Federal Court Kills PIABA FOIA SEC Demand For FINRA Records.

FINRA operates the largest dispute resolution forum in the securities industry to assist in the resolution of monetary and business disputes between and among investors, brokerage firms and individual brokers.

The Court doesn't quite understand FINRA's action or inaction in response to Timban's March 22, 2012 disclosure. For one thing, the Court found no evidence in the record showing that FINRA's Director of Dispute Resolution took any action to remove Timban from the case.  Also a tad odd, neither the Claimant nor any Respondent requested the arbitrator's removal following his disclosure.  Consider this scathing commentary from the Court that is spread out in all its glory as Footnote 7:

This Court finds it remarkable that neither of these parties nor, more particularly, FINRA saw fit to conduct any investigation or due diligence into Mr. Timban's qualifications after he revealed that he was the subject of a complaint by the State of New Jersey for unauthorized legal practice. Given that the parties were required by the terms of the subscription agreement to submit any disputes which arose thereunder to arbitration under the auspices of, inter alia, FINRA, and given that FINRA bills itself as the largest independent securities regulator in the country, one would expect that public confidence in the integrity of the arbitral process would be of paramount importance.  Indeed FINRA's June 21, 2013 announcement that it will now conduct annual background checks on its arbitrators and additional review before appointment seems, to this Court, to be an important step in the right direction, albeit "too little too late" in this cases . . .

Imperfectly Executed

Summing up the facts before it, the Court held that:

Here, in failing to provide these parties with three qualified arbitrators, FINRA failed to provide what the parties agreed to in the Subscription Agreement  We therefore conclude that vacatur of the award in this case is proper . . . arbitrators here so imperfectly executed their powers that a mutual, final and definite award was not made.

At Page 21 of the Court's Memorandum

educational and networking organization for securities arbitration attorneys who represent the public investor in securities disputes. PIABA members are involved in promoting the interests of the public investor in securities and commodities arbitration by:

(1) protecting public investors from abuses prevalent in the arbitration processes;

(2) making securities arbitration just and fair; and

(3) creating a level playing field for the public investor in securities arbitration.

1. Documents relating to audits, inspections, and reviews conducted by the [SEC] in connection with the arbitrator selection process of [FINRA];

2. Documents relating to audits, inspections, and reviews conducted by the SEC in connection with FINRA's appointment of replacement arbitrators in the event that an arbitrator is stricken as part of the list selection process or removed for cause;

3. Documents relating to audits, inspections, and reviews conducted by the SEC in connection with FINRA's policies, procedures, and processes in deciding causal challenges to an arbitrator's appointment;

4. Documents relating to audits, inspections, and reviews conducted by the SEC in connection with FINRA's internal policies and procedures regarding arbitrator selection, appointment, and replacement;

5. Documents relating to audits, inspections, and reviews conducted by the SEC in connection with FINRA's pre-approval background check on arbitrator applicants; and

6. Documents relating to audits, inspections, and reviews conducted by the SEC in connection with FINRA's public arbitrator pilot program.

Although insisting that Exemption 8 provides no protection for the records it seeks, PIABA has strikingly little evidence for that claim. The organization begins with a cursory nod to the exemption's text, arguing that "examination report" is "not part of common parlance" but rather is an "industry-specific" term with a "special or technical meaning." Appellant's Br. at 22-24. Accordingly, it urges us to read the phrase as a "term of art," rather than as a general definition that applies to all agencies in all situations. Id. Such precise, industry-specific meaning, PIABA admits, does not emanate from the text of the statute-or, indeed, from anything else in the U.S. Code.

In sum, then, we hold that documents the Commission collects while examining financial institutions-that is, while examining any organization the agency regulates-are exempt from disclosure. This is true no matter the records'substance so long as they relate to a resulting report. The Commission satisfies the "examination" requirement here. Whether it also checks the "report" box is the subject of the next section.

. . .

Exemption 8 allows the Commission to withhold records that relate to an examination "report." The district court announced two conclusions on this issue. First, it held that "Exemption 8 does not require the defendant to identify a specific report to which the information relates." Public Investors Arbitration Bar Association, 930 F. Supp. 2d at 72(qu oting Judicial Watch, Inc. v. Department of Treasury, 796 F. Supp. 2d 13, 37 (D.D.C. 2011)). Second, it found that, as a factual matter, "each potentially responsive document [in this case] does appear to relate to an examination report of some kind." Id. at 71. We have little to go on in answering the doctrinal question of whether each withheld document must relate to a specific examination report, though district courts in this circuit have held that it need not. See Judicial Watch, Inc. v. Department of Treasury, 796 F. Supp. 2d 13, 37 (D.D.C. 2011); McKinley v. FDIC, 744 F. Supp. 2d 128, 144 (D.D.C. 2010). Fortunately, we can resolve this case without addressing that issue, as the Commission has pointed to particular examinations-culminating in written products-to which the contested documents relate.

Yet, to the extent our case law fosters today's result, it bears questioning the wisdom of the course our precedents plot. The financial world has changed since the genesis of our Exemption 8 case law. So has the world in which our financial system operates. Financial institutions and their regulators now frequently operate under a haze of public distrust fueled by repeated regulatory failures and massive, opaque, and unaccountable bailouts. The public now has good reason to doubt the rigor of our financial systems' reliability and oversight.

The ramifications of Exemption 8's all-encompassing secrecy therefore reach far beyond PIABA's (legitimate) concern for the adequacy and fairness of FINRA's regime of  arbitration. It bodes ill for rebuilding civic trust that Exemption 8 could be employed to permanently shroud both the possible reckless conduct by regulated financial institutions and the particulars of sweeping agency intrusions into the sphere of the financial marketplace. See, e.g., Judicial Watch, Inc. v. U.S. Dep't of Treasury, 796 F. Supp. 2d 13, 37-38 (D.D.C. 2011) (finding many documents relating to the Treasury's Troubled Asset Relief Program, and related agency investments, protected from disclosure by, among other things, Exemption 8).

"The fabric of [the] American empire ought to rest on the solid basis of the consent of the people." THE FEDERALIST NO. 22 (Alexander Hamilton). That at times delicate weave risks coming undone where vague principles of regulatory cooperation are allowed to inevitably trump the public's interest in transparency.

Congress should revisit this ill-conceived amendment and make sure an apparent miscue does not morph into a serious misadventure.

In the Matter of the Application of Gregory Evan Goldstein For Review of Disciplinary Action Taken by FINRA (1934 Act Release No. 71970, Admin. Proc. File No. 3-15183 / April 17, 2014), See Page 11 of the SEC's Opinion.

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