Colin Barr

Following the money in banking, economics, and Washington

No one trusts the SEC

September 16, 2010: 12:17 PM ET

If there is a group held in less repute than bankers or Congress, it might just be the Securities and Exchange Commission.

That seems clear from a hearing held Thursday morning by the House Financial Services committee. Congress is considering whether to repeal a provision of the Dodd Frank Act, passed just two months ago, that gives the agency broad latitude in deciding when to release information it has collected.

Is anyone listening?

The agency's record of stonewalling and evasiveness practically drowned out any constructive measures its chief, Mary Schapiro (right), had to offer.

The provision, called Section 929I, has come under intense fire since Fox News reported the agency used it to deny requests for information tied to the SEC's bungling of its oversight of Ponzi schemer Bernard Madoff. One longtime foe of the SEC, former agency lawyer Gary Aguirre, has charged that 929I "boarded shut the last tiny beam of light afforded by the Freedom of Information Act into the SEC's regulation of Wall Street."

On Thursday, legislators peppered Schapiro with questions about the agency's failure to live up to its information-sharing obligations. Several questioned the rationale for withholding Madoff-related documents, while others pointed to an inspector general's report last year that found the agency had fulfilled a paltry 13% of Freedom of Information Act requests – compared with 60% at all federal agencies in fiscal 2008.

Schapiro fought back gamely, blaming the SEC's low response rate on its law enforcement duties. She said the agency, unlike many other bodies such as the Federal Reserve, often finds itself involved in cases being pursued by the Justice Department, for instance.

"We have a bias toward turning over anything we can," Schapiro said.

But the inspector general's report took a less rosy view:

These deficiencies initially occurred due to inadequate search capabilities such as searching for documents in key databases. Secondly, we found that documents are not sufficiently inspected to determine if the information is potentially responsive and if it can be disclosed. Finally, the volume of Enforcement's records prohibits the efficient and timely review of documents.

And her repeated claim that the SEC had already turned over "tens of thousands of pages" of documents in the Fox case met with exasperation. Committee chairman Barney Frank, D-Mass., urged Schapiro not to hide behind lawyerly claims.

In coming weeks legislators will consider several bills that would roll back or repeal 929I. Schapiro has been defending the measure, but even she seems resigned to the fact that the agency's broad powers aren't likely to survive the Fox flap and an administrative case in which the SEC also tried, fruitlessly, to retroactively apply the new law.

The SEC issued guidance this week explaining how the agency will enforce the law, and Schapiro told lawmakers she is open to having that guidance codified into new legislation if necessary.

But that may not be enough: Bills offered by congressmen including Darrell Issa, R-Calif., and Edolphus Towns, R-N.Y., would yank 929I out of Dodd Frank altogether, and Schapiro suggested she knows the SEC's not going to win this fight.

"It's a fair argument 929I is drafted more broadly than it needs to be," Schapiro said.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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