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LEGISLATIVE PROPOSALS TO ADDRESS 

CONCERNS OVER THE SEC’S NEW 

CONFIDENTIALITY PROVISION 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 16, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–154 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

September 16, 2010 .......................................................................................... 1 

Appendix: 

September 16, 2010 .......................................................................................... 43 

WITNESSES 

THURSDAY, SEPTEMBER 16, 2010 

Blum, Rick, Coordinator, Sunshine in Government Initiative ............................. 29 

Canterbury, Angela, Director of Public Policy, Project On Government Oversight ....................................................................................................................... 27

Issa, Hon. Darrell E., a Representative in Congress from the State of California ..................................................................................................................... 7 

Merrill, Susan L., Partner, Bingham McCutchen LLP, on behalf of the Securities Industry and Financial Markets Association (SIFMA) .............................. 32 

Mintz, Steven G., Founding Partner, Mintz & Gold LLP .................................... 30 

Pitt, Hon. Harvey L., Chief Executive Officer, Kalorama Partners, LLC ........... 25 

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange Commission ........................................................................................................................ 10

Towns, Hon. Edolphus, a Representative in Congress from the State of New 

York ....................................................................................................................... 5 

APPENDIX 

Prepared statements: 

Paul, Hon. Ron .................................................................................................. 44 

Towns, Hon. Edolphus ..................................................................................... 45 

Blum, Rick ......................................................................................................... 48 

Canterbury, Angela .......................................................................................... 57 

Merrill, Susan L. .............................................................................................. 71 

Mintz, Steven G. ............................................................................................... 88 

Pitt, Hon. Harvey L. ......................................................................................... 114 

Schapiro, Hon. Mary L. .................................................................................... 127 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Issa, Hon. Darrell E.: 

Letter to Hon. Mary Schapiro, Chairman of the SEC, dated September 

15, 2010 .......................................................................................................... 140 

Schapiro, Hon. Mary: 

Letter to Representative Watt dated October 27, 2010, providing additional information in response to a question posed during the hearing .. 149 

(1) 

LEGISLATIVE PROPOSALS TO ADDRESS 

CONCERNS OVER THE SEC’S NEW 

CONFIDENTIALITY PROVISION 

Thursday, September 16, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Waters, Maloney, 

Watt, Moore, Lynch, Scott, Green, Cleaver, Kosmas; Bachus, Royce, 

Manzullo, Biggert, Hensarling, Neugebauer, Campbell, Posey, Jenkins, and Lance. 

The CHAIRMAN. The hearing will come to order. 

We have some conflicts. We are trying to crowd a lot into a few 

weeks. So I am going to call on the ranking member to give his 

opening statement and then the gentleman from Texas, Mr. Hensarling. They have other business. So the gentleman from Alabama 

is recognized for 21⁄2 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman, for holding today’s hearing to examine the broad exemption from the Freedom of Information Act accorded the SEC under Section 929I of the Dodd-Frank 

Act. 

Let me also thank Chairman Schapiro for being with us today 

and for her willingness to work with the committee in a spirit of 

bipartisanship and cooperation to address the concerns that have 

been raised about Section 929I by Congressman Issa and others. 

The Dodd-Frank Act confers significant new supervisory and investigative authorities on the SEC. Combining these powers with 

the provision that appears at first blush to insulate the SEC from 

public scrutiny has caused some alarm among Members on both 

sides of the aisle. This hearing provides a welcome opportunity to 

address some of the confusion and to consider a solution that ensures proper accountability at the SEC, while not undermining the 

agency’s important ability to exercise effective supervision over the 

thousands of firms it is responsible for overseeing in the post-DoddFrank world. 

To her credit, Chairman Schapiro has been candid with the committee and with the American people in acknowledging the past 

failures of the SEC in protecting investors and regulating large investment banks. We can all agree that the agency that presided 

over the collapse of some of the largest financial institutions on 

2 

Wall Street and was apparently unable to stop Bernie Madoff from 

perpetrating the largest financial fraud in American history must 

be more transparent and any statutory departures from a general 

policy of openness must be crafted carefully. Unfortunately, Section 

929I—and I think Congressmen Towns and Issa agree—doesn’t 

meet this standard for good legislative draftsmanship, and the provision’s broad wording has given rise to concerns that it could invoked to withhold information the public has a right to know. But 

the SEC would prefer it to remain secret for fear it would be cast 

in an unfavorable light. 

At the same time, no one questions the SEC’s legitimate and important need to preserve confidentiality of certain materials it collects during the examination process. In fact, some of these would 

be protected by contract law. 

The CHAIRMAN. Would the gentleman request an additional 30 

seconds? 

Mr. BACHUS. Just 5 additional seconds. 

Let me close by commending the chairman on something else. 

The Commission’s anticipated action to prevent window dressing, 

the transfer the liabilities off balance to improve month-ending report, very similar to the Repo 105 tactics at Lehman Brothers, I 

think, is a symbol of a changing attitude under Chairman 

Schapiro’s leadership; and I commend her and yield back the balance of my time. 

The CHAIRMAN. I thank the gentleman. 

The gentleman from Massachusetts, Mr. Lynch, is now recognized for 2 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I want to thank the ranking member as well; and I would like 

to welcome our witnesses today, my other chairman, Chairman Ed 

Towns, and also our ranking member, Darrell Issa. Thank you for 

your good work on this. I also want to thank Harvey Pitt, who will 

be testifying a little bit later on the third panel, and whose opinion 

I greatly respect. 

As many have noted, since the passage of the regulatory reform 

legislation this past summer, the SEC gained significant regulatory 

responsibilities with this new bill. I have always believed that it is 

important to provide regulators with the proper tools and resources 

as well as a certain amount of flexibility to do their jobs and accomplish their mission. 

A recent example of the importance of the SEC’s regulatory ability was evidenced in the aftermath of the flash crash in May. High 

frequency trading is suspected to have played a role in the crash. 

However, as Chairman Schapiro noted in her letter to us on July 

30th—actually, it was a letter to Chairman Frank—‘‘high frequency trading firms have historically been reluctant to provide information on formulas to the SEC out of privacy concerns.’’ This obviously can hamstring the efforts of investigators to determine the 

cause of the crash and how to prevent another one in the future. 

Section 929I addresses this very issue. It allows the SEC to protect the information and records it receives from regulated firms. 

It is also a fact that I am sensitive, however, to the criticisms of 

the provision citing the need for more transparency within financial regulation, not less. I believe prudent checks and balances are 

3 

necessary within our financial system, so I appreciate the opportunity to discuss the legislative proposal before us that would affect 

this provision. 

Again, my thanks to the witnesses, and I thank the chairman, 

and I yield back. 

The CHAIRMAN. The gentleman from Texas is recognized for 21⁄2

minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Thank you for 

holding this hearing. 

This is the first hearing I guess that we have had on Dodd-Frank 

since it became law, and it probably won’t be the last. When you 

have such massive legislation that creates so many new programs 

and authorities, rulemaking authority, I suspect we will be looking 

back at the rule’s provisions. 

The purpose of government should be only to make sure there is 

integrity and transparency. We give certain agencies the authority 

to do that, to ensure that there is integrity and transparency in the 

marketplace, and we have given the SEC a lot of authority, some 

people think too much authority. 

One of the things that we do want to do is in their normal course 

of business we want to make sure they are able to collect the information that allows them to regulate the entities that they are supposed to oversee. But, at the same time, we want them to be protective of that information when it is proprietary to those particular companies. 

But by the same token too, the SEC needs to be accountable for 

their actions; and one of the concerns I think a lot of folks have 

about Section 929I is that it might give the agency some leeway 

there to claim that certain information is privileged under 929I and 

that information would not be available and the transparency integrity piece of government then is violated. 

So I am glad that we are having this hearing today. I think it 

is important that we get this right. We rushed through a lot of 

these provisions as this bill was being marked up, and it is important that we go back now and make sure that in those areas where 

we didn’t get it right, that we do get it right. We owe that to the 

American people. We owe it to the people who are relying on the 

SEC to protect their investments. 

And with that, Mr. Chairman, I yield back my time. 

The CHAIRMAN. I will yield myself 3 minutes. 

The gentleman’s statement that we rushed through these provisions is flatly inaccurate. And, in fact, with regard to this particular provision—and we are here to think about changing it and 

narrowing it and making it more specific—it was first essentially 

put before us by Chris Cox in 2006. I don’t think that is a big rush. 

Chris Cox was chairman of the SEC under President Bush, and he 

asked for it. 

In 2008, we were again asked for it when Chairman Cox was still 

the Chairman, and this committee voted out a bill unanimously 

that included it. Maybe the gentleman from Texas was rushed that 

day when he apparently didn’t object to it. But that was over 2 

years ago. And it went to the Floor and passed on suspension. 

This has been around for a while. And it was introduced again 

in 2009 in both bodies. It was before us. When the subcommittee 

4 

voted on the provisions or the committee that Mr. Kanjorski had 

worked on, it was there. It was then in both bills throughout the 

conference period. The base text was posted on the 10th of June. 

So it has been out there. All during the conference, Members had 

a chance to look at it. 

Yes, it is a big bill. It has a lot of separate sections. We worked 

on it for a little over a year. And while we are now getting complaints that we rushed through it, we also had complaints we were 

having too many meetings and hearings. So this is a serious subject, and I think talking about it being rushed through demeans inaccurately the seriousness of what we are trying to do. 

What happened apparently was there was a lawsuit that had 

been brought looking for information, and it became clear that this 

provision could have interfered with that lawsuit. Now that was 

not something that Chris Cox could have foreseen in 2006. I don’t 

think Chris Cox was trying to hide anything in 2006. We have Harvey Pitt’s testimony here; and Mr. Pitt, I don’t think, was trying 

to hide anything. 

This is a serious fact here that a legitimate issue to them now 

appears to have other consequences. What I am told by Chairman 

Schapiro—and she has tried very much to beef up enforcement— 

is that the initiative for this came from the enforcement people who 

said, if we aren’t able to protect some proprietary information, it 

would be harder for us to get it. And that is the purpose. 

No one, I hope, thinks we should be in any way shielding the 

SEC. I am convinced that it went too far. As I said, it has been 

something we have been talking about for 4 years. It wasn’t until 

this lawsuit that people were able to look at the conflict. I would 

hope we could discuss this in a serious manner. 

There was the absolute need for unmitigated transparency with 

regard to the SEC, and the question is, is the SEC doing its job? 

And the SEC has to understand that there have been too many examples of it not having done its job recently for people to rest easy 

on that. On the other hand, we don’t want to make it harder for 

the enforcement people to get what they need. I don’t know whether there is a way to sort that out. 

Senator Leahy had a bill. He tried to hotline it. It was not 

hotlined. Let me say—and I am going to give myself another 30 

seconds—it is clear that legislation is required, I believe. I know 

the chairman has done a very good job of trying to make this specific. But I think, given this, legislation is probably necessary. We 

will be looking at it. We have time to do something. And the Senate, for once, is interested in doing something. So we will be dealing with it. 

But let’s again be clear, this is a bipartisan request that has gone 

through two Administrations from two SECs. It was generated by 

the enforcement people. It has been out in public and debated in 

this committee—I will give myself another 30 seconds—for several 

years. 

Someone noted that there was a conflict between that and the 

lawsuit. It came to our attention. We promptly had a hearing. That 

is an appropriate way to go. And it is my intention to work together—and I hope in a bipartisan way—with partisan cracks 

5 

along the way—that, I suppose, comes with the territory—to resolve this in an appropriate manner. 

The gentleman from California is recognized for 21⁄2 minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

I will neither debate nor challenge your history on how we got 

here. But I am one of the bipartisan, bicameral bills—or a part of 

one of the bills that are both bipartisan and bicameral dealing with 

this. And, as the chairman suggested, we are here today because 

of a FOX Business Network lawsuit and information request. And 

the information request, my understanding is, was on Bernie 

Madoff and Allen Stanford and those Ponzi schemes. 

Now we all understand the need with the Freedom of Information Act to protect confidential and proprietary information of the 

regulated entities, but I think what has—at least for this Member, 

and I would presume for many of the other Members who have introduced legislation—it is difficult to understand why anything involving Bernie Madoff and Allen Stanford is proprietary, confidential information that needs to be protected under the Freedom of 

Information Act. That leads us all to perhaps a conclusion that 

maybe what we are trying to do is shield, in fact, the SEC and perhaps some actions of the SEC. 

Now as we look at the financial markets and the financial industry, both in the past and going forward in the future, certainly 

there are regulated entities that are under both SEC scrutiny and 

legislative scrutiny for actions in the past and will be for actions 

in the future. But the SEC should not be immune itself—the regulator—it should not be immune itself—not just the regulated—from 

the scrutiny of this legislative body as well. And it would appear 

that this Section 929I is—and I agree with the chairman—overly 

broad and permits the SEC to shield itself from scrutiny by this 

legislative body, which I think is inappropriate. 

But I look forward to hearing both the testimony of the Members 

at the table now and then the chairman of the SEC later. 

Thank you very much. I yield back. 

The CHAIRMAN. No further requests for time. 

Before me is the gentleman from New York, Mr. Towns, who is 

the chairman of the Committee on Government Reform and Oversight. He is now recognized. 

STATEMENT OF THE HONORABLE EDOLPHUS TOWNS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW 

YORK 

Mr. TOWNS. Thank you very much, Chairman Frank, Ranking 

Member Bachus, and members and staff of the Committee on Financial Services for inviting me today. 

The landmark Dodd-Frank Wall Street Reform and Consumer 

Protection Act made significant improvements to the accountability 

and the transparency of our Nation’s financial system. The Act 

gives consumers access to more information about investment and 

it reins in the abusive and excessive practices on Wall Street. 

Passing the Dodd-Frank Act was an important achievement. But 

our work in Congress did not end when the bill was passed. It is 

critical that we exercise vigilant oversight of implementation and 

that we act to close loopholes when they are identified. To that end, 

6 

I applaud you, Chairman Frank, for your willingness to hold this 

hearing to examine a significant loophole that I believe undermines 

the core purposes of the Dodd-Frank Act. 

Section 929I of the Act would allow the SEC to avoid disclosing 

information the Commission receives during examination of companies if the information is used for surveillance, risk assessment, or 

other regulatory and oversight activities. This language is too 

broad. It allows the SEC to keep secret virtually any information 

it obtains under its examination authority. 

SEC Chairwoman Mary Schapiro has asserted that the Commission will only use Section 929I as intended. But the SEC has already indicated its willingness to exploit this loophole. In an action 

the SEC brought against a broker-dealer, the Commission tried to 

use 929I to avoid an administrative law judge’s order to comply 

with the subpoena. That clearly goes beyond the intent of the provision and the SEC’s reasons for needing the provision in the first 

place. 

Chairwoman Schapiro yesterday issued guidance that places limits on the Commission’s use of Section 929I. This is a step in the 

right direction, and I do agree with that. But the Chairwoman’s 

guidance is not sufficient because the Commission can change its 

interpretation at any time, and the fact that guidance is needed at 

all is evidence itself that the provision is too broad and subject to 

abuse. 

The SEC’s rationale for Section 929I is that the provision is necessary to ensure that the Commission can obtain sensitive information when the Commission is performing examinations. 

Mr. Chairman, I introduced H.R. 6086 on August 10, 2010. H.R. 

6086 repeals the secrecy provision of Section 929I and amends the 

Securities Exchange Act to clarify that any entity the SEC regulates under the Securities Exchange Act will be considered a financial institution for the purpose of FOIA Exemption 8. My bill 

strikes a careful balance to address the SEC’s concerns without 

compromising the goals of transparency and accountability that are 

the heart of the Dodd-Frank Act. 

In a letter supporting H.R. 6086, a coalition of 36 public interest 

organizations, including groups such as the Project on Government 

Oversight, the Sunlight Foundation, and openthegovernment.org 

wrote in support of this legislation: ‘‘This bill sends a clear message 

that public access is vital to accountability,’’ and I am submitting 

a copy of that letter for the record today. 

The culture of accountability must start at the top. Allowing the 

SEC to operate in the darkness or in secrecy will undermine the 

confidence of consumers and regulated companies. 

I look forward to continuing to work with you, Chairman Frank, 

and the committee so that we can quickly and effectively address 

this issue. I want to thank the members of the committee. I want 

to thank you, Mr. Chairman, for holding this hearing today. I really feel that this is a start to be able to correct something that could 

be very detrimental as we move forward. 

On that note, I yield back the 3 seconds. 

[The prepared statement of Representative Towns can be found 

on page 45 of the appendix.] 

7 

The CHAIRMAN. The gentleman from California, Mr. Issa, will 

have 5 minutes and 3 seconds. 

STATEMENT OF THE HONORABLE DARRELL E. ISSA, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA 

Mr. ISSA. Thank you, Mr. Chairman, and Ranking Member Bachus. 

I respect the fact that this is the committee of jurisdiction that 

does oversee the SEC and that the nuances of what should or 

should not be made available under FOIA to a great extent falls 

within this committee. 

Chairman Towns and I are here because we represent the committee that is really about transparency. We will always be the 

committee that probably starts off assuming that everything should 

be available unless otherwise justified. 

Chairman Towns’ bill and what one might call a companion or 

a similar bill, H.R. 5924, which I also authored, really tried to 

unring the bell. That is our position. Our position is, you start over. 

You essentially undo what happened in the Dodd bill, and then you 

thoughtfully and carefully weigh what Chairman Cox brought, 

what Chairman Schapiro is bringing, and don’t give them what 

they ask for or what they want. Give them what they need. The 

decision of what they actually need in the long run will be yours. 

But let’s assume the following: Every bureaucrat, no matter how 

well intended, always wants to err on the side of caution unless the 

public believes they should err on the side of more. 

Now as I look down at Mike Oxley above the chairman, I remember that, in fact, Sarbanes-Oxley passed under many of your watches. I am perhaps the only Member of Congress serving on a public 

board both before and after that, taking a company public and 

watching as we went through the SEC process. 

The Securities and Exchange Commission is not an enforcement 

agency first. It is not the FBI. It does not deal in vast secrets. It 

is, in fact, an agency that exists for no other reason primarily than 

to ensure us transparency of the information and honesty of the information that public companies put out there in order that there 

might be public confidence, trust, and, thus, the free flow of funds 

to investments. The SEC exists in no small way in order to create 

transparency and honesty. 

Now, of course, we have an enforcement responsibility, and often 

they ask for additional information and information that should not 

be made public. But, make no mistake, the SEC is about asking for 

proprietary information to be made public as a part of what they 

do. We all know that you can find out a great deal about a company—far more about a public company than you can a privately 

held company as a result of their wanting to be before us. 

As Congressman Campbell said, it is impossible for us to understand how criminal enterprises such as Bernie Madoff’s can, in 

fact, continue to enjoy some level of protection from scrutiny by the 

public. So Mr. Chairman, we are coming before you here today to 

a great extent not to debate whether suggestions made by former 

SEC Chairman Cox or current Chairwoman Schapiro are, in fact, 

appropriate. That is your decision to be made in good time. But we 

8 

are asking you to consider legislation that would effectively unring 

the bell, allow that process to go forward without prejudice based 

on what was put in the bill that we believe was overly broad. 

I might point out to the committee—not that you wouldn’t already know it but perhaps for the public—that the SEC prior to 

this 929I only granted 13 percent of FOIA requests. And, as far as 

we can tell, it was only overturned when they denied once. 

So this is an agency that knows how to say ‘‘no,’’ has the power 

to say ‘‘no,’’ and says ‘‘no’’ most of the time. I think that is one of 

the reasons that in my letter to Chairwoman Schapiro, which I 

would ask unanimous consent to be placed in the record— 

The CHAIRMAN. Without objection, it is so ordered. 

Mr. ISSA. —we pointed out some of the details of that history, not 

to say by any means that her guidelines were inappropriate and 

weren’t a good step but that, in fact, if we unrang the bell here 

today, they still only would grant about 13 percent of FOIA. They 

would fully protect company secrets. And if they can’t, I certainly 

want to make sure that this committee, in due time, ensures that 

we do provide them the tools that they need. 

I might note that there is a legitimate reason to say that no one 

should ever be able to use the Securities and Exchange Commission to backdoor their way into information that would not otherwise be available through FOIA. That is a good point and a good 

starting point. 

So as we take this step forward I would hope that the members 

of the committee who have the absolute jurisdiction would start 

over to the extent possible, give us a quick remedy from an overly 

broad prohibition on FOIA, and then appropriately listen to Chairman Cox and Chairman Schapiro in the future. 

Thank you for the extra few seconds. I yield back. 

The CHAIRMAN. Thank you. 

Again, I want to be very clear. From what I am hearing, it is because FOX filed that lawsuit and it was in the course of the lawsuit that people discovered the problems. 

I just want to note, again, to repeat, in 2008, the House passed 

this bill—a bill including this unanimously. Some of the people who 

are now for appeal were cosponsors. It was put in, in 2009, when 

the committee debated the part of the financial reform bill of which 

this was a part, 45 amendments were offered, and none of them affected this. That is, nobody at the time, when we had a long set 

of markups, thought about it. 

The bill went to the Floor of the House. It was in the House. It 

was also in the Senate, and 241 amendments were filed in the 

Rules Committee. None dealt with this. And then members will remember with varying degrees of joy the conference process during 

which every member of the conference offered amendments on a 

variety of subjects, and nobody offered an amendment on this. 

So this has been out in the public—and I am saying that to be 

clear. Because the question is, how did this slip through? It didn’t 

slip through. It was plausible language. Often you don’t know 

something until it is time-tested, and the lawsuit tested this. So 

that is why we are here. 

Having been through all this, having had it laying out before all 

of us who were here, and everybody here, conferees here, three of 

9 

us conferees there, two conferees there, it just didn’t occur to anybody until it was called to our attention, and I believe that Congress is now acting appropriately. And I think what the gentleman 

from California suggested, we do have—let me just say by way of 

procedurally, we have a short time period now, and it may even get 

shorter. And there are two possibilities. One is that we try to 

amend—and I think it is clear that something should be done. Either we try to amend it in some way, as was proposed, or it is a 

two-step process of a repeal with a note that this should not be left 

undone and reapproached, and whether that would be later this 

year or next year, it could be done. Because, again, as I said, the 

history of this makes it very clear. It has been totally nonpartisan. 

So we can work on that. 

Do any other members have any comments or questions for our 

colleagues? If not, according to the custom, we thank them. 

I do want to note, yes, it is within our jurisdiction. One of the 

things I am very proud of with regard to this committee is that we 

have engaged in no turf battles with anybody, because I think that 

is Congress at its worst. When we are engaged in jurisdictional 

battles, we appear to the public to be just interested in sort of prestige. We have the full participation of both of these members in the 

conference, not restricted, de facto to what we talked about. And 

we will be drawing on the expertise of that committee which has 

jurisdiction over FOIA as we proceed. So I thank both gentlemen. 

Mr. ISSA. I thank the chairman. And I would just ask unanimous 

consent that our report from May be included in the record as part 

of our submission. 

The CHAIRMAN. The report on the SEC? 

Mr. ISSA. On the SEC, yes. It is a published report. 

The CHAIRMAN. So why do you have to publish it again? 

Mr. ISSA. I would note for the record that you are right. Thank 

you, Mr. Chairman. 

The CHAIRMAN. We will now call on Chairman Mary Schapiro. 

And I thank the gentlemen. 

As the Chairman takes her place, I would ask unanimous consent to include in the record a statement from the Society of American Business Editors and Writers, not previously published, I 

would note. No, I take it back. It has been previously published. 

We will put it in. It is short. 

Without objection, it will be included. 

Chairman Schapiro, let me say I appreciate your coming. And I 

just want to say at the outset, no one I think does or should consider this in any way any kind of criticism or indictment. My own 

view is that you have significantly improved the enforcement mechanism. 

I know Mr. Khuzami couldn’t be here because of impossible conflicts, but I welcome him and what he has been doing. 

So I want to make very clear—and I think everybody has made 

this clear—we are here in a spirit of cooperation. We have a common enterprise. We have conflicting goals, to some extent, which 

is tough enforcement but also complete openness. And I think, in 

good faith, we will work together there. 

So, Chairman Schapiro, please begin. And as this is a complicated subject, I don’t think anyone would object if we give you 

10 

the flexibility to go over the 5 minutes that we give some others 

from time to time usually. You are a one-person panel, so we can 

do that. Go ahead. 

STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, 

CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. SCHAPIRO. Thank you very much Mr. Chairman. 

Chairman Frank, Ranking Member Bachus, and members of the 

committee, thank you for the opportunity to testify today on behalf 

of the Securities and Exchange Commission concerning Section 

929I of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

Section 929I was designed to improve our examinations of regulated entities by clarifying the protections afforded to regulatees 

that provide the Commission with sensitive and confidential materials as part of those examinations. It is a provision that we raised 

with Congress for several years in both a bipartisan and transparent manner. Indeed, as the chairman has noted, 2 years ago, 

the House of Representatives passed language that, while not identical, was substantively the same in its protection of examination 

documents as Section 929I. 

Among other things, the SEC is responsible for examining in excess of 17,000 entities that play central roles in our capital markets, including investment advisers, broker-dealers, and credit rating agencies, to name just a few. During those inspections, our examiners frequently request confidential and sensitive business 

records that are critical to our oversight. Yet because of uncertainties in the law, some regulated entities have expressed concern 

about the Commission’s ability to protect those documents from 

compelled disclosure to the public or to their competitors. That ambiguity has impeded our ability to obtain vital examination information on a timely basis. 

Section 929I was designed to eliminate this substantial and longstanding impediment and facilitate more thorough and efficient examinations. 929I was never intended to exempt the SEC from the 

Freedom of Information Act, nor does it. FOIA is a landmark law 

that guarantees citizens access to government information, provided certain exemptions do not apply. 

In the case of the SEC and other financial examiners, FOIA 

seeks to balance the public’s right to information with the government’s responsibility to provide effective supervision. Though 

FOIA, through Exemption 8, does provide important protections 

from disclosure for examination materials obtained from ‘‘financial 

institutions,’’ that term is not defined in the law. Indeed, courts 

have not yet addressed whether certain entities the Commission 

has the authority and the responsibility to examine—for example, 

credit rating agencies, transfer agents and municipal advisers—are 

financial institutions for purposes of these FOIA protections. 

Additionally, existing FOIA exemptions do not apply, of course, 

in non-FOIA contexts. So when a private party in litigation with 

another private party subpoenas documents from the Commission, 

potentially about its competitors, that the Commission has received 

through its examination program, the Commission has had to rely 

11 

on arguments of undue burden, relevance, or common law privilege 

to protect the information from disclosure. 

Section 929I appropriately provides needed protection in this 

non-FOIA litigation context. Rather than use the Commission to 

gain access to information, private litigants should have to seek 

documents from the registered entity, which is, after all, best positioned to articulate the sensitivities of that information. 

While the Commission believes 929I will improve its examination 

program by facilitating better and more timely access to vital information, it also shares a commitment to accountability and transparency that is embodied by the Freedom of Information Act. The 

Commission recognizes that Section 929I is meant to balance the 

public’s right to information with the benefits of a robust examination program, a balance that is recognized under FOIA as well. 

To ensure that these important and competing interests were appropriately balanced, including in the third-party litigation context, 

last month I instructed the staff to refrain from invoking 929I until 

the Commission issued guidance as to when and how to assert this 

provision. Yesterday, the Commission issued clear guidance to the 

staff on the appropriate use of 929I. A copy of that guidance is attached to my written testimony. 

With respect to FOIA requests, the staff and the Commission will 

continue to rely on existing FOIA exemptions and use 929I only 

where the information is obtained through the examination program and where the courts have not yet determined whether the 

examined entity is a financial institution. 

With regard to third party or non-FOIA litigation, 929I will only 

be invoked where the information, had it been sought via FOIA, 

could have been protected under existing FOIA exemptions and 

then only when the party cannot establish a substantial need to obtain it from the Commission. 929I will not be invoked in any matter where the SEC or the United States Government is a party. 

Finally, you have asked that we comment on the bills introduced 

that would explicitly or effectively repeal 929I. I am concerned that 

these bills, as currently drafted, may not provide certainty to regulated entities concerning the protection of their proprietary information. In addition, none of these proposals address instances in 

which third parties seek to compel the Commission to produce documents in non-FOIA litigation through third-party subpoenas. I 

am, therefore, concerned these bills would diminish the Commission’s ability to obtain in a timely fashion the information needed 

for comprehensive examinations. 

In sum, 929I is important to our ability to develop a robust examination program that better protects investors. As you know, our 

examinations help us to identify compliance errors as well as 

wrongdoing, and where wrongdoing is uncovered, these examinations result in referrals to our enforcement division. A vigorous enforcement program goes hand-in-hand with a good examination 

program. Though we recognize the competing policy interests it 

raises, a return to the status quo ante will again limit the efficacy 

of our exam program. I do believe the Commission’s guidance 

strikes an appropriate balance by addressing the primary issues 

that existed prior to this new law, while simultaneously protecting 

against application in a broader-than-intended manner. 

12 

Thank you very much, and of course I am happy to answer your 

questions. 

[The prepared statement of Chairman Schapiro can be found on 

page 127 of the appendix.] 

Ms. WATERS. [presiding] Thank you very much, Chairwoman, for 

being here today. 

I recognize myself for 5 minutes. 

Chairman Schapiro, the SEC has been asking for this authority 

for some time. In addition to some regulated entities—some regulated entities have refused to provide requested information to the 

SEC out of fear that the information would later be subject to a 

FOIA request. Can you provide specific examples of an instance 

where having the new confidentiality provision would have allowed 

the SEC to better influence its rules and regulations against a financial institution? 

Ms. SCHAPIRO. Yes, I would be happy to. We have a number of 

examples where we have sought information that regulatees were 

uncomfortable providing the Commission because they felt that if 

we could not protect it from public disclosure, they could suffer serious competitive harm; and that would be public disclosure either 

through FOIA, where Exemption 8 might not clearly cover materials and protect them from disclosure, as well as disclosure 

through private litigation. 

That would include, for example, instances where we have 

sought from proprietary trading firms their algorithms for trading. 

Their fear was that their algorithms that they use to dictate how 

they conduct their trading are highly proprietary and they would 

suffer severe disadvantage if that information was disclosed. 

We have also had instances where a registered investment adviser that manages a number of very large funds refused to provide 

the Commission with details about its quantitative trading strategy 

for fear, again, that the information could become public and others 

could trade against that information to the disadvantage of those 

large funds. 

We have also had instances, in the context of looking at insider 

trading, where firms have been uncomfortable turning over to us 

what they call their watch list. Those are the lists that are maintained by investment bankers to track companies on which they 

have insider information to make sure their employees are not 

trading on that information, and there are some examples of discomfort in that regard. 

And then a final category would be with respect to the provision 

of internal audit reports that have been done by regulatees that 

they have not wanted to turn over to the agency. So sometimes we 

can’t get the information. Sometimes it takes a very long time for 

us to get the information ultimately from these regulatees. 

Ms. WATERS. Do you have an example of where you have seen 

proprietary information used in a way to advantage a firm or to 

disadvantage a firm with information that you had had in your 

possession? 

Ms. SCHAPIRO. Congresswoman, the issue would be the firm’s reluctance to give us that information in the first instance because 

if it were made public—a proprietary trading firm’s algorithms are 

essentially their trade secrets. It is their formula to Coca-Cola. And 

13 

if that information becomes public, then others can trade to the 

detriment of that firm and its intellectual— 

Ms. WATERS. So what you are saying is that you have had 100 

percent refusal to give certain information. You have not received 

information that has violated confidentiality. 

Ms. SCHAPIRO. No, not 100 percent refusal, certainly. We have 

had instances where we have had refusals and very long and protracted negotiations to try to find a mechanism through which 

these entities would be comfortable giving us the information. We 

do at the end of the day have the ability to subpoena the information. But I would really prefer not to see our enforcement program, 

which has so much to do with respect to fraud and manipulation 

and violations of the Federal securities laws, turned into a mechanism for suing firms just to get the production of documents that, 

frankly, should be produced to us in the course of the routine examination program. 

Ms. WATERS. Thank you very much. 

Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Chairman, for being here today. 

As I listen to this discussion and I listen to the testimony, one 

of the kind of questions that come up—some people say the reason 

we are here is because of the FOX Business News lawsuit. And 

that was more about what was, I think—as I understand it, their 

inquiry was more about what the agency’s behavior was in their investigation to these two entities and not necessarily about any top 

secret information that you may have requested from these entities. Yet we have had a lot of discussion here today about asking 

these entities for more detailed information on their trading models 

and things like that. 

These seem to be two different issues, and can you differentiate 

to me the difference of someone getting information on the behavior 

of the agency as opposed to someone getting information on the behavior of a company that the agency is overseeing? 

Ms. SCHAPIRO. Congressman, I think there is a difference, and I 

think it is very worthwhile to explore that difference. 

In the FOX litigation, which I should say is before a Federal 

judge who will make the ultimate decision about the remaining 

documents to be disclosed or not, FOX sought tips and complaints 

and referrals that had been received by the agency with respect to 

Madoff. They sought 2004 and 2005 examination information, 2006 

and present enforcement investigation information, and information coming out of our Inspector General’s investigation of how the 

agency handled Madoff. Tens of thousands of pages of documents 

have, in fact, been turned over in that litigation. 

I agree with you that 929I should not be about shielding the Securities and Exchange Commission from accountability for its failures or for the actions that it takes, whether or not you view them 

to be failures in any particular context. I would say two things 

about that. 

One is that, in response to Congressman Campbell, nothing in 

929I prevents Congress from getting complete access to everything. 

It is quite explicit in the provision. Congress has full access to the 

agency for purposes of oversight. 

14 

But in the guidance that we have published that would bind our 

staff, 929I may never be invoked in non-FOIA litigation where the 

agency or the United States Government is a party. So I understand and appreciate very much the point that we must be accountable not just to you all but to the public and that by relying only 

on FOIA exemptions we think we can do a lot to ensure that there 

is a flow of that information about the agency to the public realm. 

The last point I would make is that we do have exemptions 

under FOIA for investigations and to prevent the disclosure of material that would interfere with an active investigation or ongoing 

enforcement proceeding. In the Madoff context, there are multiple 

ongoing enforcement proceedings. And so that Exemption 7(A) from 

FOIA has been invoked with respect to some of those documents. 

Mr. NEUGEBAUER. And I guess you have heard and you have received letters from various members about the concerns about your 

implementation of this and the broadness of it. And you have yourself issued guidance on the use of 929I. Is it your position that you 

would support legislative language that would clarify and give 

more specific guidance on this, maybe in keeping with even some 

of your direction that you have issued in your guidance? 

Ms. SCHAPIRO. Congressman, I very much would. I think codification of the guidance—it limits the agency’s discretion very dramatically—I think would be a very good step. We are very anxious to 

work with the committee to try to get to the right results here. We 

want great examinations. You want us to do great examinations. 

We also want to protect business’ ability to have sensitive and confidential information in the hands of the government without it 

necessarily being broadly exposed. 

Mr. NEUGEBAUER. I thank you. 

Mr. Chairman, I yield back. 

The CHAIRMAN. The gentleman from Texas formulated an important question. That is, one option would be to statutize the guidance because guidance can come and go; and that, I think, is one 

of the things we should consider. 

I guess there might be some agreement conceptually, but it isn’t 

always easy to try to take the concept into reality. That is, we all 

agree—and you, Chairman Schapiro, said so—the SEC shouldn’t be 

shielded in any way from the media, from the public, from Congress, which it wouldn’t be anyway. The only question is, is there 

some concern that if there was nothing along these lines you would 

encounter more resistance in trying to get proprietary information? 

And I guess particularly the question would be, if you got proprietary information and there wasn’t anything wrong, would people 

have that risk? 

I don’t know whether there is agreement on that. I think there 

is, generally. Both sides have understood the importance of protecting proprietary information; and, indeed, when we had an 

amendment offered I think in the conference about—I think it 

came from the Senate on the Office of Financial Information, there 

was some concerns on both sides that it was being too intrusive in 

getting private company data. So that is one of the things we have 

to look at. So we can obviously take a look at that. 

I do think it is going to be very important here—and I know you 

want to discuss this, and I appreciate that—that we hear particuVerDate Nov 24 2008 16:02 Jan 10, 2011 Jkt 062679 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\62679.TXT TERRIE
15 

larly from the enforcement people. And I think if the enforcement 

people could give us their very specific needs on this, that would 

be very helpful to us. 

Let me also say, we have a couple more weeks. We will be talking together across the aisle. I am hoping we can come together on 

something. I think some legislative action would definitely happen. 

The Senate has already talked about this. So it would be my hope 

that by the end of next week, we could get some agreement on 

where we are on all this so that we could probably do something 

on suspension that would be a necessary—in the final week before 

we get out and the Senate would so that this would be taken care 

of. So that, as I said, was the question about statutizing. 

But let me just say, one other question that has to be asked, the 

concern is that because things are subject—you did say, if I heard 

you correctly, because I was in and out, that you would not be invoking this with regard to the litigation that FOX has brought, is 

that correct? 

Ms. SCHAPIRO. That is correct. 

The CHAIRMAN. So this will not affect their lawsuit? 

Ms. SCHAPIRO. No, it will not. We have made it quite clear in the 

guidance that where the United States is a party, either prosecuting or being sued—it is clear in our guidance, that guidance 

was— 

The CHAIRMAN. Has that been clear in whatever court processes 

are going on with regard to the FOX lawsuit? 

Ms. SCHAPIRO. Yes, that is exactly right. About a month ago, I 

directed the staff not to use 929I under any circumstances until the 

Commission could— 

The CHAIRMAN. So this is irrelevant to the FOX litigation? 

Ms. SCHAPIRO. Yes, yes. 

The CHAIRMAN. I appreciate that. 

Let me ask one last thing, and it might be helpful to the argument that you and your predecessors have been making. Are there 

examples of resistance that came from the subjects of an investigation because of the concern that through FOIA proprietary information would be made public? That would be very helpful for us to 

know. Was this a theoretical fear or have you, in fact, encountered 

this? 

I see Mr. Pitt is here, and I will put him on notice that I will 

be asking him if he can think of any examples of that as well because I think that would be very relevant for us. 

Ms. SCHAPIRO. Mr. Chairman, I believe you had stepped out of 

the room, but we have many examples with respect to proprietary 

trading algorithms, with respect to investment advisers and fund 

managers, personal trading records, with respect to internal auditor reports; and I would be happy to supplement them— 

The CHAIRMAN. Where people have resisted giving them to you 

on the grounds that they would be— 

Ms. SCHAPIRO. Yes. 

The CHAIRMAN. I apologize. And I should have asked before I duplicated. 

The gentleman from California. 

Mr. CAMPBELL. Thank you, Mr. Chairman; and thank you, Chairman Schapiro. 

16 

Let me just—on the prior question, I appreciate, as I understand 

it, your agreement that 929I is overly broad and would accept some 

codification of some restrictions in that regard, correct? 

Ms. SCHAPIRO. Yes. 

Mr. CAMPBELL. Until that occurs, this guidance that you have 

given can be changed, can be modified, whatever. Would you agree 

that with any changes or modification to this guidance, you would 

inform this committee immediately prior to it—in case, as the 

chairman suggested, we are running out of time on the legislative 

clock this year. 

Ms. SCHAPIRO. I would be happy to do that. And you should 

know, this is Commission guidance. The Commission voted to issue 

it. So it is not just my decree as chairman. But I would be happy 

to notify the committee if there were to be any change. 

Mr. CAMPBELL. Okay. Thank you. 

One question. Now this would be out of the purview of this committee. This would have been the Government Oversight Committee because of FOIA. One of the things you mentioned in your 

guidance that you issued yesterday is a lack of a definition of financial institutions. Is that something that Government Oversight 

should be looking at, a better or a complete definition of financial 

institutions for FOIA? 

Ms. SCHAPIRO. I believe that it is undefined. It has generally 

been defined by reference to the government in the Sunshine Act, 

I believe, but it doesn’t include in that list all of the, for example, 

new entities the SEC will have responsibility for regulating, such 

as municipal advisers or some, like credit rating agencies, which 

have never been found by a court to be a financial institution. It 

could be defined, I suppose, with a longer list or it could be defined 

to say that regulated entities which are examined by the Securities 

and Exchange Commission are financial institutions. 

Mr. CAMPBELL. Right. Because there could be new regulated entities 2 years from now that don’t exist today, entities that we don’t 

even know about at the moment. 

Ms. SCHAPIRO. Exactly. 

Mr. CAMPBELL. As has been discussed, we are here because of 

the FOX Business Network lawsuit pending, and to what extent I 

don’t know, because of the lawsuit. But it does appear, certainly to 

this Member and I think to other Members, that withholding information on the Stanford and Madoff entities is hard for us to understand, why that is a proprietary or confidential issue. 

Ms. SCHAPIRO. Congressman, I understand that concern. And I 

will say that, while we could have withheld many documents, we 

have turned over tens of thousands. And a judge will obviously 

make the ultimate decision about whether additional documents 

should be turned over. 

But there is ongoing litigation with respect to Madoff and Stanford, and we are only relying—I should be very clear—on existing 

FOIA exemptions to withhold any information in the FOX litigation. But there is information that has the potential to impact the 

ongoing investigation of parties related to Madoff that we think is 

important for us to protect until such time as that litigation is concluded, and then I would imagine many more documents will be released. 

17 

Mr. CAMPBELL. Okay. I guess I am still trying to understand. So, 

initially, was 929I used to deny release of documents and then now 

you have released more by using the previous or existing—I am 

just trying to understand how this works. 

Ms. SCHAPIRO. My understanding is that we originally relied 

upon existing FOIA exemptions and only existing FOIA exemptions. My understanding is also that we have never filed anything 

with the court or officially presented to the court 929I as an additional basis for withholding documents. But it was, I understand— 

and, again, I wasn’t there—discussed in a conversation between 

FOX and SEC lawyers and potentially a clerk of the judge that 929 

could conceivably be an additional basis for withholding of documents. 

That was before I directed the staff not to invoke 929I. That is 

what brought it to all of our attention, as the chairman suggested, 

but it has never been put into a pleading or officially put before 

the court. We are not relying on 929I now as this litigation continues. We are relying only on existing FOIA exemptions, as we 

have all through this litigation. 

Mr. CAMPBELL. Okay. One final question in my last seconds here 

related to something that Ranking Member Issa mentioned, that 87 

percent of FOIA requests have been denied by the SEC. I presume 

that is your chairmanship, prior chairman, a number of chairmen, 

I presume. That does seem like a very high number. Is that because of a lot of—would you like to explain? 

Ms. SCHAPIRO. We are a bit unusual with respect to FOIA. For 

example, we have had over 10,000 FOIA requests this fiscal year 

at the SEC. I will tell you that the FDIC, the Federal Reserve 

Board, and the CFTC combined had about a third of that, 3,500 in 

Fiscal Year 2009. 

Mr. CAMPBELL. Had a third of those requests? 

Ms. SCHAPIRO. A third as many requests. Those three agencies 

had about 3,500. We have over 10,000. Approximately 70 percent 

of our requests come from commercial vendors of information—who 

are seeking information for due diligence purposes or to repackage 

and sell in another context, which I think is very interesting. And 

75 percent of those requests find no information. So that is by far 

the largest percentage of our FOIA requests. There is just simply 

no information found because of— 

Mr. CAMPBELL. So you are actually not denying anything. It’s 

that you are complying with the request. There is just nothing 

there? 

Ms. SCHAPIRO. Right. So perhaps the statistics in the best light 

for the Securities and Exchange Commission, 79 percent in Fiscal 

Year 2009 were either granted in full or no information was found, 

but 64 percent of that was no information found. Twelve percent 

of requests were denied in full or in part. 

The other reason I think we have the higher denial rate, quite 

honestly, than other agencies is our law enforcement function, and 

by far the most used exemption by the SEC is Exemption 7, which 

goes to law enforcement activity. 

Mr. CAMPBELL. Thank you. 

The CHAIRMAN. The gentleman from North Carolina. 

18 

Mr. WATT. Thank you, Mr. Chairman; and Madam Chairman, I 

am sorry I had to miss your testimony. I have two really wonderful 

hearings going on in my two committees at the same time, this 

committee and the Judiciary Committee, which is sharing something on digital competition in the digital world. It is extremely exciting, and I thought I wanted to go over there and hear that testimony. 

I just have one question. I, for the first time, have seen this May 

18, 2010, report of the Committee on Oversight and Government 

Reform since I don’t sit on that committee, and it seems to be a 

rather scathing indictment of the SEC in a number of respects, and 

I was wondering whether there are any specific parts of the findings of that you would dispute vigorously or you think are overstated or is it generally true when you came in and are these 

issues being addressed? 

Ms. SCHAPIRO. Congressman, that is a minority staff report, 

which I have to say I read when it was released, but it has been 

several months. So I would be hard pressed, I think, to give you 

specifics, although I would be happy to do that for the record. 

I will say that I think it doesn’t recognize extraordinary changes 

at the SEC over the last 18 months, and while we have a long way 

to go in terms of rebuilding our culture, ensuring that our focus is 

always on market integrity and investor protections, we have made 

a lot of changes that respond to the specifics that are raised in that 

report. 

And you have heard me testify many times about the postMadoff reforms, the post-Stanford reforms, the failure of the consolidated supervised entity program, the bankruptcy of Lehman 

Brothers and others, the lessons the SEC learned from those and 

the actions that we have taken with respect to new leadership 

throughout the agency, new training, new skill-sets, and new regulatory programs, where appropriate, to deal with these kinds of 

issues and problems. We have really left no rock unturned to try 

to make sure that this agency is one that the American public can 

rely upon. 

But with respect to specifics in that report, I would be more than 

happy to provide something for the record. As you can imagine, I 

don’t agree with some of the characterizations. 

Mr. WATT. Thank you for doing that, and I would ask you to do 

that. 

I am happy I asked the question because you call to my attention 

that it is the ranking member’s report, the minority part of the 

committee’s report, rather than the Committee on Oversight and 

Government Reform. It is probably not even advertised well because it says right at the top, ‘‘U.S. House of Representatives Committee on Oversight and Government Reform’’ in great big letters, 

and then it says right under that Darrell Issa, California 49, Ranking Member. It seems to me if Mr. Issa were going to do a report, 

he could at least caption it appropriately. 

So I would welcome your responses so that we can get a clear 

picture of not so much what the history of the SEC has been but 

what changes are being made to make it a more effective advocate 

for consumers and protector of the public. 

19 

So, with that, Mr. Chairman, I didn’t hear the testimony, so I 

yield back the balance of my time. 

The CHAIRMAN. The gentleman from Florida. 

Mr. POSEY. Thank you, Mr. Chairman. 

Madam Chairman, I wonder if you could share with us—we have 

talked about the denials of the FOX request—exactly what was requested and exactly why it was denied. 

Ms. SCHAPIRO. I would be happy to do that. I would like to not 

be incomplete, though, in my response. So I would prefer to do that 

for the record. 

I can tell you generally, at the risk of leaving something out, that 

they sought tips and complaints—what happens we call TCRs—tips 

and complaints and referrals—with respect to Madoff conduct prior 

to his—I believe all of him, not just prior to his arrest, 2004 and 

2005 examination reports, information with respect to the 2006 

present enforcement investigation, and then materials surrounding 

the Office of the Inspector General’s investigation, but I don’t want 

to represent to you that is everything. I would need to do that for 

the record. 

Mr. POSEY. Could you give me an example of how that might 

interfere with any current proceedings now, even hypothetically if 

you want to? That sounds like a very reasonable request to me. 

The case is closed. The SEC did nothing. Nobody was punished. 

We don’t even know where all the people were who screwed up 

now. I asked you that last time. You couldn’t tell me. Give me an 

example of why we need to protect this proprietary information. 

Ms. SCHAPIRO. Congressman, first of all, you should know we 

have turned over tens of thousands of pages in response to this request; and a Federal judge will make the decision whether, under 

existing FOIA exemptions, the SEC has appropriately withheld additional information. 

I can imagine that there could be information with respect to related parties to Bernard Madoff Investment Securities that may 

well be subject to investigation and ongoing enforcement by the Securities and Exchange Commission or the United States Attorney’s 

Office that would not be in the interests of those investigations and 

actions to be disclosed. But that is a hypothetical, because I don’t 

know the specific answer to that. I would be happy to try to provide that to you. 

Mr. POSEY. It just seems like they are asking for records that are 

over 4 years old, and as old as how old are some of the records they 

are asking for? 

Ms. SCHAPIRO. Again, I don’t know the very detailed specifics of 

their request, but there is no question that these date back a number of years. But, again, many tens of thousands of documents and 

pages have been— 

The CHAIRMAN. Would the gentleman yield? 

Mr. POSEY. Yes. 

The CHAIRMAN. Chairman Schapiro, a piece of advice. When 

someone asks you why you haven’t turned over anything, the fact 

that you turned over 10,000 is not a good answer. Quite frankly, 

it sounds like the lawyers kind of cooked up an answer for you. Let 

me just give you my advice. It’s like all the days you didn’t rob anyVerDate Nov 24 2008 16:02 Jan 10, 2011 Jkt 062679 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\62679.TXT TERRIE
20 

body—not that you robbed anybody. The fact that you turned over 

pages is no answer to the gentleman’s question. 

The other thing I would say is this: The fact that a judge will 

ultimately decide it doesn’t answer the question, because the judge 

isn’t preventing you from doing it. So, again, you may have other 

reasons. 

I would just recommend—the question was, why not turn these 

over? The fact you have turned over other things is not in issue or 

that a judge may make you turn them over doesn’t go to your rationale for not turning them over. 

Ms. SCHAPIRO. I should say, Mr. Chairman, I have a bias—we 

have a bias towards turning over anything that we can. There are 

ongoing law enforcement investigations by the Securities and Exchange Commission and the United States Attorney’s Office with 

respect to individuals and entities associated with Madoff, and I 

believe that— 

The CHAIRMAN. If the gentleman would yield again, that gets 

right to the point I think the gentleman was saying. 

Let me make this proposal to my colleagues. That is, next week 

would you be willing to conduct a confidential briefing, a membersonly briefing that might give some more specifics about some of 

this? I think that would be very helpful, and members who wanted 

to go could go. If you could agree to do that and get back to us, 

I think that would be very helpful where you could discuss some 

of this information. 

The idea there might be some constraints legitimate but not to 

FOIA, then that would be undercut by talking about it here. But 

I think if you were able to do your—enforcement people could do 

a members-only briefing next week, that might be helpful. 

The gentleman has an additional 2 minutes. 

Mr. POSEY. Thank you very much, Mr. Chairman. That would be 

very helpful. 

I have had a little bit of experience with government agencies 

over the years. Usually, they want to avoid any sunshine to protect 

incompetency, not to really do the more upscale performance that 

you have suggested. And I am not suggesting that yours is going 

to protect any unknown incompetency any further, but that has 

just been historically why I have seen agencies stonewall letting 

documents go to the press. And I guess every member of this committee has made it very clear and have been fairly passionate 

about the need to have transparency in government. So I would be 

interested in having the questions answered in private, as the 

chairman suggested, if necessary. 

And I would also just be curious to know, if the agency’s call was 

wrong in withholding information that should be public, what are 

the consequences? What are the penalties for the employees who 

made that bad call? 

Ms. SCHAPIRO. The staff makes the decision based on expertise 

and guidance and counsel from the General Counsel’s office about 

whether or not information needs to be disclosed. We don’t punish 

people if they made a wrong call about whether a document could 

legitimately be held under a Freedom of Information Act exemption. If somebody had a pattern of making bad calls or judgments, 

21 

we would have to take that into consideration in performance evaluation— 

Mr. POSEY. I think I got my answer. Just like the Madoff scandal, nobody has even had their wrist slapped. 

I think that maybe when we look at reforming the agency, we 

might want to put a little personal responsibility and accountability there for that. Right now, if there’s no penalty whatsoever 

for making bad calls—and if anyone has ever been disciplined by 

the SEC, I would like to know about it because I haven’t yet. I 

have read some books. I have read all I could on the issue. I heard 

the supervisors testify. I have heard the Secretary testify. Nobody 

has been punished yet about the Madoff mishandling. We don’t 

even know where those people are now, the two to three dozen examiners and investigators who blew the whole thing, and I was 

under the impression you were going to find out for me and let me 

have that information, but I haven’t received it yet. 

But I think what everybody is alluding to is we just want to see 

some accountability. That is what this whole thing is about. And, 

as the chairman said, we ask an agency head what time it is and 

they start describing the clock till our time runs out. I just wish 

we would stop some of the game playing and just be kind of frank 

and forthcoming with this stuff. 

Thank you, Mr. Chairman, for the extra time. 

The CHAIRMAN. The gentleman from Kansas. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

Chairman Schapiro, you mentioned in your testimony that on 

September 25, 2009, the SEC’s Inspector General issued a report 

entitled, ‘‘Review of the SEC’s Compliance with the Freedom of Information Act.’’ That report contained 10 recommendations with respect to strengthening FOIA, most of which the SEC concurred 

with. Two questions. 

First, when you became the Chairman of the SEC, were you 

aware of these problems with respect to FOIA compliance or was 

the IG report the first time you were made aware of these problems? 

Second, you also mentioned one remaining item from that report 

that has yet to be resolved. What is the issue and why has that 

not been resolved yet? 

Ms. SCHAPIRO. Congressman, the Inspector General report, as 

you point out, was issued in September of 2009; and within a few 

weeks after its issuance, I hired a new Chief Freedom of Information Act Officer with deep experience in this area. 

As you say, the IG made 10 recommendations. Nine have been 

closed out to the satisfaction of the Inspector General. The one that 

remains open relates to developing new performance standards for 

employees in the Freedom of Information Act office, and we are 

working on that. It is not resolved only because it actually would 

require negotiation with the SEC’s union in order to do that. 

Mr. MOORE OF KANSAS. Okay, very good. Thank you. I yield 

back. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Forgive me, Madam Chairman, I missed your testimony, so we 

may cover some old ground here. 

22 

I understand that you have previously stated—perhaps you stated in your testimony that 929I is necessary or helpful because it 

eliminates uncertainty. Is that correct? 

Ms. SCHAPIRO. Yes. 

Mr. HENSARLING. As I understand it, the Commission’s guidance 

says that, ‘‘The Commission should make disclosures where permitted by law when the need for confidentiality is outweighed by 

the public’s interest and accountability and transparency.’’ 

So I guess my first question is, if the Commission still reserves 

the right to disclose information whenever it decides that the public has this interest and accountability and transparency, how is it 

that regulated entities achieve a greater level of certainty then 

with 929I? 

Ms. SCHAPIRO. Because I think regulated entities with whom we 

work on a daily basis understand that the Commission appreciates 

the competitive harm that can come from something like disclosure 

of a high frequency trader’s algorithm. So they have a higher level 

of comfort that the agency, as an expert in these kinds of matters, 

will in fact understand the potential damage from certain kinds of 

disclosures. 

Mr. HENSARLING. I’m not sure I still understand. I am still confused by the nexus to 929I, though. 

Ms. SCHAPIRO. It is not ironclad in the sense that, yes, just like 

under FOIA, FOIA doesn’t prohibit you from disclosing anything. 

It gives you the ability to not disclose certain kinds of information. 

So, yes, you are right in the sense that the agency has discretion 

in many areas to continue to disclose even where there might be 

an applicable FOIA exemption. 

Nonetheless, as I said, regulated entities trust that the agency 

understands that to produce a list of holdings by a hedge fund or 

a mutual fund or to produce a trading algorithm that would allow 

someone to trade against that firm’s interests would be potentially 

devastating to those entities and that the agency wouldn’t do it. 

Mr. HENSARLING. Fairly basic question. In years going back, Congress has increased the authority of the SEC in a number of areas 

including the authority to compel registered entities to provide information and records. So, number one, clearly under the 1934 Securities and Exchange Act, I am under the impression you already 

have the power to subpoena witnesses to require the production of 

records from registered entities. I understand if they fail to comply, 

you have the authority to impose monetary penalties. You can refer 

the cases to DOJ, and I am just trying to figure out why is it that 

929I is needed or is it needed to somehow convince registered entities to cooperate? What does it add to the mix? 

Ms. SCHAPIRO. Congressman, I can tell you that we have examples where registered entities have refused or held up dramatically 

our examinations by not giving us information. 

We could use a subpoena. There is no question about it. I don’t 

actually think they would prefer to get a subpoena. I actually think 

they would prefer to voluntarily produce information or produce information pursuant to our examination authority with the understanding that it can be protected rather than actually require us 

to go and sue them, leading to all kinds of additional issues for 

that entity. 

23 

I also don’t think it is the best use, honestly, of the SEC’s enforcement resources to spend a lot of time having to pursue regulated entities to give us documents that they frankly should be giving us under our examination authority. I think you all and we 

would rather have our enforcement staff out there looking for fraud 

and prosecuting violations of securities laws. 

I know, and I think you will hear on a later panel, that lawyers 

counsel their regulated entity clients to try to always cooperate and 

provide information to the SEC and that will be easier to do if 

there’s a higher level of comfort that we can protect that information from disclosure to their creditors. 

Mr. HENSARLING. My time is about to run out. That’s prior to my 

arrival here. Some of the legislation that deals with this has been 

discussed. Can I assume that you are familiar with H.R. 6086, 

Chairman Towns’ legislation, which appears to not be a straight repeal? Are you familiar with his legislation? 

Ms. SCHAPIRO. Yes, Congressman, and he was here, actually. 

Mr. HENSARLING. Sorry I missed that portion. 

Can you comment briefly on your opinion of his legislation. 

Ms. SCHAPIRO. Sure. It would repeal 929I, but it would add a 

provision which we think is quite important, making it clear that 

under FOIA Exemption 8, any entity that was regulated and examined by the SEC is considered a financial institution. 

I think where it is not as helpful is in the context of third-party 

litigation, where two parties, private parties, are suing each other, 

serve the Securities and Exchange Commission with a subpoena to 

get information about each other that is potentially competitively 

damaging, and we don’t have the capability without 929I to have 

a relatively high level of assurance that we would not have to disclose that information. I do believe that is an issue we can resolve. 

The CHAIRMAN. I am told, by the way, that the Senate Judiciary 

Committee has voted out by voice vote a bill that is very close to 

the Towns bill. And I have previously said, I am asking everybody 

now, let’s think about this; and by the end of next week I am hoping we might be able to come to a consensus here so it will give 

us enough this week to act on something. 

The gentleman from Texas, Mr. Green. We have some votes, but 

it now looks to me we only have two more members after this. 

We’ll be able to finish with you and then go to the votes and then 

come back for our third panel. Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman; and thank you, Madam 

Chairman, for appearing today. 

I am a person without a made-up mind as to what the remedy 

is, and I would welcome your testimony because the intelligence 

that you are quoting us is going to be very helpful. 

I would like to make a comment and receive your response, if I 

may. You have mentioned the ongoing investigation exception, but 

what we haven’t said and perhaps it is assumed but hasn’t been 

said is simply this, that exception exists because persons who are 

being investigated have a way of allowing their factual circumstances to metamorphose. They don’t remain static. They are 

somewhat dynamic. And as they receive information about what 

you may have, they can sometimes conform their defense, if you 

will, around what they know your offense can produce. Is that a 

24 

fair statement, that the ongoing investigation exemption is to allow 

you to effectively prosecute, if you have to? 

Ms. SCHAPIRO. That is absolutely right. There is one part of Exemption 7 that is geared toward protecting law enforcement techniques. In our case, it would be how we look at certain kinds of 

trading information and sift through it to find particular patterns 

of trading or practices. But there is an exemption that specifically 

contemplates that law enforcement needs to be able to protect some 

of its techniques from disclosure. 

Mr. GREEN. And with reference to proprietary information, this 

is a highly competitive industry that you regulate, and every edge 

that you have as a businessperson you want to protect to the extent that you can, and competitors will sometimes want to acquire 

the information that they can about your edge so as to negate your 

edge. And proprietary information, simply put, as I am understanding it today, is to protect the edge that you have as you try 

to compete in a highly competitive market. And if there is a way 

to acquire information about that thing that helps you to succeed, 

others will co-opt it and use it. Perhaps it won’t hurt you, but it 

could also work to your detriment for this to be utilized by your 

competitors. Is that a fair statement? 

Ms. SCHAPIRO. That is fair. 

Mr. GREEN. So you are trying to protect proprietary information. 

You are trying to protect ongoing investigations so that they can 

be effectively prosecuted, and, in so doing, you are trying to balance 

this need of the public to know about these things, and there is 

something called judicial determination. When you reject a request, 

there is an opportunity to have a disinterested third party, known 

as a judge, to look at it and say either you made the right call or 

you made a bad call; is that a fair statement? 

Ms. SCHAPIRO. That is fair. 

Mr. GREEN. Is that process lengthy? And I want you to be as candid as you can be. I know we all have our biases. But is that a 

lengthy process to the extent that it is seen as a means by which 

persons simply go into some never never land and they never get 

the results that they want? 

Ms. SCHAPIRO. I don’t know the specific answer to that. I have 

no doubt that it is a process for sure and that there are costs associated with having to appeal a FOIA denial to a Federal judge; and 

so, as a result, I think our bias should be that wherever we can, 

we should release information unless it is going to clearly fall within one of the existing FOIA exemptions or cause real commercial 

harm to an entity. 

Mr. GREEN. Thank you. 

With my final seconds, 10,000 requests so far this year. How 

many people do you have working on just managing these requests? It seems to me that takes an inordinate amount of personnel and you have to have support systems. Talk about that, if 

you would, briefly. 

Ms. SCHAPIRO. We have 30 people in the Freedom of Information 

Act Office, but they also call upon people throughout the agency to 

actually do the searches for documents within each division or department to make sure that we have covered everything. 

25 

We have some technology. One of the recommendations of the Inspector General was to improve our technological capacity to handle FOIA requests, and we have taken a number of steps in that 

regard, to the satisfaction of the Inspector General. 

We stepped up dramatically in the last year our training of employees so that they have the latest techniques in order to handle 

this just extraordinary, I think by comparison— 

Mr. GREEN. Thank you. My time has expired. Thank you. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

I have just one question. I am concerned about repealing a law 

that has only been on the books for a minute or two. Do you believe 

that we have had enough time to evaluate it or do you think we 

need more time for evaluation? 

Ms. SCHAPIRO. Congressman, I think it is a fair argument that 

929I as drafted is broader than it needs to be to protect the information we believe needs to be protected, which is why we issued 

guidance that we think really hits the right spot. It relies on existing FOIA exemptions, except with respect to whether something 

has been determined to be a financial institution. There was a little 

coverage there, and it helps us in the third-party litigation context. 

I think that is the right place for us to be, and whether Congress 

is satisfied that we have binding guidance, as we do on our staff, 

or feels the need to amend the law to achieve the same result, that 

is I think a judgment call for all of you. We really stand ready to 

help get that done. 

Mr. CLEAVER. So no comment. Thank you. 

The CHAIRMAN. The timing is good. Chairman Schapiro, thank 

you. You have been very helpful. The guidance is helpful, and your 

responses as well. 

I would urge you to think about a confidential briefing. I think 

that would be very much in your interest because I think members 

are not close-minded on this, but they want to ask questions. And 

I would say, in my experience, the discretion of members of this 

committee can be trusted. We have not had confidential information inappropriately shared. 

We are going to recess now and come back for our first panel. 

There are three votes. The first one will take about 20 minutes, 

and the second one will take 5 minutes. I would say in about a half 

hour we should be able to be back. So witnesses can take a break, 

if they want to get a bite to eat or something, but we will be back 

here in about a half hour, and we will begin immediately with our 

next panel. We are in recess. 

[recess] 

The CHAIRMAN. We will reconvene. I apologize to the witnesses 

for this delay, and we will begin with Mr. Pitt. 

STATEMENT OF THE HONORABLE HARVEY L. PITT, CHIEF 

EXECUTIVE OFFICER, KALORAMA PARTNERS, LLC 

Mr. PITT. Chairman Frank, members of the committee, I am 

pleased to have this opportunity to testify regarding Section 929I 

of Dodd-Frank and pending legislative proposals that would modify 

or eliminate it. My views are solely my own and don’t represent the 

26 

views of any client. With the committee’s permission, I will only 

briefly summarize my written testimony. 

The CHAIRMAN. You may do that at the committee’s encouragement, Mr. Pitt. Any documents, statements, or supporting material 

that any of the witnesses wish to be submitted will be, without objection, made a part of the record. 

Please go ahead. 

Mr. PITT. Thanks. 

I start with the belief that there is and should be a strong presumption in favor of ensuring the accountability and transparency 

of government agencies and their decision-making. But Section 

929I, particularly as it has been interpreted, does not vitiate SEC 

transparency or accountability. Rather, I believe it was intended as 

a necessary tool to permit the SEC to be as effective and efficient 

as it can be in performing not only its existing functions but the 

myriad of new functions that have been assigned to it in under 

Dodd-Frank. 

The Commission gathers a wide range of proprietary and confidential information from those it directly regulates. To perform effectively, it has to obtain information rapidly, with a minimum of 

effort and contest. Section 929I was intended to permit the Commission to do that, as bank regulators have done for decades. 

Persons who are fearful of improper disclosure of their proprietary or confidential information work assiduously to limit or condition the SEC’s prompt receipt of information, as well as condition 

the terms on which the SEC receives it. I know this because I used 

to represent such persons when I was practicing law. 

Once the SEC obtains information, corporate competitors and 

creditors try to wrest that information from the SEC to use against 

those who have entrusted their sensitive data to the agency. Section 929I enables but does not compel the SEC to prevent those 

kinds of injustices from occurring. To the extent that there are concerns about its breadth, the SEC’s guidance yesterday should allay 

those concerns. 

There are two principal ways in which proprietary data may be 

sought from the SEC, either through the FOIA or through 

nonFOIA means such as litigation, subpoenas, or discovery demands. 929 clarifies the reach of two existing FOIA exemptions 

and it is critical, given the new classes of entities the SEC is 

charged with regulating and overseeing. With respect to non-FOIA 

demands, the SEC is given an equivalent of the bank examiner’s 

privilege that bank examiners have long enjoyed. 

I believe that the provision clearly prohibits the Commission 

from withholding information from Congress, as it should; and it 

would not shield, particularly as interpreted, materials necessary 

to determine how the SEC is doing its job. It enables the Commission to preserve confidentiality of private sector companies’ sensitive data if making that data public would inflict unfair harm. 

The SEC’s issuance yesterday of guidance, in my view, is an example of government operating at its best. The guidance is binding 

on the Commission and its staff and makes perfectly clear that the 

new provision would be administered intelligently and fairly and 

not as some automatic barrier to disclosure. 

27 

The committee’s invitation asked for responses to a number of 

questions, and the only one that I would just single out here is that 

the current bills that are pending which attempt to either repeal 

929I or otherwise limit the SEC’s abilities I think raise some problems. What we really need, if there’s going to be an adjustment, is 

a carefully constructed approach that is comparable to the SEC’s 

guidance, and I believe that as interpreted by the SEC, Section 

929I will be only a useful but not an abused tool in the SEC’s arsenal to obtain necessary data. 

Thank you. 

[The prepared statement of Mr. Pitt can be found on page 114 

of the appendix.] 

The CHAIRMAN. Next, Angela Canterbury, director of public policy for the Project on Government Oversight. 

STATEMENT OF ANGELA CANTERBURY, DIRECTOR OF PUBLIC 

POLICY, PROJECT ON GOVERNMENT OVERSIGHT 

Ms. CANTERBURY. Chairman Frank, Ranking Member Baucus, 

and members of the committee, thank you for inviting me to testify 

today and for your willingness to revisit this issue. I am the director of public policy at the Project on Government Oversight 

(POGO). 

POGO has a keen interest in ensuring the public can hold our 

financial regulators accountable for protecting the interests of taxpayers, investors, and consumers. This is why we are deeply concerned about Section 929I of the Wall Street Reform and Consumer 

Protection Act. 

Section 929I would provide the Securities and Exchange Commission with an unnecessary and overly broad exemption to the 

Freedom of Information Act and a blanket authority to withhold 

records. It strips protections of due process currently in place and 

gives the Commission an accountability shield that is not in the 

public interest. Indeed, limiting disclosure of public information 

should not be done lightly, and the burden should be on the SEC 

to show very compelling and specific need. With all due respect to 

Chairman Schapiro, they have not yet done so. 

Although we fully understand the need to protect against disclosure of certain confidential information collected by regulators, preexisting FOIA exemptions are more than adequate. In fact, the concerns raised by registered entities and the SEC seem very inconsistent with reality. 

The courts have strongly censured the SEC for nondisclosure, 

and last year an audit conducted by the SEC’s Office of Inspector 

General determined that the SEC practices create a presumption 

of withholding in spite of the President’s mandate for a presumption in favor of disclosure. The OIG also found that the agency’s 

FOIA release rate was significantly lower compared to all other 

agencies. 

But, today, Chairman Schapiro said it all when she said we have 

a bias toward turning over anything we can. Notably, today, she 

could not come up with one instance in which confidential information business collected by the SEC has been revealed to the public 

through FOIA or litigation. 

28 

The public stakes in more, not less, transparency and accountability at the SEC cannot be overstated. American families continue to suffer from the financial crisis created in part by systematic regulatory failures. The SEC claims to need 929I so that it can 

more effectively obtain records, police Wall Street, but the SEC’s 

failures, most notably its botched investigations of the Madoff and 

Stanford Ponzi scheme, had to do with enforcement, not availability to collect records. 

On the other hand, if the serious problems with the agency’s operations exposed by these and other scandals are kept hidden from 

the public, as 929I allows, the SEC will not be held accountable. 

In one recent case, former SEC enforcement attorney Gary 

Aguirre was able to use FOIA to prove the agency had retaliated 

against him and bungled his investigation of insider trading at 

Pequot Capital Management. He eventually used these records to 

force the SEC to reopen the case, leading to a $28 million sanction 

and vindication for Mr. Aguirre’s wrongful termination. 

We understand that the Commission’s job is made more difficult 

when registered entities refuse to cooperate, but we are not convinced that the agency is uniquely burdened, nor is it lacking in 

the power of subpoena or the ability to levy penalties. We do not 

believe it is necessary to expand Exemption 8 either, but if Congress shares the Commission’s concern that certain newly regulated entities may not be considered financial institutions, then it 

might be appropriate for Congress to make that clarification. In 

any case, because it is already aggressively applied, Congress 

should examine Exemption 8 and apply clear standards for employing it. 

Also, we do not believe that it is in the public interest or in the 

services of the Commission’s core mission to give the agency extraordinary authority to refuse subpoenas from civil litigants as the 

SEC guidance does. Why should defrauded investors, whistleblowers who suffered retaliation, the media seeking to uncover corruption, or any other party be denied access to public documents 

that might make the difference in exposing corporate malfeasance 

or holding the agency accountable? 

Again, the SEC has not demonstrated a real need. In fact, it already is very difficult for a civil litigant to enforce a subpoena on 

a Federal agency. The SEC has many tools at its disposal for 

quashing subpoenas and can already warn registered entities if 

confidential information might be disclosed in a subpoena. The decision about whether or not a subpoena should be enforced should 

be made by the courts on a case-by-case basis as is the norm, not 

by the SEC. For this reason, we do not support the SEC’s guidance 

in this area. 

In any case, we do not believe the agency guidance is sufficient 

to allay concerns of the public’s interest since it can be changed 

with no public notice, oversight. Nor is the agency discretion appropriate for Exemption 3 or subpoena refusal, particularly this agency’s discretion. 

So we concede there is some agreement to codify the changes to 

929I, but the solution is to re-ring the bell, as Representative Issa 

said today, not codify the agency’s guidance, which is another accountability shield. We urge you to pass H.R. 6086, H.R. 5924, or 

29 

similar legislation to repeal this blanket secrecy provision, and I invite you to review our other recommendations calling for additional 

examination of Exemption 8 and follow-up of the audits by the 

OIG. 

I thank you very much. 

[The prepared statement of Ms. Canterbury can be found on page 

57 of the appendix.] 

The CHAIRMAN. Next, Rick Blum, who is the coordinator of the 

Sunshine in Government Initiative. 

STATEMENT OF RICK BLUM, COORDINATOR, SUNSHINE IN 

GOVERNMENT INITIATIVE 

Mr. BLUM. Mr. Chairman, thank you for the opportunity to testify today. I especially want to thank you for holding this hearing. 

I testify today on behalf of the Sunshine in Government Initiative, a coalition of media associations promoting transparency in 

the Federal Government. We would like to emphasize four points. 

First, the statute as written is too broad. I think we have heard 

that today. Second, only an act of Congress can fix this problem. 

Third, the approaches pending before Congress to fix 929I would be 

better than no action at all. And, fourth, Congress should strengthen the disclosure and review of proposed statutory exemptions to 

FOIA. 

As you have already heard, under 929I, the Commission could 

exempt from disclosure any information about official business, including its approach to oversight and supervisory information having nothing to do with trade secrets. Simply put, the statute gives 

too much discretion to the SEC to decide what should be disclosed 

or withheld, a key factor the courts look at in FOIA Exemption 3 

cases. 

Even with 929I, the sought-after cooperation from private entities may continue to be elusive. For example, one influential firm 

reacted to Dodd-Frank by telling firms to stamp confidential on 

documents they used to freely turn over to the SEC. For these and 

other reasons I identify in my written testimony, we believe 929I 

is overbroad and Congress should take action. 

Second, only an act of Congress can remedy 929I’s flaws. Even 

the most disclosure-friendly guidance is no substitute for congressional action. We have seen agencies interpret statutory exemptions to FOIA as broadly as they see fit once they have the discretion. The lesson’s clear: Over time, when Congress writes broad exemptions, the government broadly uses them. 

Turning to solutions, either repealing 929I or expressly applying 

Exemption 8 to FOIA to the SEC and the firms it oversees would 

improve the status quo. It is important to provide clarity, not 

breadth. Exemption 8 has its own flaws. Chiefly, it is broad as well. 

But this approach avoids enacting broad ad hoc exemptions like 

929I. 

On the issue of third-party subpoenas, the SEC’s position could 

significantly hinder open judicial proceedings, and the issue deserves closer scrutiny. These issues should not be taken up lightly 

but publicly, deliberately, and separately from the FOIA discussion. 

I want to use my remaining time to note one reason this hearing 

is being held today. This controversy arose because the process that 

30 

Congress uses for proposing statutory exemptions to FOIA is 

flawed, leading repeatedly to imprecise or overbroad or redundant 

legislation. This committee fell victim, in a sense, to this weakness. 

In the meantime, by our account, Federal agencies have used 

over 250 Federal laws over the last decade to deny FOIA requests. 

That is in addition to FOIA’s categories that exempt from disclosure things like trade secrets or classified information. 929I is just 

one of these secrecy statutes. Sometimes the purpose of these exemptions is understandable. Other times it is not. Why protect the 

identities of honeybee handlers or watermelon growers? 

Congress should take modest, feasible steps to strengthen how 

these proposals are considered, such as enforcing the open FOIA 

Act of 2009 which requires all proposals to cite FOIA’s Section 

(b)(3), promoting disclosure in searchable form at the time these 

proposals are introduced, routinely referring Exemption 3 proposals 

to the Oversight and Government Reform Committee which has 

oversight of FOIA, as we know, for brief review, or showing new 

Exemption 3 statutes are necessary and existing statutes are inadequate. 

These feasible steps can avoid needless litigation and congressional controversy by reinforcing our democracy’s promise that the 

public should know what the government is up to. 

To conclude, Mr. Chairman, journalists tell us they are chiefly 

concerned that the language in 929I is too broad and only an act 

of Congress can fix this problem. We look forward to working with 

this committee to improve both this provision and the way Congress handles such secrecy provisions in the future. 

We appreciate this opportunity and look forward to your questions. Thank you. 

[The prepared statement of Mr. Blum can be found on page 48 

of the appendix.] 

The CHAIRMAN. Mr. Steven Mintz. 

STATEMENT OF STEVEN G. MINTZ, FOUNDING PARTNER, 

MINTZ & GOLD LLP 

Mr. MINTZ. Good afternoon, Chairman Frank, Ranking Member 

Bachus, and members of the committee. My name is Steven Mintz. 

I am the founding partner of Mintz and Gold. Thank you for inviting me to testify on this important issue. 

During the past few years, I have served as lead counsel on a 

number of Freedom of Information Act lawsuits against the Federal 

Reserve, the Department of the Treasury, and the Securities and 

Exchange Commission; and I have been successful in forcing the 

Treasury to produce documents related to the AIG and Citigroup 

bailout and to force the SEC to produce documents related to the 

failed investigations of Bernard Madoff and R. Allen Stanford. 

Section 929I of the Dodd-Frank Act has an unintended consequence of weakening government transparency. Section 929I 

gives the SEC unreviewable control over the information it has to 

share with the public and is directly contrary to the transparency 

goal of the Dodd-Frank Act. 

FOIA was enacted in 1966 with the notion that a democracy requires accountability and accountability requires transparency. A 

31 

central feature of FOIA is the role of courts in mediating disclosure 

disputes between citizens and the executive branch. 

Section 929I gives the SEC the power to refuse disclosure of any 

document or record as long as it can say it was obtained through 

or even based on or derived from the exercise of the agency’s surveillance, risk assessment, or other regulatory and oversight activities. This broad language, combined with Exemption 3B, completely eliminates the role of the courts as the arbiter of disputes 

under FOIA. 

While Chairman Schapiro has taken the position that the new 

FOIA exemption is required to protect proprietary information and 

trade secrets of business submitters, this type of information has 

always been protected by Exemption 4. Any legitimate concerns 

that regulated firms have about their proprietary data are satisfied 

by Exemption 4 and SEC rule 83, which provides a specific procedure for an entity submitting information to request confidential 

treatment and to be heard if a FOIA request affecting the information is made. 

The same is true for proprietary information sought through subpoenas; and, frankly, the guidelines that have been proposed by the 

chairman now simply want to substitute out the role of courts to 

be the final decisionmaker and to substitute in the SEC as the ultimate decisionmaker on whether information should be released or 

not. That changes and reverses the role. 

The suggestion that the SEC needs a new FOIA exemption to 

compel regulatory compliance is troubling. With subpoena power 

and sanctions that are available, the SEC can force registered entities to produce information; and if that remains a problem, the solution should not be to entice those entities with promises of secrecy but, rather, to adopt additional regulations to ensure that 

they will comply with SEC requests for information. 

Section 929I is also unnecessary to prevent interference with the 

SEC’s law enforcement functions since materials compiled for law 

enforcement purposes are already protected by Exemption 7A. By 

the same token, privileged documents are covered by Exemption 5, 

and records implicating personal private interests are covered by 

Exemption 6. 

In addition, the SEC also uses Exemption 8 improperly, in my 

own view, to block FOIA requests. Section 929I provides the agency 

with a get-out-of-jail-free card, enabling it to invoke Exemption 3 

without actually conducting a document-by-document review. Instead, the agency can bypass FOIA by simply labeling the requested documents as material obtained pursuant to its regulatory 

authority. 

The SEC has not pointed to a single instance in which it has 

been denied the use of an existing FOIA exemption because of statutory language that is overly narrow. Both my own experience with 

the SEC and the findings contained in the report of the Inspector 

General suggest that the SEC is struggling with FOIA compliance 

not because of inadequacy of existing exemptions but because it 

does not have the resources it needs to collect and review materials 

as FOIA requires. 

I respectfully submit that an evisceration of FOIA through 929I 

is neither necessary nor appropriate. The SEC should not receive 

32 

an agency pass from the Freedom of Information Act. Accordingly, 

Section 929I needs to be repealed in its entirety. The recommendation by Representative Issa, I agree with that. Let’s repeal it, and 

if they need one, it can be done properly. 

Thank you again for giving me this opportunity to testify, and I 

look forward to answering any questions that you may have. 

[The prepared statement of Mr. Mintz can be found on page 88 

of the appendix.] 

The CHAIRMAN. Ms. Susan Merrill. 

STATEMENT OF SUSAN L. MERRILL, PARTNER, BINGHAM 

McCUTCHEN LLP, ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Ms. MERRILL. Thank you, Chairman Frank, Ranking Member 

Bachus, and members of the committee. I am Susan Merrill, a 

partner in the Broker-Dealer Group of the law firm of Bingham 

McCutchen. 

Prior to joining Bingham, I served as the Chief of Enforcement 

at FINRA, the Financial Industry Regulatory Authority; and prior 

to 2007, I served as the Chief of Enforcement at the New York 

Stock Exchange. 

Thank you for the opportunity to testify today. I appear on behalf 

of SIFMA, the Securities Industry and Financial Markets Association, to provide an overview of the securities industry’s position 

with respect to Section 929I of the newly enacted Dodd-Frank Wall 

Street Reform and Consumer Protection Act. 

The securities industry has a strong interest in maintaining an 

open, cooperative, and efficient dialogue with the Securities and 

Exchange Commission in the course of SEC exams. Registered entities being examined understand that it is in no one’s interest to 

hinder the Commission’s ability to comprehensibly complete its 

work. However, the industry’s practical ability to produce certain 

types of sensitive proprietary or confidential information to the 

SEC was, prior to the Dodd-Frank Act, significantly impeded by 

Federal laws governing the Commission’s legal obligation to publicly disclose such information in certain circumstances, whether 

the SEC supported such disclosures or not. 

Section 929I directly addresses these issues. We believe the practical effect of this provision will lead to greater trust, openness, and 

efficiency between regulators and the industry and ultimately to 

better protection for investors and stronger markets. It is for these 

reasons that we support the new law and oppose the efforts to remove it from the Wall Street Reform and Consumer Protection Act. 

One logical question in response to the industry’s concerns is 

wouldn’t the type of information firms fear disclosing be protected 

under the FOIA exemptions? The answer is not necessarily. The 

FOIA exemptions are simply too imprecise to allay the industry’s 

fears regarding public disclosure, and the issue runs deeper than 

mere semantics because it is this lack of clarity that impedes the 

flow of necessary information between firms and the SEC staff. 

And, similarly, it is the clarity provided by Section 929I that will 

foster open communication between the firms and the SEC. 

But FOIA is not the only source of concern prior to the DoddFrank Act. Additional Federal laws obligate the Commission to disVerDate Nov 24 2008 16:02 Jan 10, 2011 Jkt 062679 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\62679.TXT TERRIE
33 

close documents in its possession in response to third-party subpoenas. Information so produced generally enters the public domain upon production by the SEC. The FOIA exemption for trade 

secrets, confidential communication, and exam reports simply do 

not apply here. 

The Commission is left to the uncertainties of the common law 

and to general litigation and discovery processes in seeking to protect from disclosure the most sensitive information it receives from 

regulated entities in the course of this exam. The fact that the 

FOIA exemptions do not apply to third-party subpoenas served 

upon the SEC is, in the industry’s view, the most important consideration in weighing the interests served by Section 929I. Since 929I 

squarely addresses this issue, its provisions will function to foster 

a more open and cooperative dialogue between the securities industry and its regulators. 

With no risk of compelled disclosure looming over the production 

of information, regulated entities are now able to produce all that 

people would likely agree the Commission should have access to 

without fear that the Commission will later be legally obligated to 

disclose it. 

Section 929I effectively closes the third-party subpoena loophole 

that provides a path to compel public disclosure of confidential information even when the FOIA exemptions are met. There is a 

sound logic in Congress’ recognition of the fact that there are certain types of sensitive information that one would not expect a financial institution to disclose to the public but which one would expect them to freely disclose to its regulator. Section 929I achieves 

this balance, and I urge the committee to leave it intact. 

[The prepared statement of Ms. Merrill can be found on page 71 

of the appendix.] 

The CHAIRMAN. Thank you. 

A couple of things to make clear. There is going to be legislation. 

The guidance that is going out, even if people thought it was perfect, doesn’t suffice, because it can be undone. So it has to be statutory. 

Mr. Blum, I did have some questions about the procedures. I 

think you may be looking for procedural solutions that—nothing is 

going to be a substitute for people reading. This particular issue 

has been in the public domain since 2008. It has passed the House 

unanimously. 

As far as referring to the Committee on Government Reform, 

members of the Committee on Government Reform were members 

of the House-Senate Conference Committee on this. They had a 

month to look at it. Frankly, I think people looking at it in the abstract didn’t fully understand it until the lawsuit. So I am not sure 

anything would suffice, and that is not something to be cured. 

Sometimes you don’t understand what something means until in 

fact it gets put into effect. So I understand the perceiving of things, 

but procedurally this couldn’t have been truer. It just took the lawsuit. 

Mr. BLUM. Can I address that point? 

The CHAIRMAN. Yes. 

34 

Mr. BLUM. It is true, under the procedures that we think would 

improve the situation, you might not find out that there’s a concern— 

The CHAIRMAN. Excuse me, I would take exception to slipped 

through. Nothing slipped through here. It was public. 

Mr. BLUM. I appreciate that very much. But we see this happen 

very often where— 

The CHAIRMAN. What exactly is your procedural solution to this? 

Mr. BLUM. We think that there have been inadequate reviews 

of— 

The CHAIRMAN. But what is your procedure, again? It has been 

out there in public. What is the procedural way to force the review? 

Mr. BLUM. I think having a referral to the Committee on Oversight and Government Reform in the House would help and just do 

it routinely. 

The CHAIRMAN. I would note that this was before them for a 

month, and it didn’t—I’m not sure—as I said, they saw it. Nobody 

understood the implications of it until the parties in the lawsuit 

brought it to their attention. 

Mr. BLUM. I think that when agencies propose these, they ought 

to go to the stakeholders. I don’t know how many reporters saw 

this before it was introduced and there was a lawsuit; and, frankly, 

my job is to look for these things. 

The CHAIRMAN. I have to say some responsibility, I thought, went 

on the media to cover the agencies that they are covering. There 

was never any secret about that. It was set up in public letters. We 

discussed it in hearings. 

Mr. BLUM. Sure. 

The CHAIRMAN. I am not sure how much we can spoon-feed the 

media. Nobody ever got in the way of the media covering this agency or this committee or this Congress. 

Mr. BLUM. We are not asking for it to be spoon-fed. I think what 

we are asking is to have a fair hearing and adequate review for the 

impact on FOIA. 

The CHAIRMAN. We have had hearings on this, and nobody noticed it until the lawsuit. 

Mr. BLUM. And I think that the language actually evolved from 

the timeframe that you are talking about. I think the earlier 

versions were probably slightly narrower. Some of the really broad 

language didn’t come in until June. 

The CHAIRMAN. I am sorry. But the language that was in the 

final bill was there for over a month. It was in the public. And, in 

fact, it was in both bills adopted in the House and the Senate. So 

it didn’t evolve. 

Let me just ask one other question. What you have is this: And 

the one concern I think is on the third-party litigation. Congress 

passed—it was controversial—over the veto of Bill Clinton a limitation on the ability of plaintiffs to get discovery in corporate litigation. One question raised is, is this a way around that? 

Now that was actually passed by Congress. I think it was the 

only bill passed over Bill Clinton’s veto. And to get discovery in a 

private securities lawsuit you need to meet a certain standard. 

Does this become a way around that? 

35 

That is just a question that occurred to some of us as we were 

listening. Namely, if the SEC has subpoenaed—has gotten information for regulatory purposes and you are in a lawsuit and you 

might not be able to meet the standard of the Securities Litigation 

Act, is this a way for you to get discovery without meeting that 

standard? And, if so, is that something to be concerned about? 

Any of the panelists? 

Mr. PITT. The answer I think, Mr. Chairman, is yes. Without 

929I, or something like it, litigants who have very different objectives would be able to get around some of the barriers on discovery. 

It doesn’t mean that the precise wording of 929I is ideal, but it 

does mean that there is both the FOIA and the non-FOIA component, and both have to be addressed. 

The CHAIRMAN. Let me go down the list on this. Is that any kind 

of a concern that—should anything that the SEC gets for its purposes—and I think there is some consensus here about the SEC not 

having it—but should anything the SEC gets from a private company be fully available to any litigant who has an issue with that 

company, who might not, in the absence of the SEC getting it, otherwise be able to get at it? Ms. Canterbury? 

Ms. CANTERBURY. No, sir. I don’t believe in every case. But I 

think our concern is for the whistleblower who comes to the Securities and Exchange Commission. 

The CHAIRMAN. Okay. Let me stop you, please. 

Fine, because that is what we have the advantage of in legislating, and that is a distinction we could make in the legislation. 

We could protect whistleblowers, but purely private disputants in 

a commercial dispute could be treated differently. I appreciate that 

distinction, and that would be very much the kind of thing we 

could look at. 

Ms. CANTERBURY. Defrauded investors who cannot go to the Bernie Madoffs but have to go to the SEC to prove harm. 

We are also concerned that the SEC is empowering itself to make 

a determination that should be made by the courts. I don’t know 

of any other agency that has this kind of discretion— 

The CHAIRMAN. Let me ask you this: If we were to leave it as 

it is, when a court was deciding whether or not to— 

Let me ask you this, because I don’t know the law here, and 

there are lawyers here who will. 

I am a private company whose material has been taken by the 

SEC. Some litigant against me in a purely private dispute—not a 

whistleblower—seeks to get that information and subpoenas it from 

the SEC. Who has the ability to defend against this subpoena? Do 

I have a right to intervene and defend against a subpoena? 

Ms. MERRILL. If you are given notice, if you receive timely notice. 

Mr. MINTZ. The industry’s concern is that the SEC oftentimes 

doesn’t follow their own procedures and provide them with notice. 

But once they provide that confidential information, whether there 

is a FOIA request or a third-party request— 

The CHAIRMAN. I am sorry. I tend to ask very specific questions, 

and I would appreciate very specific answers. So now the answer 

is apparently—and please don’t assume I know more than I know. 

The answer is that if I have gotten notice from the SEC that someVerDate Nov 24 2008 16:02 Jan 10, 2011 Jkt 062679 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\62679.TXT TERRIE
36 

one in a subpoena is seeking my private information, I have the 

right to go to court to defend against this subpoena? 

Mr. MINTZ. I can appear in Federal court, make a motion to protect my— 

The CHAIRMAN. ‘‘Yes’’ would handle that. 

Mr. MINTZ. ‘‘Yes.’’ 

The CHAIRMAN. But you are telling me that the problem is that 

the SEC may have been lax in giving the notice? 

Mr. MINTZ. That is what the industry is telling me as we sit here 

today. 

Ms. MERRILL. I think that the issue is that, if you receive timely 

notice that your documents have been subject to such a subpoena, 

then you do have the opportunity. 

The CHAIRMAN. All right. Again, these things get complicated. 

One thing you could do would be to say that subpoena couldn’t be 

enforced until you got notice and time to respond. That would take 

care of that. So you do have the ability. 

Now the question that I have for everybody is this—again, these 

are questions I don’t know the answer to. If I am given notice and 

have a chance to go in and defend, is the standard that I use to 

prevent them from getting this the same as in the Securities Litigation Act or would there be a lower standard? Mr. Mintz. 

Mr. MINTZ. I can’t speak specifically to the Securities Litigation 

Act, but I can tell you that if a third party is seeking to protect 

its own proprietary information, it is going to be a common law 

privilege. And if it is— 

The CHAIRMAN. We are beyond that. A statute was passed over 

Bill Clinton’s veto—it was taken very seriously—which raised the 

level of the predicate you need before you get into this. And it 

would seem to me we would be undermining that if people like it. 

Some people didn’t like it. Bill Clinton vetoed it. Some people 

thought it was a terrible idea. I do not think it has the negative 

consequences others have said, but there it is. 

Would there be an objection if we did this to saying that, in those 

cases where we are dealing with third-party commercial litigation, 

the standard for enforcing a subpoena would be the same as the 

Securities Litigation Act? And if you are not familiar with it off the 

top of your head, if you would get back to us. 

Again, in fact, it is easier to say ‘‘yes’’ or ‘‘no,’’ but that is how 

we get in trouble, and that is why we need to do this. To me, that 

is the one, frankly, sticking point. 

We don’t want—I keep talking about all my legal ignorance, I 

will show my legal knowledge with some Latin here—sub silentio 

to amend the Securities Litigation Act. So if all of you would address that issue, the question would be—and I think they should 

go to meet some of the concerns that people had. 

If your proprietary information, given to the SEC for its purposes, was the subject of a subpoena by a litigant against you, do 

we resolve this in part by saying, okay, first of all, the subpoena 

can’t be enforced until you have been given notice by the SEC; and, 

secondly, the standard which you can use to defend is the same as 

the one we set in the Securities Litigation Act? Yes, Ms. Merrill? 

Ms. MERRILL. If I may, I don’t think that simply allowing the entity that is being regulated by the SEC, a securities industry regVerDate Nov 24 2008 16:02 Jan 10, 2011 Jkt 062679 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\62679.TXT TERRIE
37 

istrant, to go to court and defend at all addresses the problem and 

the reason that the SEC sought this legislation to begin with. I will 

give you an example. 

This legislation is trying to allow the SEC to take what it gets 

while it is in an exam mode and protect it from anyone having to 

3 years down the line go into court and make those arguments. 

And here is why: 

If you are sitting with an examiner and the examiner says, 

please show us everything we need to understand how you trade 

and hedge your global book across five entities in five different jurisdictions—which is what many global firms do. They pass the 

book as it trades. And as one market closes and it trades in Tokyo 

and then the sun comes up somewhere else and they trade it to another foreign affiliate—and the entity, the securities entity that is 

regulated in the United States says, I would show you all of this 

in order for you to understand our entire global strategy so that 

you can make a decision about the systemic risk that you are looking into, but I would rather not because I don’t know if what I am 

going to show you is going to end up being protected 2 years, 3 

years down the line when some magistrate or judge decides whether or not they think it should be protected. And so they simply will 

say, I would rather not show you that. 

And that is an example of where the SEC’s enforcement proceedings and powers do not reach. 

The CHAIRMAN. If that were true, we might empower the SEC to 

do more. What I am suggesting is that we tell that entity, but here 

is that standard. That is, at any point, no one—and that is why I 

am suggesting that might mediate that conflict—no one would be 

able to get that information unless they could independently have 

gotten it under the bar set by the Securities Litigation Act, that 

they could show that there was some basis for this and it couldn’t 

purely be a fishing expedition. Mr. Mintz? 

Mr. MINTZ. The only point I would add is, if the final decision 

is being made by a court as opposed to the agency itself, then I 

think we have something that is— 

The CHAIRMAN. Then the question is, what is the standard by 

which the court does it? And I do think there is a problem. And 

we could carve out whistleblowers. I think we had some good whistleblower stuff in the bill in general, and we were very sympathetic 

to that. But that is the one area—and, again, I am hoping that we 

do something by the end of next week. Yes, Ms. Canterbury? 

Ms. CANTERBURY. I am just concerned that there is not really a 

problem here to fix. We have not seen one example of proprietary 

information provided in this setting, so is there really a problem? 

The CHAIRMAN. Maybe not. But I don’t know that we should not 

try to anticipate one. And if what we are talking about doesn’t do 

any harm, I don’t understand why we wouldn’t try to do it. We 

don’t always want to be reactive. 

I take it back. What the SEC tells us is the harm is this, not that 

proprietary information has been so much released but that they 

have had a greater degree of resistance to doing it. 

Yes, Ms. Merrill? 

Ms. MERRILL. That is what I was going to say. I think that the 

issue is that there is not now a free and open relationship between 

38 

the regulated and the regulator. And if you want that to grow so 

that the SEC, in its exam provisions, can actually understand what 

these firms are doing and do what it needs to do to regulate the 

systemic risk in the system, then you have to give them the tools 

to let them have that relationship. 

The CHAIRMAN. I am sympathetic to the issue. But I think your 

overall argument—the notion that we will reach a point where 

there will be that harmonious relationship between the regulator 

and regulated brings to mind Woody Allen’s paraphrase of the old 

hope, ‘‘The lion may lay down with the lamb, but the lamb won’t 

get much sleep.’’ 

The likelihood of reaching—I can see where you might diminish 

the resistance. But an open, cooperative—look, let’s be clear, too. 

We are not talking about the average company. The SEC doesn’t— 

I hope—randomly go out and decide to get all this information. 

They are generally doing that where there is some reason to think 

that something wasn’t so hot. So the notion— 

Ms. MERRILL. That is not true of the exam content. 

The CHAIRMAN. I am sorry. I have not finished yet. 

Again, I think you have given me an ideological—let me put it 

this way: The notion that we are going to have this wonderful voluntary cooperation between the regulator and the regulated is not 

I think the model that we want to legislate to. 

Yes, Mr. Pitt? 

Mr. PITT. Let me first say there are examples, many of which 

can’t be identified publicly, but there are examples where proprietary data has not only been sought but received. But the specific 

problem— 

The CHAIRMAN. Sought by a private party? 

Mr. PITT. By a private party, yes. After the Madoff problem, one 

of the things that has happened now in SEC investigations is that 

these investigations now take months and months and months. 

And because the staff is concerned about missing anything—which 

they should be—they now demand far more paper and far more 

documentation than is necessary for the traditional kind of an examination. I am not saying that is improper. I am just saying this 

is now a fact of life. 

We work with a lot of entities that produce volumes and volumes 

of material that the SEC usually doesn’t need. But once the SEC 

has it, it doesn’t want to give that information up. And there are 

sound policy reasons why it shouldn’t. I believe that this committee, if it is going to adjust this provision, should look at who is 

making the request and what the purpose is. 

People have mentioned whistleblowers. I don’t see that as being 

a proper subject of 929I, but I do believe that if it is one private 

competitor trying to take advantage of another competitor’s investigation or examination by the SEC, then there ought to be clear 

enough protection. 

The CHAIRMAN. I am trying to get something done here. Let me 

ask this, conceptually—and I would I guess, Ms. Canterbury, Mr. 

Blum, Mr. Mintz, is anyone arguing that anything the SEC gets 

ought to be available to a private party simply because the SEC 

had it? Does anybody advance that argument? 

Ms. CANTERBURY. No. 

39 

The CHAIRMAN. Okay. And I appreciate that. I didn’t think so, 

but it is good. 

So then the question is—it doesn’t mean—that is the problem 

with a simple repeal. The question is, what could we put in there? 

What are the legitimate barriers that ought to be exerted if we all 

agree that not everything the SEC gets should go to everybody 

else? 

I think whistleblowers will be exempted. They get the free ride. 

The next cut for me is—the Congress has already litigated with 

the Securities Litigation Act which sets this barrier, and that 

would be one conceivable barrier to look at it, which is to say that 

a private party has to meet the same requirements—a litigant, a 

competitive litigant. And you could also separate out shareholders. 

There are different categories. There are whistleblowers, there are 

shareholders, and legitimate shareholders and competitors. 

I don’t expect to get those all resolved now. I would invite any 

of you, we have about a week to think about it. This helps me. This 

makes progress as we conceptualize it. There is going to be legislation. The Senate is moving, and there is a great deal of public demand. So there is going to be legislation. 

And I think there is consensus in a number of areas. The SEC 

has already conceded it should not be itself able to defend. That 

will be clear. And they have already, as you know, Mr. Mintz, 

waived any notion of invoking it in the lawsuit that you are doing, 

whistleblowers. 

But then when we get to other categories there is a question 

about what different level should you have to meet if you are a private litigant to get information the SEC got and by what category? 

And anybody who has any suggestions on that, we would be glad 

to listen. 

Is there anything further the witnesses want to say? 

Ms. MERRILL. I think at a minimum, you would want to extend 

the FOIA exemptions to the private litigation field so that thirdparty litigants would not be able to get information that is protected if it were asked for under a FOIA request. 

Ms. CANTERBURY. I believe that there are currently standards for 

a weighing privilege that are very different from FOIA and it involves a judge gauging the public interest versus the private interest. And that is a completely different ball game. 

The CHAIRMAN. I would invite both of to you submit further conversation. 

Again, there needs to be some limits. But I would say as well, 

when you are going into court, you have to go, FOIA or this or that. 

We can mix and match and take one from column A and one from 

column B. 

So, yes, I think everybody would agree. There have to be some 

standards that differentiate—let’s put it this way. I think there is 

consensus. There is information we want the SEC to be able to get 

fairly freely, although—we want to diminish resistance to the SEC 

reaching broadly for information by giving some degree of protection to the proprietary information, absent some showing of wrongdoing, etc., or some other thing. And if you will help us with that, 

I think we may be able to greatly advance this. 

40 

Mr. PITT. Would it be useful if we submitted something to you 

in writing? 

The CHAIRMAN. Yes, it would be. 

And, Mr. Blum, if you will give us your phone number, we will 

call you every time we have an amendment. 

Mr. BLUM. I wasn’t looking for special treatment. 

The CHAIRMAN. I am sorry. I thought you were when you said 

to ‘‘notify the stakeholders.’’ If you talk about notifying the stakeholders, that is special treatment for the stakeholders, as opposed 

to simply making it public. 

Mr. BLUM. I would hope that by the end of next week, there 

would be clear differentiation between dealing with the third-party 

issue separately from the FOIA issue and that in that process, 

there is some way to draw that clear line. 

The CHAIRMAN. I thought that is what I was talking about. Yes? 

Mr. BLUM. But I think 929I puts the two together. And I think 

that there has to be some clear line— 

The CHAIRMAN. I understand that. We are going to amend it. We 

are going to change it. We are going to change the law. 

Mr. BLUM. Okay. But I hope that there is some way—a clear line 

to immunize whatever comes out of this from allowing the SEC to 

avoid embarrassment. 

The CHAIRMAN. Mr. Blum, I will ask you, have you not been here 

for the last 3 hours? I am offended by that question because—I am 

sorry. Please listen, and I will listen to you—it is so clearly contrary to the subject of the conversation we have been trying to 

have. It is tendentious for a reason I don’t understand. 

First of all, we have been making it very clear that the SEC 

itself will not be involved, that they won’t be able to use it. We are 

talking solely about protecting third-party proprietary information. 

I thought we were clear, and I am frankly disappointed, I should 

say, by the tone of the question. 

Now go ahead. 

Mr. BLUM. Let me refrain—you have been a clear champion of 

transparency by having the open committee process and by doing 

many things to make this a more open process, and we appreciate 

that very much. At the same time, I just want it to be clear that, 

by way of example, if the SEC is investigating something or is cooperating, and writes a supervisory letter, a year later if no action 

has been taken, say—say the SEC doesn’t like the formula that a 

credit rating agency uses and suggests changes. Will the public see 

that supervisory letter? So it is not a third party— 

The CHAIRMAN. Mr. Blum, nothing in what we have been talking 

about suggests that would be protected. Is a supervisory letter like 

that third-party proprietary information? Excuse me, Mr. Blum. I 

will listen after I have made this clear. But we have been very 

clear that we are talking solely about proprietary information from 

a registrant which the SEC gets. How could you possibly confuse 

that with a supervisory letter? And I will be glad to listen. 

Mr. BLUM. The point is well taken. 

The CHAIRMAN. I thank you. 

And, yes, I do invite—and, by the way, some of you might be 

more inclined to write statutory language. Some can do it, conceptually in English or whatever. 

41 

But I am serious. I don’t expect everybody to agree to everything. 

I think we have a great deal of agreement. And I say this, but it 

is in everybody’s interest because if there is any significant controversy, our chances of getting this done by the end of the month 

diminish. And it still has to go to a President who will be listening 

to the SEC. So if you can help us along these lines of dealing with 

protecting the whistleblower function. The SEC is completely unprotected, the whistleblower is completely protected, and thirdparty proprietary information somewhere along that spectrum, that 

is where we want to go. 

I thank the witnesses. This has been very useful for me. 

Ms. CANTERBURY. Thank you. 

Mr. PITT. Thank you. 

[Whereupon, at 1:05 p.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

September 16, 2010 

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