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Public Investors Arbitration Bar Ass'n v. United States Securities & Exchange Commission

United States District Court, District of Columbia

March 14, 2013

PUBLIC INVESTORS ARBITRATION BAR ASSOCIATION, Plaintiff,
v.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Defendant

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[Copyrighted Material Omitted]

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For PUBLIC INVESTORS ARBITRATION BAR ASSOCIATION, Plaintiff: Daniel A. Ball, LEAD ATTORNEY, Rockville, MD.

For UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Defendant: Karen Johnson Shimp, LEAD ATTORNEY, U.S. SECURITIES AND EXCHANGE COMMISSION, Office of the General Counsel, Washington, DC; Kathleen A. Cody, LEAD ATTORNEY, U.S. SECURITIES & EXCHANGE COMMISSION, Washington, DC; Melinda Hardy, LEAD ATTORNEY, SECURITIES & EXCHANGE COMMISSION, Office of General Counsel, Washington, DC.

OPINION

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BERYL A. HOWELL, United States District Judge.

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 nonprofit 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,

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Securities Arbitration of Investor Disputes: A Primer for the Unwary Practitioner, 59 Advocate 11, 11 (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, 107 S.Ct. 2332, 96 L.Ed.2d 185 (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 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:

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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.

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.

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 ...


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