oversight." Under D.C. Circuit precedent, bolstered by the 2010 amendment, Exemption 8 can apply to documents that are not necessarily "fundamentally financially-related." In light of the public's interest in transparency, Judge Brown called on Congress to "revisit this ill-conceived amendment."

The case is No. 13-5137.

Attorneys: Julie Alyssa Murray, Public Citizen Litigation Group for Public Investors Arbitration Bar Association. Karen J. Shimp for the SEC.

Companies: Public Investors Arbitration Bar Association

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