Transparency and Confidentiality in the Post Financial Crisis World

Annette Nazareth and Margaret Tahyar are partners in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is part of a series discussing articles appearing in the inaugural issue of the Harvard Business Law Review, which is published in partnership with the Harvard Law School Program on Corporate Governance.

The U. S. Congressional response to the most significant financial crisis since the Great Depression was to mandate, among other things, an unprecedented amount of new types of disclosure by financial institutions and their supervisors. In the Dodd-Frank Act, Congress created a new oversight body—the Financial Stability Oversight Counsel (FSOC), which is responsible for supervision and oversight of systemic risk in the financial system. To enable the FSOC to make informed decisions about systemic risk, Congress granted the FSOC access to vast amounts financial information. The Dodd-Frank Act also created an independent office within the Treasury Department—the Office of Financial Research (OFR)— which is charged with collecting data on behalf of the FSOC and making the results of its activities available to financial regulatory agencies and the public. The OFR and the FSOC are expected to collect data, some of which may be of a confidential or sensitive nature, that were never previously collected and aggregated by the government, including information from financial institutions about any activity that might be deemed to be of systemic significance, information in resolution plans, information about trading strategies related to trading position data, and information related to stress tests.

In our paper Transparency and Confidentiality in the Post Financial Crisis World—Where to Strike the Balance? (published in the inaugural issue of the Harvard Business Law Review), we argue that in the rush to complete The Dodd-Frank Act, Congress neglected a significant policy issue, i.e., how pre-existing confidentially and disclosure laws, such as the Freedom of Information Act (FOIA), will be applied to new institutions such as the FSOC and the OFR, as well as the new powers granted to existing supervisors. Out of an understandable desire to promote transparency, Congress created an intolerable level of uncertainly concerning whether information collected by various government agencies will be kept confidential.

We suggest that clearly some information that financial institutions disclose to supervisors must remain confidential. Untimely public disclosure of sensitive and competitive information through FOIA request, third-party subpoenas, or by Congress, could undermine the goals of the Dodd-Frank Act by unnecessarily roiling markets and making financial institutions reluctant to disclose data to the government voluntarily as well as creating a competitive disadvantage for some institutions.

If supervisors or Congress do not establish clear policies concerning public disclosure of confidential or proprietary information, courts, through the random and ad hoc process of judicial decision-making, will determine the contours of this very important policy issue. We suggest various paths to achieving a balance between confidentially and transparency in this new era of financial regulation—paths set ideally by Congress or supervisors rather than by the judicial system.

The full paper is available for download on SSRN here and on the Harvard Business Law Review website here.

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