Public Investors Arbitration Bar Association v. United States Securities and Exchange Commission , 930 F. Supp. 2d 55 ( 2013 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
PUBLIC INVESTORS ARBITRATION BAR
ASSOCIATION,
Plaintiff, Civil Action No. 11-2285 (BAH)
v. Judge Beryl A. Howell
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION,
Defendant.
MEMORANDUM OPINION
The plaintiff, an association of attorneys who represent public investors in securities
arbitrations, brings this action against the defendant U.S. Securities and Exchange Commission
(“SEC”) to compel its compliance with the Freedom of Information Act (“FOIA”), 5 U.S.C.
§ 552. Pursuant to the FOIA, the plaintiff requested various records related to the SEC’s
oversight of the Financial Industry Regulatory Authority (“FINRA”), but the SEC refused to
disclose any responsive records, citing FOIA Exemption 8, 5 U.S.C. § 552(b)(8). Both parties
have moved for summary judgment, and the primary question presented by these motions is
whether FOIA Exemption 8 applies to documents related to the SEC’s examinations of the
administrative activities of a self-regulatory organization.
I. BACKGROUND
Before discussing the plaintiff’s FOIA request, the Court will provide a brief introduction
to FINRA, public investor arbitrations, and the SEC’s oversight of FINRA. FINRA is a non-
profit corporation that acts as a self-regulatory organization over all securities firms that do
business with the public, also known as “broker-dealers.” See Steven D. Urban, Securities
Arbitration of Investor Disputes: A Primer for the Unwary Practitioner, 59 ADVOCATE 11, 11
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(2012). FINRA was created in 2007, “upon the consolidation of the enforcement arm of the New
York Stock Exchange, and the National Association of Securities Dealers, Inc.” Id. Beginning
with the Supreme Court’s holding in Shearson/American Express, Inc. v. McMahon, 482 U.S.
220, 238 (1987), “most disputes involving broker-dealers are now subject to arbitration rather
than litigation.” 6 THOMAS LEE HAZEN, THE LAW OF SECURITIES REGULATION § 15.0 (6th ed.
2009). 1 One forum for the arbitration of securities claims by public investors is FINRA Dispute
Resolution, Inc. (“FINRA DR”), which is “a subsidiary company under the umbrella of
FINRA . . . charged with administrating arbitration, mediation, and other alternative dispute
resolution services.” See Compl. ¶ 6, ECF No. 1.
Once parties commence an arbitration proceeding, “the proceedings in some ways
resemble a typical court case”: the parties file pleadings, engage in discovery, and present their
arguments to a panel of arbitrators, which in turn makes an award. See 6 HAZEN, THE LAW OF
SECURITIES REGULATION §§ 15.6–15.7. “[N]either FINRA nor FINRA DR,” however, “is a
party [to the proceedings,] and the arbitrators are not FINRA or FINRA DR employees.” Decl.
of William A. Jacobson (“Jacobson Decl.”) ¶ 11, ECF No. 12-1. “Rather, FINRA DR employees
administrate the case pursuant to the terms of the [FINRA Code of Arbitration for Customer
Cases], which contains various provisions as to arbitrator selection, disclosure, removal, and
replacement.” Id. 2 For example, FINRA uses what is called a “Neutral List Selection System,”
which randomly generates lists of arbitrators for a given hearing. See FINRA Code of
Arbitration Procedure for Customer Disputes (“FINRA Code”) § 12400(a) (2008). Once this list
is generated, each party has the ability to strike up to four arbitrators from the list and must rank
1
In Shearson/American Express, the Supreme Court held that pre-dispute agreements to arbitrate federal securities
laws claims were enforceable. See Shearson/American Express, 482 U.S. at 238.
2
See generally FINRA Code of Arbitration Procedure for Customer Disputes (2008), available at
http://www.finra.org/web/groups/arbitrationmediation/@arbmed/@arbion/documents/arbmed/p117546.pdf.
2
the remaining arbitrators by preference. See id. § 12404. Then, FINRA DR appoints the highest
ranked arbitrators from a combined list, see id. § 12406, and FINRA DR may remove and
replace any arbitrator “for conflict of interest or bias,” either by request of a party or on its own,
see id. § 12407.
The SEC’s Office of Compliance Inspectors and Examinations (“OCIE”), among other
responsibilities, “conducts oversight examinations of arbitration programs at self-regulatory
organizations that are registered with the SEC, including [FINRA].” Decl. of Kristen Lever
(“Lever Decl.”) ¶ 2, ECF No. 10-1. The OICE also handles “particular complaints . . . from
arbitration participants.” Id. ¶ 8. “In response to each complaint, as part of OCIE’s ongoing and
continuous oversight responsibilities, OCIE [investigates] the allegations,” which can “include[]
obtaining a copy of the [arbitration] file and any other relevant documents from FINRA.” Id.
In a letter dated February 9, 2010, the plaintiff submitted a FOIA request to the SEC for
six categories of documents, all of which “relat[e] to audits, inspections, and reviews conducted
by the [SEC]” of FINRA. See Compl. Ex. 1, at 1, ECF No. 1-1. Specifically, the plaintiff’s
FOIA request sought the following:
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
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6. Documents relating to audits, inspections, and reviews conducted by the SEC
in connection with FINRA’s public arbitrator pilot program.
Id. at 1–2 (footnotes omitted). Upon receipt of this request, the SEC “searched all places within
OCIE’s records where it would be reasonable to find responsive documents.” Lever Decl. ¶ 3.
This search included “reviewing offsite storage boxes, locating boxes with labels indicating the
contents may be responsive in OCIE’s onsite file room,” and “contacting examiners still
employed by the SEC who participated in the examinations to identify boxes responsive to the
request and to identify unboxed documents that may be responsive, including any electronic
documents.” Id. After conducting this search, the SEC located “approximately 65 boxes that
contain potentially responsive material.” Id. ¶ 5. On March 24, 2010, however, the SEC notified
the plaintiff that it had “determined to withhold the non-public records that may be responsive to
your request under 5 U.S.C. § 552(b)(8).” See Compl. Ex. 2, at 1, ECF No. 1-2.
The plaintiff filed an administrative appeal of the SEC’s determination on March 21,
2011—nearly one year after the SEC communicated its determination to the plaintiff. See
Compl. Ex. 3, ECF No. 1-3. After considering the plaintiff’s administrative appeal, on April 25,
2011, the SEC decided to affirm its decision to withhold all potentially responsive records under
FOIA Exemption 8. See Compl. Ex. 4, ECF No. 1-4.
The plaintiff filed its Complaint in the instant action on December 22, 2011, seeking “a
declaratory judgment . . . that all of the documents in the custody and control of the SEC, which
are covered by [the plaintiff’s] FOIA Request, must be disclosed to PIABA and that such
documents are not protected from disclosure by Exemption 8.” Compl. ¶ 16. Pending before the
Court are the SEC’s motion for summary judgment on the plaintiff’s FOIA claim, as well as the
plaintiff’s cross-motion for summary judgment. For the reasons discussed below, the Court
grants the SEC’s motion and denies the plaintiff’s cross-motion.
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II. LEGAL STANDARD
Congress enacted the FOIA to promote transparency across the government. See 5
U.S.C. § 552; Quick v. U.S. Dep’t of Commerce, Nat’l Inst. of Standards & Tech., 775 F. Supp.
2d 174, 179 (D.D.C. 2011). The Supreme Court has explained that the FOIA is “a means for
citizens to know ‘what their Government is up to.’ This phrase should not be dismissed as a
convenient formalism. It defines a structural necessity in a real democracy.” Nat’l Archives &
Records Admin. v. Favish, 541 U.S. 157, 171–72 (2004) (citation and internal quotation marks
omitted). “The basic purpose of FOIA is to ensure an informed citizenry, vital to the functioning
of a democratic society, needed to check against corruption and to hold the governors
accountable to the governed.” NLRB v. Robbins Tire & Rubber Co., 437 U.S. 214, 242 (1978).
As a result, the FOIA requires federal agencies to release all records responsive to a request for
production. See 5 U.S.C. § 552(a)(3)(A). Federal courts are authorized under the FOIA “to
enjoin the agency from withholding agency records and to order the production of any agency
records improperly withheld from the complainant.” Id. § 552(a)(4)(B).
This strong interest in transparency must be tempered, however, by the “legitimate
governmental and private interests [that] could be harmed by release of certain types of
information.” United Techs. Corp. v. U.S. Dep’t of Def., 601 F.3d 557, 559 (D.C. Cir. 2010)
(internal quotation marks omitted); see also Critical Mass Energy Project v. Nuclear Regulatory
Comm’n, 975 F.2d 871, 872 (D.C. Cir. 1992) (en banc). Accordingly, Congress included nine
exemptions permitting agencies to withhold information from FOIA disclosure. See 5 U.S.C.
§ 552(b). Generally, “[t]hese exemptions are explicitly made exclusive, and must be narrowly
construed.” Milner v. Dep’t of the Navy, 131 S. Ct. 1259, 1262 (2011) (citations and internal
quotation marks omitted); see also Pub. Citizen, Inc. v. Office of Mgmt. & Budget, 598 F.3d 865,
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869 (D.C. Cir. 2010) (“FOIA allows agencies to withhold only those documents that fall under
one of nine specific exemptions, which are construed narrowly in keeping with FOIA’s
presumption in favor of disclosure.” (citations omitted)). When a FOIA requester properly
exhausts its administrative remedies, it may file a civil action challenging an agency’s response
to its request. See 5 U.S.C. § 552(a)(4)(B); Wilbur v. CIA, 355 F.3d 675, 677 (D.C. Cir. 2004).
Once such an action is filed, the agency generally has the burden of demonstrating that its
response to the plaintiff’s FOIA request was appropriate.
When an agency’s response to a FOIA request is to withhold responsive records, either in
whole or in part, the agency “bears the burden of proving the applicability of claimed
exemptions.” Am. Civil Liberties Union v. U.S. Dep’t of Def. (“ACLU/DOD”), 628 F.3d 612,
619 (D.C. Cir. 2011). “The government may satisfy its burden of establishing its right to
withhold information from the public by submitting appropriate declarations and, where
necessary, an index of the information withheld.” Am. Immigration Lawyers Ass’n v. U.S. Dep’t
of Homeland Sec., 852 F. Supp. 2d 66, 72 (D.D.C. 2012) (citing Vaughn v. Rosen, 484 F.2d 820,
827–28 (D.C. Cir. 1973)). “If an agency’s affidavit describes the justifications for withholding
the information with specific detail, demonstrates that the information withheld logically falls
within the claimed exemption,” and “is not contradicted by contrary evidence in the record or by
evidence of the agency’s bad faith, then summary judgment is warranted on the basis of the
affidavit alone.” ACLU/DOD, 628 F.3d at 619. “Ultimately, an agency’s justification for
invoking a FOIA exemption is sufficient if it appears ‘logical or ‘plausible.’” Id. (internal
quotation marks omitted) (quoting Larson v. Dep’t of State, 565 F.3d 857, 862 (D.C. Cir. 2009)).
When a requester challenges an agency’s response based on the adequacy of the search
performed, “[t]o prevail on summary judgment . . . the defending ‘agency must show beyond
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material doubt . . . that it has conducted a search reasonably calculated to uncover all relevant
documents.’” Morley v. CIA, 508 F.3d 1108, 1114 (D.C. Cir. 2007) (quoting Weisberg v. U.S.
Dep’t of Justice (“Weisberg I”), 705 F.2d 1344, 1351 (D.C. Cir. 1983)). “In order to obtain
summary judgment the agency must show that it made a good faith effort to conduct a search for
the requested records, using methods which can be reasonably expected to produce the
information requested.” Oglesby v. U.S. Dep’t of Army, 920 F.2d 57, 68 (D.C. Cir. 1990).
“Summary judgment may be based on affidavit, if the declaration sets forth sufficiently detailed
information ‘for a court to determine if the search was adequate.’” Students Against Genocide v.
Dep’t of State, 257 F.3d 828, 838 (D.C. Cir. 2001) (quoting Nation Magazine v. U.S. Customs
Serv., 71 F.3d 885, 890 (D.C. Cir. 1995)).
III. DISCUSSION
A. The Scope of FOIA Exemption 8
This case primarily presents a question of statutory interpretation. In particular, this case
requires the Court to examine the scope of FOIA Exemption 8, which exempts from disclosure
any matters “contained in or 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). The parties agree that FINRA is a “financial institution”
within the meaning of Exemption 8, and they also agree that the SEC is “an agency responsible
for the regulation or supervision of financial institutions,” as that phrase is used in Exemption 8.
See Def.’s Mem. of P. & A. for Summ. J. (“Def.’s Mem.”) at 5, ECF No. 10; Pl’s Opp’n to
Def.’s Mot. for Summ. J. (“Pl.’s Opp’n”) at 7, ECF No. 12. The parties disagree, however,
whether the documents sought by the plaintiff are “related to examination, operating, or
condition reports prepared by, on behalf of, or for the use of” the SEC. See 5 U.S.C. § 552(b)(8).
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At the outset, the Court notes that the language of Exemption 8, by its terms, is very
broad. First, although Exemption 8 is limited to “examination, operating, or condition reports
prepared by, on behalf of, or for the use of” a financial regulatory agency, the exemption covers
all material that is “related to” such reports, not just reports themselves. Hence, the “related to”
language casts a wide net of non-disclosure over any documents that are logically connected to
an “examination, operating, or condition report[].” See id. Furthermore, “Exemption 8 does not
require the defendant to identify a specific report to which the information relates.” Judicial
Watch, Inc. v. U.S. Dep’t of Treasury (“Judicial Watch/Treasury”), 796 F. Supp. 2d 13, 37
(D.D.C. 2011) (citing McKinley v. FDIC, 744 F. Supp. 2d 128, 143–44 (D.D.C. 2010)). Rather,
Exemption 8 extends to any documents received by a financial regulatory agency in the course of
exercising its “regulatory responsibilities in relation to the financial institutions whose
information has been withheld.” See McKinley, 744 F. Supp. 2d at 144; see also Judicial
Watch/Treasury, 796 F. Supp. 2d at 37 (upholding Treasury Department’s withholding, under
Exemption 8, of “information [the FDIC] relayed to the [Treasury] through its monitoring of the
condition of the financial institutions it regulates”). Finally, the D.C. Circuit has held that, for
purposes of Exemption 8, “examination reports need not pertain to an institution that is regulated
or supervised by the withholding agency.” Pub. Citizen v. Farm Credit Admin., 938 F.2d 290,
294 (D.C. Cir. 1991). This means that agencies that do not directly regulate or supervise a
particular financial institution may still withhold information about that institution under
Exemption 8, so long as the withholding agency is one that is “responsible for the regulation or
supervision of financial institutions” more generally. See 5 U.S.C. § 552(b)(8).
In the instant action, the SEC rests its argument in favor of nondisclosure on the plain
language of both Exemption 8 and the plaintiff’s FOIA request, contending that “PIABA’s
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request by its very terms recognizes that responsive documents will have been obtained or
generated in the course of SEC ‘audits, inspections, and reviews,’ which are all synonyms for
‘examinations.’” Def.’s Mem. at 5–6. Thus, according to the SEC, “[b]ecause the documents
relate to examinations of a financial institution regulated by the SEC, that is the beginning and
end of the inquiry.” Id. at 6. The plaintiff, however, advocates for a narrower construction of
Exemption 8, based on what it perceives to be the thrust of the FOIA’s legislative history and the
weight of authority interpreting Exemption 8. The plaintiff begins by clarifying that its FOIA
request “seeks a narrow set of documents as to the way in which FINRA, through FINRA DR,
administrates the arbitrator selection process in private arbitrations.” Pl.’s Opp’n at 2. Next, the
plaintiff contends that “neither of the legislative purposes behind Exemption 8 is implicated” by
this narrow set of documents, and “[e]very reported case of which we are aware in which
Exemption 8 has been applied in some measure involved the finances of the subject financial
institution or financial transactions involving the financial institution.” See id. at 8. According
to the plaintiff, since “the audits, inspections, and reviews conducted by the SEC of FINRA’s
arbitrator selection process do not implicate any such financial conditions or transactions,” it
“would work an unreasonable result to apply an exemption based on protecting the financial
security of the institution to documents having nothing to do with the institution’s finances or
financial activities.” Id. at 9.
1. The Text of, and Legislative Purpose for, Exemption 8 Permit
Withholding.
In approaching the question presented by this case, the Court is mindful that “a reviewing
court must accord first priority in statutory interpretation to the plain meaning of the provision in
question.” See Consumers Union of U.S., Inc. v. Heimann, 589 F.2d 531, 533 (D.C. Cir. 1978).
Heeding this canon of statutory construction, the D.C. Circuit has held that “the meaning of
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exemption 8 [is] clear,” and “its broad, all-inclusive scope should be applied as written since
Congress ha[s] ‘intentionally and unambiguously’ so contemplated.” Gregory v. FDIC, 631 F.2d
896, 898 (D.C. Cir. 1980) (per curiam) (quoting Heimann, 589 F.2d at 533). Indeed, the D.C.
Circuit has held that, in Exemption 8, “Congress has intentionally and unambiguously crafted a
particularly broad, all-inclusive definition,” and thus “it is not [the Court’s] function, even in the
FOIA context, to subvert that effort.” Heimann, 589 F.2d at 533; see also McKinley, 744 F.
Supp. 2d at 143 (“Although generally FOIA exemptions are to be ‘narrowly construed,’ it is
well-established that Exemption 8’s scope is ‘particularly broad.’” (citations omitted)); Judicial
Watch/Treasury, 796 F. Supp. 2d at 37 (“While FOIA exemptions are normally construed
narrowly, it is recognized in this Circuit that Exemption 8’s scope is ‘particularly broad.’”
(quoting Heimann, 589 F.2d at 533)).
Despite the strong preference accorded to a statute’s plain meaning, “a court can look
beyond the plain meaning of a statute in limited instances, most notably when . . . a literal
reading leads to an unreasonable result.” Heimann, 589 F.2d at 534. The plaintiff “vigorously
asserts” that this situation is present here, see id., and therefore the Court will also consider the
legislative history of this FOIA exemption. See, e.g., Pl.’s Opp’n at 8 (“[I]t would lead to an
‘unreasonable result’ to apply Exemption 8 to documents which have nothing to do with the
purposes behind the exemption.”). To begin, the legislative history specifically addressing the
purposes of Exemption 8 during the enactment of the FOIA “is rather sparse.” See Heimann,
589 F.2d at 539 (Wright, J., concurring). The 1965 Senate report on the FOIA stated that
“Exemption No. 8 is directed specifically to insuring the security of our financial institutions by
making available only to the Government agencies responsible for the regulation or supervision
of such institutions the examination, operating, or condition reports prepared by[,] on behalf of,
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or for the use of such agencies.” S. Rep. No. 89-813, at 10 (1965). Similarly, the 1966 House
report observed: “[Exemption 8] is designed to insure the security and integrity of financial
institutions, for the sensitive details collected by Government agencies which regulate these
institutions could, if indiscriminately disclosed, cause great harm.” H.R. Rep. No. 89-1497, at 11
(1966).
From these reports and other pieces of the FOIA’s legislative history, the D.C. Circuit has
distilled two legislative purposes behind Exemption 8. “[T]he primary reason for adoption of
exemption 8 was to ensure the security of financial institutions.” Heimann, 589 F.2d at 534.
“Specifically, there was concern that disclosure of examination, operation, and condition reports
containing frank evaluations of the investigated banks might undermine public confidence and
cause unwarranted runs on banks.” Id. “[A] secondary purpose in enacting exemption 8 appears
to have been to safeguard the relationship between the banks and their supervising agencies.” Id.In this regard, “[i]f details of the bank examinations were made freely available to the public and
to banking competitors, there was concern that banks would cooperate less than fully with
federal authorities.” Id.; see also Bloomberg, L.P. v. U.S. Sec. & Exch. Comm’n, 357 F. Supp. 2d
156, 170 (D.D.C. 2004) (“[T]he purpose of [Exemption 8] is . . . to ensure that [financial]
institutions continue to cooperate with regulatory agencies without fear that their confidential
information will be disclosed.”). 3
The plaintiff agrees that these were the two discernible legislative purposes motivating
enactment of FOIA Exemption 8, but the plaintiff nevertheless contends that “neither of the
legislative purposes behind Exemption 8 is implicated” by the documents that it seeks. See Pl.’s
3
As to this second purpose, former Chief Judge Wright noted in his concurring opinion in Heimann that “[t]he
House and Senate Reports make reference to the ‘integrity’ and ‘security’ of financial institutions,” which are
“words that could . . . refer only to commercial soundness and solvency.” Heimann, 589 F.2d at 539 (Wright, J.,
concurring). On the other hand, Judge Wright observed, “those words might have somewhat broader import as well,
perhaps encompassing the need for a smoothly functioning regulatory regime.” Id.11
Opp’n at 8. 4 In particular, the plaintiff argues that “in the context of FINRA DR’s administration
of the arbitrator selection process in private arbitrations, there is no threat of [regulatory]
disruption” from the release of documents related to the examination of FINRA’s administrative
functions. See Pl.’s Opp’n at 9. The plaintiff goes so far as to contend that “[t]o apply
Exemption 8 to the administrative functions of FINRA DR as to arbitrator selection would read
the purpose and wording of Exemption 8 out of existence,” and “would create the unreasonable
result that the SEC would act as a functional vacuum cleaner into which all manner of non-
exempt documents would be shielded from scrutiny.” Pl.’s Reply Mem. in Further Supp. of Pl.’s
Cross-Mot. for Summ. J. (“Pl.’s Reply”) at 6–7, ECF No. 19.
The Court is sympathetic to the plaintiff’s parade of horribles, but the broad language of
the FOIA, as well as Congress’s recent amendment to the 1934 Securities Exchange Act, require
the Court to conclude that the documents sought by the plaintiff are exempt from disclosure.
The keystone of the plaintiff’s argument is that Congress did not intend, through FOIA
Exemption 8, to protect from disclosure records related to a regulatory agency’s examination of a
financial institution’s administrative functions. Indeed, only if this proposition were true would
the withholding of such documents be the “unreasonable result” of which the plaintiff repeatedly
cautions. Yet, it is clear that at least one purpose of Exemption 8, apparent from both the plain
meaning of its text and the legislative history, is served by withholding the records at issue in this
case. That purpose, as the D.C. Circuit has put it, is “to safeguard the relationship between the
banks and their supervising agencies.” See Heimann, 589 F.2d at 534. Put another way, this
purpose is “to ensure that [financial] institutions continue to cooperate with regulatory agencies
without fear that their confidential information will be disclosed.” Bloomberg, 357 F. Supp. 2d
at 170. As the SEC states in its sworn declaration, “OCIE depends on receiving cooperation to
4
The SEC does not argue that the first purpose—preserving the security of financial institutions—is implicated here.
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effectively and efficiently conduct the types of examinations that are at issue here,” and “in the
course of an examination, the [OCIE] staff necessarily must provide frank evaluations of the
quality of, and need for, improvement in, FINRA’s regulatory programs.” Lever Decl. ¶¶ 15–16.
Hence, according to the SEC, “[t]he ability to share and discuss those evaluations with FINRA
without making them public is crucial to the success of the SEC’s examination program.” Id.
¶ 16. The plaintiff offers no meaningful opposition to these statements other than the conclusory
assertion that release of the examination documents carries “no threat of disruption.” See Pl.’s
Opp’n at 9.
At a higher level of generality, the plaintiff’s policy argument does not fit with either the
plain language of the FOIA’s text or the statute’s legislative history, as that history has been
interpreted in this Circuit. The plaintiff’s proposed interpretation of Exemption 8 would only
protect documents that in some way “implicate[] a financial transaction or condition of the
financial institution.” See Pl.’s Opp’n at 9. This might make sense, from a policy perspective, to
prevent self-regulatory organizations or other industry-policing organizations from becoming
“captive” to the financial institutions they regulate, rather than serving the consumer protection
and market integrity functions that they were intended to perform. The text of the statute,
however, indicates no such limitation. The statute broadly exempts any records “related to
examination, operating, or condition reports prepare by, on behalf of, or for the use of” a
financial regulatory agency. 5 U.S.C. § 552(b)(8). This sweeping language “seems an odd way
of phrasing the kind of [limited] provision which [the plaintiff] claims was intended.” Heimann,
589 F.2d at 540 (Wright, J., concurring). Congress did not limit the exemption according to the
function of the financial institution being examined. Rather, “Congress looked to the nature and
source of the material and determined to provide absolute protection regardless of the
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circumstances underlying the regulatory agency’s receipt or preparation of examination,
operating or condition reports.” Gregory, 631 F.2d at 898 (emphasis added). Indeed, “there is
nothing in the legislative history to indicate that Congress . . . intended exemption 8 to apply
only to the varieties of bank examinations then extant, for . . . the disclosure of the bank
examination reports of any type . . . could lead to the same adverse results.” Heimann, 589 F.2d
at 534 (emphasis added).
Furthermore, the plaintiff’s proposed limitation on the text of Exemption 8 does not
appear to fit with the larger structure of the FOIA. Although the plaintiff would narrow
Exemption 8 only to cover records related to “a financial transaction or condition of the financial
institution,” see Pl.’s Opp’n at 9, the FOIA already provides a separate exemption for
“commercial or financial information obtained from a person and privileged or confidential.”
See 5 U.S.C. § 552(b)(4). The plaintiff’s reading of Exemption 8 would essentially render
Exemption 4 superfluous, or at least would sap Exemption 4 of any meaning that is reasonably
distinct from that of Exemption 8. Hence, the plaintiff’s proposed interpretation of Exemption 8
does not comport with the Court’s obligation to “strive to interpret a statute to give meaning to
every clause and word, and certainly not to treat an entire subsection as mere surplusage.” See
Donnelly v. FAA, 411 F.3d 267, 271 (D.C. Cir. 2005).
Finally, although the plaintiff finds significance in the notion that “[e]very reported case
of which [the plaintiff] is aware in which Exemption 8 has been applied in some measure
involved the finances of the subject financial institution or financial transactions involving the
financial institution,” see Pl.’s Opp’n at 8, that assertion is both factually inaccurate and legally
irrelevant. First, it is clear that at least one case from within this Circuit (and arguably more) has
applied Exemption 8 to documents other than those involving the finances or financial
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transactions of the institutions being examined. That case, Bloomberg, L.P. v. SEC, upheld the
application of Exemption 8 to “notes and memoranda” of two aides to then SEC Chairman
Harvey Pitt relating to the Chairman’s meeting with officials from the New York Stock
Exchange, the National Association of Securities Dealers, and several brokerage firms in which
the officials “report[ed] to the SEC on steps they were taking or considering in connection with
issues of concern regarding the regulation of securities analysts.” See 357 F. Supp. 2d at 167,
169. Although the plaintiff baldly contends that “it is clear that the subject document [in
Bloomberg] did concern the finances and financial transactions of the various brokerage firms
involved,” see Pl.’s Reply at 4–5, that fact is far from clear. In fact, the Bloomberg court noted
that the documents reflected “a candid assessment of industry problems” by financial
institutions, see Bloomberg, 357 F. Supp. 2d at 170, which appears similar to the “frank
evaluations of the quality of, and need for improvement in, FINRA’s regulatory programs”
contained in the documents at issue in the instant action, see Lever Decl. ¶ 16.
Indeed, the plaintiff’s attempt to distinguish Bloomberg from the instant case is
unpersuasive. The plaintiff contends that the documents in Bloomberg “concern[ed] the finances
and financial transactions of the various brokerage firms involved” because the documents
related to “the interaction between the investment banking and broker-dealer functions.” Pl.’s
Reply at 4–5. Yet, the clear thrust of the meeting at issue in Bloomberg was not to report
directly on the transactions or financial conditions of the brokerage firms, but rather to report on
institutional problems related to fairness and transparency, such as conflicts of interest, that
likely bear indirectly on financial matters and might require further regulation. See Bloomberg,
357 F. Supp. 2d at 167–68 (observing that issues discussed at meeting included “the supervision
of analysts, potential conflicts of interest for analysts and their firms, the structure of analyst
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compensation, and the transparency of analysts’ reports”). The plaintiff does not convincingly
distinguish the institutional or industry-wide regulatory problems at issue in Bloomberg with the
similar potential institutional problems at issue in the instant action. Most notably, the plaintiff
does not explain why records regarding the examination of FINRA’s arbitration selection
process—which appear to address similar institutional concerns about fairness and transparency
and that also likely have an indirect effect on the financial condition or transactions of the
financial institutions appearing in arbitrations before FINRA—should be treated differently from
the documents at issue in Bloomberg. See Pl.’s Opp’n at 10 n.10 (stating that plaintiff’s purpose
in obtaining the requested records is to “add more transparency and fairness to the arbitration
process and increase public confidence in the process”).
More generally, however, even if the plaintiff were correct that every reported case
applying Exemption 8 only involved documents about financial institutions’ transactions and
fiscal health, that pattern “would not provide a basis for imposing a limitation that does not exist
in the statutory language.” See Reply in Supp. of Mot. for Summ. J. (“Def.’s Reply”) at 4, ECF
No. 17. All that this fact would establish (if it were true) is that courts have consistently upheld
the application of Exemption 8 in the context of records related to financial institutions’
transactions and financial health. It would most certainly not establish that such fact patterns are
the only scenarios in which application of Exemption 8 is appropriate. Indeed, court decisions
cannot be read like statutes, applying the maxim expressio unius est exclusio alterius to exclude
any applications of a legal rule not previously considered.
2. 2010 Amendment Defining “Financial Institution”
Before concluding its discussion of Exemption 8’s scope, the Court feels compelled to
point out a peculiar aspect of Exemption 8’s reach that has not been addressed by the parties but
nevertheless illuminates why one origin of the instant controversy is the FOIA’s definition of
16
“financial institution,” not the definition of “examination, operating, or condition reports.” See 5
U.S.C. § 552(b)(8). As referenced above, the plaintiff concedes that FINRA is a “financial
institution” as that term is used in Exemption 8. See Pl.’s Opp’n at 7. This concession is
mandated by a recent legislative amendment, not to the FOIA, but to the Securities Exchange
Act of 1934, which states that “[f]or purposes of [FOIA Exemption 8], . . . any entity for which
the [SEC] is responsible for regulating, supervising, or examining under this title is a financial
institution.” See 15 U.S.C. § 78x(e). This amendment, passed by Congress in 2010, was
intended “to improve transparency at the Securities and Exchange Commission,” see 156 Cong.
Rec. H6954 (daily ed. Sept. 23, 2010) (statement of Rep. EdolphusTowns), but it appears to have
done just the opposite.
By way of background, Congress enacted a confidentiality provision in the Dodd-Frank
Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), Pub. L. No. 111-203, 124
Stat. 1376–2223 (2010), which amended the Securities Exchange Act to state that:
the [SEC] shall not be compelled to disclose records or information obtained
pursuant to [15 U.S.C. § 78q(b)], or records or information based upon or derived
from such records or information, if such records or information have been
obtained by the [SEC] for use in furtherance of the purposes of this title, including
surveillance, risk assessments, or other regulatory and oversight activities.
See Dodd-Frank § 929I, 124 Stat. at 1858 (repealed 2010). This provision was inserted into the
Dodd-Frank bill at the request of the SEC, but it immediately came under scrutiny when the SEC
invoked it in a civil lawsuit with Fox Business Network to withhold documents regarding the
agency’s handling of the Bernie Madoff case. See 156 Cong. Rec. H6953 (daily ed. Sept. 23,
2010) (statement of Rep. Barney Frank). The response from Congress was swift. On September
16, 2010—less than two months after the SEC purportedly invoked section 929I in the Fox News
litigation—a hearing was held before the House Financial Services Committee about how to fix
what was perceived as an overbroad exemption for the SEC. See, e.g., Legislative Proposals to
17
Address Concerns over the SEC’s New Confidentiality Provision, Hearing Before the H. Comm.
on Fin. Servs. (“SEC Confidentiality Hearing”), 111th Cong. 6 (2010) (testimony of Rep.
Towns) (testifying that section 929I was “too broad” because “[i]t allows the SEC to keep secret
virtually any information it obtains under its examination authority.”). At that time, five bills
had already been drafted to repeal section 929I—four in the House and one in the Senate. See
H.R. 5924 (2010); H.R. 5948 (2010); H.R. 5970 (2010); H.R. 6086 (2010); S. 3717 (2010). Two
of the bills would have simply repealed section 929I, see H.R. 5924; H.R. 5948, while others
would have, in addition to repealing section 929I, specified that “any entity for which the
Commission is responsible for regulating, supervising, or examining under this title is a financial
institution” for purposes of FOIA Exemption 8, see H.R. 6086; S. 3717.
In her testimony before the House Financial Services Committee, then SEC Chairman
Mary Schapiro defended section 929I by testifying that it “was designed to improve [the SEC’s]
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.”
See SEC Confidentiality Hearing at 10. Chairman Schapiro also specifically discussed the need
for section 929I in light of the possibility that FOIA Exemption 8 “might not clearly cover
[certain] materials and protect them from disclosure” because “courts have not yet addressed
whether certain entities the Commission has the authority and the responsibility to examine . . .
are financial institutions for purposes of these FOIA protections.” See id. at 10, 12. Similarly,
Susan Merrill, a former Chief of Enforcement at FINRA, testified that “[t]he FOIA exemptions
are simply too imprecise to allay the industry’s fears regarding public disclosure.” See id. at 32.
It is clear from the testimony before the House Financial Services Committee that the primary
goal of section 929I was to fill a perceived gap in the law and prevent private litigants from
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obtaining “proprietary information” from regulated financial entities through FOIA requests or
third-party subpoenas to the SEC. See, e.g., id. at 8 (testimony of Rep. Darrell Issa) (“[T]here is
a legitimate reason to say that no one should ever be able to use the [SEC] to backdoor their way
into information that would not otherwise be available through FOIA.”); id. at 11 (testimony of
Chairman Schapiro) (“[N]one 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.”); id. at 33 (testimony of Susan Merrill) (“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.”).
Ultimately, Congress passed the Senate’s proposed bill repealing section 929I. See Pub.
L. No. 111-257, 124 Stat. 2646 (2010) (codified at 15 U.S.C. § 78x(e)). That law, as discussed
above, not only repealed section 929I of Dodd-Frank but also amended 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.” See SEC
Confidentiality Hearing at 6 (testimony of Rep. Towns). The purpose for the repeal of section
929I was clear. As the Senate sponsor stated when he introduced the legislation on the floor of
the Senate, section 929I “would shield from public scrutiny all information provided to the
[SEC] in connection with its broad examination and surveillance activities,” and therefore
interests of government transparency necessitated its repeal. See 156 Cong. Rec. S7299 (daily
ed. Sept. 21, 2010). In fact, Congressman Barney Frank was pellucid in his comments on the
House floor that “we don’t want the SEC at any point to be able to shelter information about
what it’s doing” because the SEC “must be fully transparent in its operations” and “accountable
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to the American people, and also to scrutiny of the media and the press.” See 156 Cong. Rec.
H6953–54 (daily ed. Sept. 23, 2010).
Yet, by adding this definition of “financial institution” that would apply in FOIA
Exemption 8, Congress appears to have given back with the FOIA what it simultaneously
intended to take away by repealing section 929I. Although perhaps motivated as a response to
the concerns raised by Chairman Schapiro and others regarding the ambiguity of Exemption 8,
the new definition of “financial institution” effectively expanded that term to include entities like
FINRA that do not “manage[] money, credit, or capital,” see BLACK’S LAW DICTIONARY 706
(9th ed. 2009), and appears to have inadvertently resulted in the very type of broad disclosure
shield that the repeal of section 929I was intended to prevent. Indeed, Congress’s 2010
amendment to the Securities Exchange Act provides an even broader disclosure shield than
section 929I did because Exemption 8 can be invoked by any “agency responsible for the
regulation or supervision of financial institutions,” see 5 U.S.C. § 552(b)(8), not just the SEC.5
The Court is skeptical that a self-regulatory organization like FINRA would logically qualify as a
“financial institution” as that term has traditionally been defined or as that term was understood
when the FOIA was first enacted. See, e.g., BLACK’S LAW DICTIONARY at 706; WEBSTER’S
THIRD NEW INTERNATIONAL DICTIONARY, UNABRIDGED 851 (1981) (defining “financial
institution” as “an enterprise specializing in the handling and investment of funds”); see also 18
U.S.C. § 20 (defining “financial institution” for purposes of the criminal code); 31 U.S.C.
§ 5312(a)(2) (defining “financial institution” for purposes of the Bank Secrecy Act). For this
reason, the plaintiff may be correct that Exemption 8 is overbroad because it extends to records
related to the oversight of self-regulatory organizations, but there is no escaping the conclusion
5
The amended scope of Exemption 8 is also obviously narrower than section 929I of Dodd-Frank insofar as section
929I would have applied in non-FOIA contexts as well, such as third-party subpoenas.
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that “Congress has left no room for a narrower interpretation,” and therefore the plaintiff’s
arguments must be directed at Congress, rather than the courts. See Heimann 589 F.2d at 535;
see also id. at 541 (Wright, J., concurring) (“[I]f Congress wanted a bright line, I am not
persuaded that we are the ones who should smudge it.”); Gregory, 631 F.2d at 899 (“When
experience shows that a[] [FOIA] exemption was too broadly drawn, Congress is, of course, free
to reconsider.”). There is little question in the Court’s mind that Congress’s amendment
effectively expanding the definition of “financial institution” was a well-intentioned legislative
fix which, as this case demonstrates, has resulted in its own set of unintended consequences.
***
For the reasons discussed above, the Court holds that FOIA Exemption 8 broadly applies
to records related to a regulatory agency’s examination of a financial institution, including that
financial institution’s administrative functions or activities. This may mean, as the plaintiff
cautions, that “Exemption 8 applies to everything the SEC scoops up in the course of its
interaction with FINRA,” Pl.’s Reply at 3, but if that is the result, it is the only result that
comports with the current text of the FOIA and the clear intent of Congress to add an expansive
definition of “financial institution.”
B. Sufficiency of the SEC’s Search Efforts and Identification of Documents
In light of the Court’s holding regarding Exemption 8, the rest of the issues presented in
this case fall into line. Nevertheless, the plaintiff raises two other potential problems with the
SEC’s response to the plaintiff’s FOIA request that the Court must briefly address. First, the
plaintiff argues that the SEC has failed to “substantiate its motion for summary judgment with
information sufficient to identify the documents at issue with sufficient clarity so as to
demonstrate the application of the claimed exemption.” See Pl.’s Opp’n at 11. The plaintiff also
21
appears to challenge whether the SEC conducted a reasonable search for responsive records. See
id. at 5–6, 11–12.
1. Identification of Documents
“‘Even if the protected records could be withheld under one of the FOIA exemptions, that
does not absolve the agency of its duty to identify the responsive documents, claim the relevant
exemptions . . ., and explain its reasoning for withholding the documents in its affidavit.’”
Elliott v. U.S. Dep’t of Agric., 596 F.3d 842, 851 (D.C. Cir. 2010) (quoting Morley, 508 F.3d at
1120). The agency’s identification of withheld records is traditionally done through a Vaughn
index, which permits an agency “to justify its actions without compromising its original
withholdings.” See Judicial Watch, Inc. v. FDA (“Judicial Watch/FDA”), 449 F.3d 141, 146
(D.C. Cir. 2006); see also Campaign for Responsible Transplantation v. FDA, 511 F.3d 187, 190
(D.C. Cir. 2007) (“The [Vaughn] index is supposed to ‘describe with reasonable specificity the
material withheld’ and justify why each responsive document is exempt from disclosure under
FOIA.” (quoting King v. Dep’t of Justice, 830 F.2d 210, 221 (D.C. Cir. 1987))); Vaughn, 484
F.2d at 826 (requiring agencies to submit “a relatively detailed analysis” of their basis for
withholding information). Notwithstanding the traditional requirement of a Vaughn index, when
“a claimed FOIA exemption consists of a generic exclusion, dependent upon a category of
records rather than the subject matter which each individual record contains, resort to a Vaughn
index is futile.” Church of Scientology of Cal. v. IRS, 792 F.2d 146, 152 (D.C. Cir. 1986).
Indeed, an agency may “submit other measures in combination with or in lieu of the index
itself.” Judicial Watch/FDA, 449 F.3d at 146 (emphasis added). Ultimately, an agency’s
submissions suffice “‘so long as they give the reviewing court a reasonable basis to evaluate the
claim of privilege.’” Id. (quoting Gallant v. NLRB, 26 F.3d 168, 172–73 (D.C. Cir. 1994)).
22
In the instant action, the SEC did not submit a Vaughn index. In lieu of a Vaughn index,
the SEC submitted a sworn declaration that summarizes the agency’s search efforts and explains
both the nature of the withheld documents and the factual basis for withholding those documents
categorically under Exemption 8. See Lever Decl. The plaintiff complains that this declaration
is insufficient, see Pl.’s Opp’n at 12–14, but the Court disagrees. In fact, this case is a
paradigmatic example of a situation in which a document-by-document Vaughn index is
unnecessary because the scope of the plaintiff’s FOIA request necessarily renders all potentially
responsive materials exempt from disclosure under Exemption 8. As previously discussed, each
of the six categories of records sought by the plaintiff “relat[e] to audits, inspections, and reviews
conducted by the [SEC]” of FINRA. See Compl. Ex. 1, at 1. Therefore, in light of the Court’s
holding above that records related to SEC examination reports of FINRA are exempt under
Exemption 8, it necessarily follows that any records responsive to the plaintiff’s FOIA request
would be exempt from FOIA disclosure. In other words, for purposes of analyzing the SEC’s
withholding decision, the plaintiff requested only one overarching category of documents: those
“relating to audits, inspections, and reviews conducted by the [SEC]” of FINRA, see id., and that
entire category of records is, by its terms, exempt from disclosure. Hence, the SEC’s claimed
exemption is “dependent upon the category of records rather than the subject matter which each
individual record contains,” and therefore “resort to a Vaughn index is futile.” Church of
Scientology, 792 F.2d at 152. 6
The plaintiff also attempts to point out other deficiencies in the SEC’s sworn declaration,
but none of them holds water. First, the plaintiff complains that the SEC’s declaration “does not
6
To put this issue in stark relief, the factual scenario in this case is akin to a FOIA request that would seek “all
materials in the possession of the agency that are classified in the interest of national security.” Of course, any
records potentially responsive to such a request would be categorically exempt from disclosure under FOIA
Exemption 1, just as here any records potentially responsive to the plaintiff’s request are categorically exempt from
disclosure under Exemption 8.
23
in any way demonstrate that the documents withheld concern FINRA’s financial condition or
FINRA’s financial transactions, or that the disclosure would damage the SEC’s regulatory
oversight.” Pl.’s Opp’n at 12. Yet, as the Court’s holding above makes clear, the SEC is not
required to demonstrate any of these things to withhold documents under Exemption 8. See
supra Part III.A.
The plaintiff further complains that the SEC’s declaration “leaves unclear whether some
of the documents withheld . . . are even part of or related to a report covered by Exemption 8”
and that the SEC’s affiant “does not affirm that all of the documents in the 65 boxes are
contained in or relate to a report.” Pl.’s Opp’n at 13. Once again, this contention is both
factually inaccurate and legally irrelevant. It is factually inaccurate because the SEC’s
declaration avers that all of the potentially responsive records “relate to four examinations
conducted by OCIE,” and that “[e]ach examination described . . . resulted in a writing, either
termed a report or closing memorandum.” See Lever Decl. ¶¶ 7, 9. Thus, each potentially
responsive document does appear to relate to an examination report of some kind. In any event,
the plaintiff’s assertion is legally irrelevant because, as discussed above, “Exemption 8 does not
require the defendant to identify a specific report to which the information relates,” see Judicial
Watch/Treasury, 796 F. Supp. 2d at 37 (citing McKinley, 744 F. Supp. 2d at 143–44), and the
SEC avers that all of the potentially responsive documents were obtained pursuant to the SEC’s
“ongoing and continuous oversight responsibilities,” see Lever Decl. ¶¶ 8, 10, which is sufficient
to bring them within the ambit of Exemption 8.
Finally, the plaintiff complains that some of the records in the 65 boxes located by the
SEC may not be responsive to its FOIA request. See Pl.’s Opp’n at 12 (complaining that some
documents “might be beyond the scope of the FOIA Request”); Pl.’s Reply at 3 n.2 (arguing that,
24
because “we are left to guess whether the documents the SEC says might be in the boxes even
are responsive to the FOIA Request,” this constitutes a “failure of proof” that is “fatal to the
SEC’s motion”). Yet, it is elementary that an agency’s decision to withhold non-responsive
material is not a violation of the FOIA. See, e.g., 5 U.S.C. § 552(a)(3).
2. Adequacy of Search
The plaintiff does not clearly state whether it challenges the adequacy of the SEC’s
search, but it does contend in its statement of material facts in dispute that “[t]he SEC has not set
forth a sufficient basis to prove that there are ‘approximately 65 boxes in which potentially
responsive documents could be located,’ as there has not been an actual search of boxes,” and
“[t]he SEC has not set forth a sufficient basis to prove that the universe of documents is only the
four ‘examinations’ by the SEC’s [OCIE].” See Pl.’s Opp’n at 5–6. These statements, though
not elaborated through any legal argument, fairly raise the issue of whether the SEC conducted
an adequate search for responsive records. Though the issue was (barely) raised, the Court is
skeptical that the adequacy of the SEC’s search makes any difference in light of the fact that any
records potentially responsive to the plaintiff’s request would be categorically exempt from
disclosure in any event. See supra Part III.B.1. Assuming arguendo that the adequacy of the
SEC’s search is still a relevant issue, however, the Court finds that the SEC has nevertheless
averred that it “conducted a search reasonably calculated to uncover all relevant documents.’”
Morley, 508 F.3d at 1114. The SEC’s sworn declaration states that it “searched all places within
OCIE’s records where it would be reasonable to find responsive documents.” Lever Decl. ¶ 3.
This was accomplished by “reviewing offsite storage records, locating boxes with labels
indicating the contents may be responsive in OCIE’s onsite file room,” and “contacting
examiners still employed by the SEC who participated in the examinations to identify boxes
responsive to the request and to identify unboxed documents that may be responsive, including
25
any electronic documents.” See id. The plaintiff points to no aspect of this search that was
inadequate, and the Court concludes that, absent some identifiable deficiency in the SEC’s
process, the agency’s search efforts were sufficient to comply with its FOIA obligations.
Therefore, the Court concludes that none of the additional arguments raised by the
plaintiff is sufficient to defeat summary judgment in favor of the SEC.
IV. CONCLUSION
As the foregoing discussion establishes, the Court concludes that the SEC is entitled to
summary judgment on the plaintiff’s FOIA claim, primarily because all records relating to the
SEC’s examination reports—including reports relating to the administrative functions of
FINRA—are exempt from disclosure under the FOIA. Additionally, the Court concludes that
the SEC sufficiently identified the withheld documents in order to justify its withholdings,
despite the absence of a document-by-document Vaughn index, and the Court also concludes that
the SEC’s search efforts were adequate. Therefore, the SEC is entitled to summary judgment.
For the same reasons, the Court concludes that the plaintiff’s cross-motion for summary
judgment must be denied.
An appropriate Order accompanies this Memorandum Opinion.
Date: March 14, 2013
/s/ Beryl A. Howell
BERYL A. HOWELL
United States District Judge
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