Industry Pushback: ASA FOIA request

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The American Securities Association (ASA) has filed a lawsuit in the U.S. District Court in Florida to compel the SEC to release enforcement documents that explain how it calculated the $1.8 billion in penalties imposed on broker-dealers for recordkeeping violations over the past few years, as reported widely.

The ASA, representing some of the largest regional broker-dealers in the country, initiated the lawsuit after the SEC refused to provide enforcement records detailing penalty calculations and related information. This refusal came in response to three Freedom of Information Act (FOIA) requests the ASA submitted in March.

This lawsuit occurs amid increasing industry criticism, judicial actions, and scrutiny from lawmakers directed at the SEC.

Questioning the “recordkeeping sweep initiative”

The ASA’s FOIA request seeks all records related to the SEC’s “recordkeeping sweep initiative,” including information used to calculate, determine, and propose penalties, fines, and other sanctions associated with the sweep.

According to the lawsuit, the SEC cited an exemption to FOIA for requests that might interfere with law enforcement proceedings. However, the ASA contends that the agency “did not explain why the exemption applied or why it justified a blanket withholding of every responsive document.”

According to the ASA’s lawsuit, the SEC initiated an investigation into certain broker-dealers’ retention of off-channel communication records, such as text messages, by requesting extensive documents from numerous companies without any specific suspicion of rule violations.

The agency “launched a suspicion-less investigation into whether certain broker-dealers were properly retaining business-related text messages sent and received on personal devices as required by the Commission’s rules,” the lawsuit states. The ASA noted that these investigations continued during the Covid-19 pandemic, when many employees were working from home.

“There appears to be no rhyme or reason for how the SEC imposed these penalties, and the SEC has provided little explanation into its decision-making,” the ASA stated in the suit.

Merely ‘a tool to generate numbers for year-end statistics’

“The regulated community thus is left with many questions. How were these penalties calculated? And why were these firms targeted in the first place? Or, as two SEC Commissioners recently put it, is the SEC’s penalty regime simply ‘a tool to generate numbers for year-end statistics’ rather than ‘a means to achieve outcomes that enhance market integrity and investor protection?'”

“The purpose of the Freedom of Information Act is to ensure the public has access to information held by federal agencies so the people can hold their government accountable,” ASA president and CEO Chris Iacovella said in a statement. “Unfortunately, the SEC has failed to comply with its FOIA obligations, and that is why ASA filed this lawsuit. The American public must have transparency into the SEC’s enforcement process.”

The public needs to know why, the ASA says. Instead of producing the documents requested under FOIA, the SEC cited exemptions for disclosures that could “reasonably be expected to interfere” with ongoing or prospective enforcement proceedings. Furthermore, the continuous stream of cases pursued by the SEC raises questions about its role as a regulatory agency compared to its function as an enforcement agency, akin to the Justice Department.

“But the SEC concedes that ASA is seeking documents from settled proceedings,” the trade group stated in its lawsuit. The ASA argues that the SEC cannot withhold documents simply because it may bring different enforcement proceedings against other, unrelated entities. “Such an outcome would license agencies to withhold documents in perpetuity,” the ASA said.

The SEC records will help the public understand the rationale behind the fines imposed, the trade group contended.

Why these victims and penalties?

“After the dust settles, those targeted by the SEC are left to wonder how it all happened. Why did the SEC choose to target certain companies for suspicion-less investigations? How did the SEC arrive at the penalties it imposed?” the ASA asked in its complaint.

The ASA seeks to compel the SEC to release the documents and cover its attorneys’ fees. Since the broker-dealers and RIAs involved in the sweep can refuse to have their documents included in FOIA requests, it is highly likely that all the documentation provided will be exclusively from the SEC.

FOIA, codified under law at 5 U.S.C. 552(a), promotes government transparency by allowing any person to request access to federal agency records. All U.S. government agencies must disclose records upon receiving a written request, except for records that are exempt from public disclosure.

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