District Of Columbia Circuit Rejects PIABA’s Attempt At Obtaining Records Relating To The SEC’s Examination Of FINRA’s Arbitration Program

Securities Law Alert

November 20, 2014

David J. Libowsky

David J. Libowsky



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Introduction

The Public Investors Arbitration Bar Association PIABA (“PIABA”) has lost another round in its attempt at obtaining records maintained by the Securities and Exchange Commission (“SEC”) relating to its examination of FINRA’s arbitration program. In Public Investors Arbitration Bar Association v. Securities and Exchange Commission, 2014 U.S. App. LEXIS 21624 (D.C. Cir. Nov. 14, 2014), the District of Columbia Circuit Court of Appeals affirmed the district court’s determination that such records were exempt from disclosure pursuant to Exemption 8 of the Freedom of Information Act (“FOIA”), which exempts from  disclosure records “related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions.” 5 U.S.C. § 552(b)(8) (2014).  As a result, the Court concluded, the SEC is not required to turn over to PIABA any records relating to its review of FINRA’s arbitration program.

PIABA’s FOIA Request And The District Court Litigation

PIABA submitted a FOIA request to the SEC demanding “records relating to the agency’s audits, inspections and reviews of FINRA’s arbitration program.” Public Investors Arbitration Bar Association, 2014 U.S. App. LEXIS 21624 at *3.  The SEC searched its archives for responsive documents and identified 65 boxes containing potentially responsive records, mostly relating to the SEC’s responses to consumer complaints about FINRA’s arbitration process. The SEC refused to turn those documents over to PIABA, asserting that the records were protected from disclosure under Exemption 8 of FOIA. The SEC thereafter denied PIABA’s administrative appeal of its decision denying the FOIA request. Id. at **3-4. In 2013, PIABA  commenced an action against the SEC in the United States District Court for the District of Columbia to obtain those records. The district court granted the SEC’s motion for summary judgment, concluding that the “requested records ‘relate[ ] to’ the SEC’s ‘examinations’ of FINRA and that Exemption 8 therefore protects them from disclosure.” Public Investors Arbitration Bar Association v. SEC, 930 F. Supp. 2d 55 (D. D.C. 2013). In granting the SEC summary judgment, the district court rejected PIABA’s argument that Exemption 8 “protects only information related to financial examinations and so does not apply to the Commission's oversight of FINRA's arbitration program.” Public Investors Arbitration Bar Association, 2014 U.S. App. LEXIS 21624 at **4-5 (emphasis in original). Relying on what it called “Exemption 8’s ‘plain meaning’ and purpose, as well as its relationship to other financial legislation,” the district court held that Exemption 8 “nowhere distinguishes between a regulated entity’s financial and administrative activities ….” Public Investors Arbitration Bar Association v. SEC, 930 F. Supp. 2d at 63-67. The district court concluded that “applying Exemption 8 in this case would serve the enacting Congress’s stated purpose of protecting the cooperative relationship between the Commission and the entities it regulates, including FINRA.” Id. The district court also rejected PIABA’s argument that the SEC had “failed to identify a particular report to which each contested document relates,” holding that “nothing in Exemption 8 requires the Commission to point to any such specific report.” Id. at 70-72. The district court held that the SEC had in fact conducted its inquiries into FINRA’s arbitration program “under its examination authority and that each investigation ‘resulted in a writing, either termed a report or closing memorandum.’” Id.

The D.C. Circuit’s Decision

On appeal, the D.C. Circuit affirmed the district court’s order granting summary judgment in favor of the SEC, concluding that Exemption 8 allows the SEC to withhold the documents it had collected while examining FINRA’s arbitration program. Public Investors Arbitration Bar Association, 2014 U.S. App. LEXIS 21624 at **1-2. The Court observed  initially that the ambit of Exemption 8 is “particularly broad,” explaining that “the exemption’s ‘broad, all-inclusive scope’ allows us to apply the statute ‘as written’ -- that is, without adding any extra requirements -- ‘since Congress ha[s] intentionally and unambiguously so contemplated.’” Public Investors Arbitration Bar Association, 2014 U.S. App. LEXIS 21624 at *9 (quoting Gregory v. FDIC, 631 F.2d 896, 898 (D.C. Cir. 1980)). Critical to the Court’s decision were two amendments to the Securities Exchange Act of 1934 (the “Exchange Act”) -- and by extension to FOIA --  passed by Congress in 2010 “that made apparent once and for all the exemption’s striking breadth, at least with respect to the [SEC].” Public Investors Arbitration Bar Association, 2014 U.S. App. LEXIS 21624 at *12.  The first amendment provided that “[f]or the purposes of FOIA, the SEC is ‘an agency responsible for the regulation or supervision of financial institutions.’” Id. (citing 15 U.S.C. § 78x(e)(1)(2014)). The second amendment provided that “[f]or the purposes of [FOIA] … any entity for which the Commission is responsible for regulating [sic], supervising or examining under [the Exchange Act] is a financial institution.” Public Investors Arbitration Bar Association, 2014 U.S. App. LEXIS 21624 at **12-13 (citing 15 U.S.C. § 78x(e)(2)(2014)). The latter amendment thus confirmed that FINRA is a “financial institution for which the SEC is responsible for regulating” for purposes of Exemption 8. Public Investors Arbitration Bar Association, 2014 U.S. App. LEXIS 21624 at **12-13.

The District of Columbia Circuit rejected PIABA’s argument that Exemption 8 “protects only information related to financial examinations” and thus does not apply to the SEC’s “oversight of FINRA’s arbitration program….” Public Investors Arbitration Bar Association, 2014 U.S. App. LEXIS 21624 at ** 4-5 (emphasis in original). The Court held that “[b]y clarifying that ‘financial institution’ means ‘any entity the Commission regulates,’ Congress conditioned the exemption’s reach on whether the institution being examined is a ‘financial institution’ -- though, still, not on whether the particular records would divulge financial data.” Id. at **13-14.  The Court held further that “in essence, one should read ‘examination, operating or condition reports’ to mean “examination, operating or condition reports related to financial institutions.’” Id. (emphasis in original). The District of Columbia Circuit concluded that “documents the Commission collects while examining financial institutions -- that is, while examining any organization the agency regulates -- are exempt from disclosure” and that “[t]his is true no matter the record’s substance so long as they relate to a resulting report.”  Id. at ** 15-16.  The District of Columbia Circuit did not need to resolve the issue of whether each withheld document had to relate to a specific examination report in order to be exempt from disclosure under Exemption 8, as the SEC had demonstrated that there were “particular examinations -- culminating in written products -- to which the contested documents relate.” Id. at **16-19. 

Conclusion

The District of Columbia Circuit’s decision appears to be well reasoned, as the language of Exemption 8 is broad, and the recent amendments to the Exchange Act make clear that the SEC is an agency for purposes of FOIA and that FINRA is a financial institution subject to SEC regulation for purposes of FOIA. The plain language of Exemption 8 encompasses any information contained in examination reports relating to the covered financial institution (here, FINRA) maintained by the regulator (here, the SEC), not just financial examination information as PIABA argued. Barring a request by PIABA for en banc review by the full District of Columbia Circuit or certiorari to the Supreme Court, the panel’s decision puts to an end PIABA’s quest to obtain records from the SEC relating to its review of FINRA’s arbitration program.  Thus, PIABA will not have the benefit of whatever information might be reflected in those SEC records in advancing its objectives with respect to the FINRA arbitration process.