Securities Exchange Commission (SEC) chairwoman Mary Schapiro received nearly $9 million in compensation and retirement benefits from the Financial Industry Regulatory Authority (FINRA) when she left to head the government regulator.

The total amount of compensation was released in a report and posted on the blog ZeroHedge yesterday. FINRA is a self-regulatory organization (SRO) that was tasked with watchdogging the securities industry. Schapiro was the CEO of FINRA from 1996 to 2009. She oversaw the SRO as Wall Street boomed and busted during that same period.

One chief point of contention for FINRA is what kind of oversight they provided for the criminal hedge fund manager Bernie Madoff. In August, a majority of broker-members of FINRA voted for the organization to release more information related to FINRA's ties to and oversight of Madoff. FINRA subsequently rejected an independent review of its Madoff ties.

SEC officials have met twice with officials from FINRA as the government agency seeks to craft new rules under the Dodd-Frank financial reform law.

Schapiro's financial disclosure document filed upon accepting the nomination to the SEC shows that she received $2.75 million in salary and incentive compensation from FINRA. The disclosure document also shows an additional Defined Benefits Plan that ranges from five to twenty-five million dollars and a 2008 Incentive Compensation that ranges from one to five million dollars. The financial disclosure document is available for viewing here.

Yesterday the House passed legislation to close a loophole that may have allowed the SEC to disregard certain FOIA requests. The Senate passed identical legislation on Wednesday; S. 3717 now goes to the President for his signature. Many organizations, including the Sunlight Foundation, had called for removal of the exemption which was created in the Dodd-Frank financial regulatory bill passed earlier this year.

Yesterday the Senate unanimously voted to close a loophole that may have allowed the SEC to disregard certain FOIA requests. The loophole was uncovered only after the Dodd-Frank financial regulatory bill was enacted in July.

Many organizations took issue with the SEC FOIA exemption, prompting letters from the Project on Government Oversight on August 3 and OpenTheGovernment.org on August 10. The Sunlight Foundation endorsed both letters, as did many others.

The measure enacted in the Senate, S. 3717, was the subject of a hearing by the Senate Judiciary Committee on September 16. Companion legislation, H.R. 6086, was referred to the House Committee on Oversight and Government Reform. The measure enjoys bipartisan support, although time is running out for the House to act before the mid-term elections.

On Friday, the New York Times reported that four agencies responsible for implementing the financial reform bill are announcing new transparency policies:

After passage of the law overhauling the nation’s financial regulations, the federal agencies responsible for writing the rules are striving for transparency to avoid the appearance of improper coziness with lobbyists, bankers and executives in the financial services industry.

After closely tracking similar policies put in place by the Treasury to oversee the stimulus and TARP programs, we've started looking into just what these policies will entail.

Unfortunately, details are still scant, but we're collecting what we can about the new policies apparently being put in place by the Fed, the FDIC, the SEC, and the CFTC. They're strongly reminiscent of the previous policies around the stimulus and TARP, where new disclosure policies were self-imposed by the Executive over particularly vulnerable or sensitive decision making processes, ostensibly to protect merit-based decision making from undue special interest influence.

In plain English, they're posting who they meet with, so that they make honest decisions as they reform our finance system.

These policies should be a very important development, protecting important decisions, and giving us a view into who is trying to influence the reworking of our financial regulatory system.

We'll be looking in more detail at how these policies work, and whether they're effective as they're developed and implemented. In the meantime, there are a few guidelines that should cover what they're doing.

First, the reporting needs to be timely. Disclosure needs to move at the pace of influence, and reading about last quarter's meetings enables history, not oversight.

Second, the reporting needs to be online. They should follow guidelines for openness, and encourage reuse and analysis. (To see the sort of view into lobbying that we've envisioned, see this mockup of a lobbying disclosure site.)

Third, the disclosures need to be substantive. They should include information like the date, names of people attending the meetings, substance of the conversation, the clients represented, and copies of materials submitted. If disclosing the meetings protects decisions, adding substance to what gets disclosed should enhance that effect.

Finally, careful thought needs to be given to what gets reported. Agencies should consider carefully whether the rules will apply to different classes of meetings, and offer clear guidance about what constitutes a reportable meeting. They should also recognize that relying on the Lobbying Disclosure Act definition of lobbyist isn't particularly meaningful, since influence can easily find its way around the twenty percent rule.

We'll be following this closely, since it can be another test case in how online transparency can affect a situation where concentrated interests are swarming a few very important decisions.

If you have any further suggestions for how these policies should work, please add them in the comments, or suggest any further resources to add to our research.

I’ve been reading about a brewing controversy over whether language in the new Financial Regulations Act -- officially the Dodd-Frank Wall Street Reform and Consumer Protection Act, aka HR 4173 -- weakens public oversight over banks and investment companies. The alarm was publicly raised by Fox Business News last week  over section 929I of the legislation.

Fox's complaint: SEC is guarding the henhouse

Fox is suing the SEC for information “related to the agency’s response to complaints, tips and inquiries” stemming from the Bernie Madoff scandal. The SEC denied the FOIA request, citing the new provision.

To explain why this is important, Fox Business’s Dunstan Prial quotes SEC “whistleblower” and former SEC attorney Gary Aguirre as saying the law “permits the SEC to promulgate its own rules and regulations regarding the disclosure of records without getting the approval of the Office of Management and Budget, which typically applies to all federal agencies.”

The Washington Post’s Zach Goldfarb noted on July 28th that the SEC complies with “substantially fewer” FOIA requests than other agencies. Fox’s lawyer said the law’s purpose was to “keep the SEC’s failures secret.” The media giant's concern, no pun intended, is that the fox is guarding the henhouse. Equally plausible is the argument that the agency has been "captured" by those it regulates -- or that it's doing the will of Congress.

It seems to me that there are two anti-transparency concerns: why were the new FOIA exemptions created?, and why should the SEC be able to shrug off court subpoenas for information stemming from private lawsuits?

Goldfarb provides additional context and a caveat:

While, as Fox notes, the law exempts the SEC from disclosing records derived from ‘surveillance, risk assessments, or other regulatory and oversight activities’ this only concerns documents obtained through examinations of broker-dealers and investment advisers -- periodic or targeted reviews of financial firms.

People and organizations can still use FOIA to obtain a range of SEC information, such as inspector general reports; communications with Congress and the business community; and officials' calendar, salary and conflict-of-interest information.

SEC: These rules will improve enforcement

SEC Chairman Mary Schipiro reportedly responded to Fox’s allegations via letters to Senator Dodd and Representative Franks (which is not available on the SEC’s website, but is available from news outlets like the Washington Post.) She calls “false” the assertion that the legislation “'exempts’ the SEC from the Freedom of Information Act (FOIA).”

Out of fairness to Fox, the Chairman's characterization of its position is off base: the news conglomerate asserts that the SEC can set its own rules regarding how to comply with FOIA -- which means in practice that the SEC will only comply with FOIA requests to the extent it wants to -- but Fox does not claim the agency is exempted from FOIA entirely. Her characterization of Fox’s assertion seems to be a strawman.

The nub of Chairman Schapiro’s argument is that “[i]n order for our efforts [to protect investors, including those in hedge funds, private equity funds, and venture capital funds] to be successful, it is important that registered entities be able to provide us with access to confidential information without concern that the information will later be made public.”

She adds:

Prior to the Dodd-Frank Act, regulated entities not infrequently refused to provide Commission examiners with sensitive information due to their fears that it ultimately would be disclosed publicly. Existing FOIA exemptions were insufficient to allay concerns due in part to limitations in FOIA (including that certain existing exemptions may not apply to all registrants) (FN 1) and the fact that FOIA exemptions are not applicable when the SEC must respond to a subpoena (as either a party or non-party) (FN 2). The Commission's resulting inability to obtain this information hindered our capacity to enforce the securities laws and protect investors.

The first argument about “allaying concerns” is interesting because of the lack of a subject in the sentence. Whose concerns were not being allayed? Apparently the financial institutions the SEC oversees. Based upon the Commissioner’s letter, perhaps the problem from a regulatory point of view is that the SEC is relying (and perhaps must rely) on voluntary compliance from financial institutions for it to engage in regulatory oversight; FOIA (and public disclosure in general) is a side issue as to whether the SEC is empowered to do its job, and a fig leaf for financial institutions who do not wish to comply with a voluntary regulatory regime.

The second argument concerning subpoenas is not a FOIA argument, but one rather of regulated institution’s concerns that courts would be able to use information gathered by the SEC to help resolve litigation, potentially against a company’s interests. (Who knows -- they may be disclosing one set of books in court and another to the SEC.)

The good stuff is in the footnotes to her letter, which are not shown in the Washington Post’s reprint of the letter, but are available in the PDF the Post links to.

Footnote 1 explains that the FOIA exemptions do not apply to all registrants.

1 For example, FOIA exemption (b)(8) protects matters that are "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 (emphasis added).

Footnote 2 discusses the SEC’s response to subpoenas, which is unrelated to FOIA but does concern a person’s ability to have his or her day in court.

2 With respect to subpoenas, the staff is forced to contest them on grounds such as relevance and common law privileges. Depending on how a judge resolves the issues, the SEC may be ordered to produce sensitive records received from a registered entity to the firm's competitors. In some cases, the firms whose records could be disclosed have not even been parties to the proceeding in which the subpoena had been issued. Such disclosures obviously may cause significant harm to the businesses whose records and information are disclosed, and to the integrity of our examination program.

As a gesture towards the public, the Commissioner says that she is “asking the Commission to issue and publish on our website guidance to our staff that ensures the provision is used only as it was intended.” Congress didn't provide much guidance to aid the SEC, as the committee report that accompanied the legislation (House Report 111-517) does not provide any context as to legislative intent or explanation for this change in these provisions.

FOIA law prior to passage of the financial regulation bills (5 USC 552) seems to address the SEC’s concerns. FOIA exemption 4 excludes from disclosure “a trade secret or privileged or confidential commercial or financial information obtained from a person.” FOIA exemption 8 excludes information “contained in or related to examination, operating, or condition reports about financial institutions that the SEC regulates or supervises.”

Three Exemptions to FOIA and Court Subpoenas

Looking at the legislation itself, it appears that three exemptions have been inserted, all of which exempt the SEC from certain FOIA requests and court subpoenas arising from civil matters.

Exemption #1

First, a new provision was added to the rules regarding “public availability of information” for security exchanges, 15 USC 78x. Note that the SEC no longer needs to comply with court subpoenas or FOIA requests. Here's the language (with emphasis added in bold, and notes in square brackets):

‘‘(e) RECORDS OBTAINED FROM REGISTERED PERSONS.—

‘‘(1) IN GENERAL.—Except as provided in subsection (f), the Commission shall not be compelled to disclose records or information obtained pursuant to section 17(b), or records or information based upon or derived from such records or information, if such records or information have been obtained by the Commission for use in furtherance of the purposes of this title, including surveillance, risk assessments, or other regulatory and oversight activities.

‘‘(2) TREATMENT OF INFORMATION.—For purposes of section 552 of title 5 [FOIA laws, in other words], United States Code, this subsection shall be considered a statute described in subsection (b)(3)(B) of such section 552 [and thus be exempt from FOIA]. Collection of information pursuant to section 17 shall be an administrative action involving an agency against specific individuals or agencies pursuant to section 3518(c)(1) of title 44, United States Code [the section that establishes Office of Information and Regulatory Affairs within the Office of Management and Budget].’’.

I am not clear what provision 17(b) refers to, although I would guess that it is section 17(b) of the Securities and Exchange Commission Act of 1934 concerning “automated quotation systems for penny stocks,” codified at 15 USC 78-q2. If I'm right, this provision concerns the making publicly available of information regarding trading activity. (Note that subsection (f), not reproduced here, contains examples of when the agency must respond to subpoenas, e.g., in lawsuits brought by the government.)

Exemption #2

Second, a provision was modified that requires investment companies to maintain records, (15 U.S.C. 80a-30), which now allows the SEC to shrug off court subpoenas demanding information for the resolution of civil suits, as well as ignore FOIA requests. Inserted text is in caps; deleted text is struck through and in brackets; text I am emphasizing is in bold.

(b) Investment Company Act of 1940.—Section 31 of the Investment Company Act of 1940 (15 U.S.C. 80a-30) is amended—

(1) by striking subsection (c) and inserting the following:

‘‘(c) Limitations on Disclosure by the Commission.—Notwithstanding any other provision of law, the Commission shall not be compelled to disclose ANY RECORDS OR INFORMATION [internal compliance or audit records], or information contained therein provided to the Commission under this section, OR RECORDS OR INFORMATION BASED UPON OR DERIVED FROM SUCH RECORDS OR INFORMATION, IF SUCH RECORDS OR INFORMATION HAVE BEEN OBTAINED BY THE COMMISSION FOR USE IN FURTHERANCE OF THE PURPOSES OF THIS TITLE, INCLUDING SURVEILLANCE, RISK ASSESSMENTS, OR OTHER REGULATORY AND OVERSIGHT ACTIVITIES. Nothing in this subsection authorizes the Commission to withhold information from the Congress or prevent the Commission from complying with a request for information from any other Federal department or agency requesting the information for purposes within the scope of jurisdiction of that department or agency, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this section shall be considered a statute described in subsection (b)(3)(B) of such section 552. COLLECTION OF INFORMATION PURSUANT TO SECTION 31 SHALL BE AN ADMINISTRATIVE ACTION INVOLVING AN AGENCY AGAINST SPECIFIC INDIVIDUALS OR AGENCIES PURSUANT TO SECTION 3518(C)(1) OF TITLE 44, UNITED STATES CODE.’’;

(2) by striking subsection (d); and

(3) by redesignating subsections (e) and (f) as subsections(d) and (e), respectively.

As you can see, the pendulum has swung away from broader disclosure. Instead of excluding “internal compliance or audit records,” now no entity can compel the SEC to disclose any records or information, or anything derived from them, except for the reasons identified above. Again, this isn’t just a FOIA exemption, but also allows the SEC to decline to provide materials subpoenaed by a court by a lawsuit brought by anyone except the federal government.

I do not know what it meant here by an “administrative action.”

Exemption #3

A third provision was added, which provides FOIA and subpoena exemptions regarding disclosure of information by investment advisers (15 USC 80b-10). Here's the text, with my emphasis in bold.

c) INVESTMENT ADVISERS ACT OF 1940.—Section 210 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-10) is amended by adding at the end the following:

‘‘(d) LIMITATIONS ON DISCLOSURE BY THE COMMISSION.—Notwithstanding any other provision of law, the Commission shall not be compelled to disclose any records or information provided to the Commission under section 204, or records or information based upon or derived from such records or information, if such records or information have been obtained by the Commission for use in furtherance of the purposes of this title, including surveillance, risk assessments, or other regulatory and oversight activities. Nothing in this subsection authorizes the Commission to withhold information from the Congress or prevent the Commission from complying with a request for information from any other Federal department or agency requesting the information for purposes within the scope of jurisdiction of that department or agency, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this subsection shall be considered a statute described in subsection (b)(3)(B) of such section 552. Collection of information pursuant to section 204 shall be an administrative action involving an agency against specific individuals or agencies pursuant to section 3518(c)(1) of title 44, United States Code.’’.

I am conjecturing that section 204 is codified at 15 USC 80b-4, which requires investment advisers to keep records and make reports to the SEC. In addition to creating an exemption from FOIA, this is another get-out-of-court-free provision, where courts are prohibited from compelling the SEC from provide records from investment advisers. In other words, it’s again up to the SEC’s sole discretion.

What does this say about transparency?

What does this all mean? I don’t really know. It appears that less information will be available to the public or to resolve lawsuits. The SEC is granted a freer hand to help shield corporate information from public view, and apparently the agency is unafraid to wield that power. Based on the Commissioner’s letter, these provisions have shown up in legislation before -- thus demonstrating how omnibus legislation allows a pre-existing laundry list to be enacted into law.

This also shows how difficult it can be to figure out what’s going on. With the move into the regulatory implementation phrase -- and a request for public comments on the implementation of these regulations already issued by the SEC -- it is likely that those who are in the know will work very hard to keep the rest of us from figuring out what’s going  on ... until it’s too late.

• Disclosure: I was a law clerk for Fox Television Stations Incorporated and had no dealings with Fox News.

There's a reason why lobbying has boomed so much over the last decade. The potential return on investment is just too lucrative to pass up. Some things are easy to quantify, a contract, an earmark, or a direct payment for services. But other things, like tax breaks, can take a little bit more time to figure out (at least for now). For example, a University of Kansas study, to be released today, will show that firms pushing for a "tax holiday" in 2004 received a 22,000% return on their lobbying investment. I'll write that number again: 22,000%. From the AP:

The report details efforts by hundreds of companies in 2003 and 2004 to push through a one-time tax "holiday" that lowered for a year the tax rate they paid on profits earned abroad. All told, U.S. companies saved about $100 billion in taxes, with pharmaceutical behemoths Pfizer and Merck & Co., technology giants IBM and Hewlett Packard, and health products maker Johnson & Johnson among the top beneficiaries.

The study zeros in on 93 firms that spent as much as $282.7 million lobbying on the issue during that period, and ultimately saved a total of $62.5 billion through the tax change. Researchers used publicly available lobbying disclosures filed with Congress and financial statements submitted to the Securities and Exchange Commission to compare the amount each company saved with its lobbying expenditures.

"It calls into question what Congress did in 2004," said Stephen Mazza, who conducted the study with Raquel Alexander and Susan Scholz. "It clearly is a very lucrative field for lobbyists. Congress wanted to create jobs, and what they probably did was create jobs for the lobbyists."

This is a pretty outrageous, although entirely predictable, result, pointing to a serious problem in governance. If investment in lobbying is the number one determinant in firm growth, how can we trust policy makers to do what is best for anyone other than those with money to spare on lobbyists? As we have been explaining all week, one way to expose influence and mitigate its excesses is to require the real time disclosure of lobbying contacts, providing more detail as to whom lobbyists meet with and what they discuss.

Another way more transparency could help us all in this area--and particularly acamedia--is the disclosure of key data in a structured format. The above mentioned study used lobbying disclosure data and SEC data to show how the lobbying of the examined firms expanded their worth. We already know that the SEC now requires top firms to submit their SEC disclosures in XBRL. If lobbying disclosures, particularly if they became real time, could be posted in a similar format, this kind of study could be created on a web site, providing near real time results of lobbying return on investment.

Just to drill the point home: 22,000% return on lobbying investment. Yet another case that lobbying needs to be made more transparent.

John Wonderlich, Sunlight's program director, writing at the Open House Project Google Group, tipped me off to an encouraging development. Late last week, Nextgov reports, the SEC  (Securities and Exchange Commission) passed a rule requiring public companies and mutual funds to use a standard electronic format to publish financial data. The expectation (and hope) is that this move will bring more transparency and oversight to corporate balance sheets and earnings. The agency is requiring companies to start using XBRL (extensible business reporting language) when filing financial disclosures. They are also requiring companies to publish the information on both the SEC's Web site and their own corporate site.

XBRL allows computers to tag and identify data, making financial disclosures searchable, accessible and easier to understand. This will allow investors, regulators and investigators to look at the data faster and more easily, meaning they could possibly find things that don't look quite right in corporate financial statements. "(The SEC's ruling) heralds a new era for business communications as XBRL offers the potential to revolutionize how financial data is transmitted and analyzed," stated Scott Mozarsky, chief strategy and development officer, PR Newswire . "In our estimation, the integration of XBRL will create significant productivity gains and offer benefits for everybody who utilizes financial data in their occupation or daily lives, from analysts, portfolio managers and corporate officers to individual investors and the media."

Maybe we should all spend more time reading the Inspector General reports, which are (required to be) posted on line. Look at what ProPublica’s Jake Bernstein found. He had a titillating report (really! see below) by the IG for the U.S. Security and Exchange Commission (SEC) on the activities inside the department. The IG found employees downloading online porn, running a private business out of government offices among other derelictions of duty. (Think while the cat's away, the mice were playing....).

It made me want to look at little deeper into the whole IG system and whether some sunlight on their work could tell us a lot of stuff we don't know.

Congress, via the Inspector General Act of 1978 set up offices of inspector general (OIG) in federal agencies and charged them with auditing and ferreting out abuse, fraud, mismanagement and waste within their agency. Over the past 30 years, Congress has expanded the act, including increasing the number of agencies with IGs from the original 12 to 65 today. (Here’s an alphabetical listing of each agency’s OIG along with links to each OIG’s Web site.) Each OIG posts their audit reports on their Web site. Their investigative reports, which could lead to law enforcement actions, are not made public. Maybe that's where the 'best' stuff is.

This fall, Congress passed, with unanimous votes in both chambers, the Inspector General Reform Act of 2008, to enhance the IG independence. According to the Center for Public Integrity’s Matthew Lewis, lawmakers wrote the bill to provide separate legal counsel for inspectors, beef up law enforcement authority, and establish an executive Council of the Inspectors General on Integrity and Efficiency. In October, President Bush signed the bill into law. Matthew also adds that Bush issued a signing statement objecting to several provisions, including the authority of the separate legal counsel. Another section he objected to dealt with IG comments of presidential budget submissions. The president’s statement says, ‘The executive branch shall construe section 8 of the bill in a manner consistent with the president’s constitutional authority.’”

But more can be done to improve the requirements now in place. Sen. Claire McCaskill has introduced S.3731, the Special Inspector General for the Troubled Asset Relief Program Act of 2008. This bill would amend the federal financial bailout, the Emergency Economic Stabilization Act of 2008, by beefing up the oversight powers of the bailout’s Special Inspector General. On December 10, the Senate passed the bill by unanimous consent, and sent it to the House.