Understanding confidentiality: program effectiveness and the Freedom of Information Act exemption 4.

• Author: Zimmerman, Samuel L.

TABLE OF CONTENTS INTRODUCTION I. BACKGROUND A. Financial Crisis and Federal Reserve Lending B. FOIA Requests and Court Decisions II. LEGISLATIVE HISTORY III. DEVELOPMENT OF EXEMPTION 4 LEGAL DOCTRINE A. National Parks and the Narrow Test for Confidentiality B. 9 to 5 and Critical Mass Embrace a Broader View of Confidentiality C. Exemption 4 in the Second Circuit IV. TRANSPARENCY AND FINANCIAL INFORMATION: IS DISCLOSURE ALWAYS GOOD? A. Program Effectiveness Versus Public Interest B. Treating Financial Information Differently Under FOIA V. A PROPOSED SOLUTION CONCLUSION INTRODUCTION

On August 22, 2007, the four biggest banks in the country--Citigroup, Bank of America, JPMorgan, and Wachovia--each borrowed $500 million directly from the Federal Reserve Bank of New York. (1) At the time, observers saw the move as largely symbolic--a coordinated attempt by the Federal Reserve System (Fed) and these major financial institutions to remove preemptively the stigma associated with borrowing from the discount window. (2) Within a month, borrowing from the discount window rose to the highest level since the day after the September 11 terrorist attacks. (3) As the financial crisis unfolded, the Fed continued lending, and by August 2009, its balance sheet approached $2.08 trillion. (4)

Public and private interests clashed as the Fed refused to disclose information regarding these transactions, such as the identities of the borrowers, the amount of the loans, and the collateral accepted in return. (5) As a result, in the midst of the financial crisis and this unprecedented level of Federal Reserve lending, the U.S. District Court for the Southern District of New York heard two cases, involving the Bloomberg and Fox News media outlets, seeking to gain information regarding the Fed's lending practices pursuant to the Freedom of Information Act (FOIA). (6) In both cases, the Fed rejected the requests on the basis that the information was exempt from disclosure under FOIA Exemption 4, (7) which exempts from disclosure "commercial or financial information obtained from a person and privileged or confidential." (8) The opposite conclusions reached by the two courts (9) are representative of the divergent approaches courts have taken in their attempt to understand the word "confidential." (10)

The ruling of the Second Circuit Court of Appeals, endorsing the narrow view of confidentiality taken by the district court in Bloomberg, failed to resolve this problem. (11) The interpretation of confidentiality that the Second Circuit endorsed is narrow because it views the two-pronged test for confidentiality as exclusive. (12) The program effectiveness test, by contrast, allows an agency to withhold information in situations in which the disclosure of information that serves a valuable purpose and is useful for the performance of statutory duties would disadvantage the agency. (13) This approach espouses a broad view of confidentiality because it adds a third prong to the otherwise dichotomous test. (14)

This Note argues that given the legislative history and underlying purposes of FOIA, the program effectiveness test rejected by the Second Circuit is a proper approach to interpreting the statutory meaning of the word "confidential." (15) Furthermore, an examination of the costs and benefits of the disclosure of financial information that would affect an agency's performance of its statutory duties justifies overcoming FOIA's default presumption in favor of disclosure. Part I of this Note discusses the factual background of the Second Circuit cases, including the relevant details of the financial crisis, the mechanics of Federal Reserve lending, and the information sought in FOIA requests. Part II examines the legislative history of FOIA to show that the program effectiveness test protects specific congressionally contemplated interests. Part III traces the development of Exemption 4 jurisprudence and analyzes the organic development of the program effectiveness test. Part IV rejects the Second Circuit's comparison of the program effectiveness test to the discredited "public interest" doctrine and proposes that the broadness of the program effectiveness test is not only permissible but also proper. Part V suggests that courts adopt a modified version of the existing program effectiveness test--one that incorporates a balancing test--in order to give the courts the ability to prevent agencies from arbitrarily withholding information.

1. BACKGROUND

   1. Financial Crisis and Federal Reserve Lending

      The financial crisis has complex and multifaceted roots, (16) with the collapse of the subprime mortgage industry commonly considered the proximate cause. (17) The Fed became involved in response to the imminent failure of numerous significant financial institutions. (18) The first financial institution to collapse was Bear Stearns in March 2008. (19) September 2008 saw the nationalization of Fannie Mae and Freddie Mac, (20) the bankruptcy of Lehman Brothers, (21) and the Fed's bailout of the American International Group. (22)

      The Fed acts pursuant to authority granted by the Federal Reserve Act (FRA). (23) One of the Fed's primary duties is to serve as a lender of last resort and lend to "any individual, partnership, or corporation ... unable to secure adequate credit accommodations from other banking institutions." (24) The discount window operates to provide two types of credit: primary credit, which is available to depository institutions "in generally sound financial condition," (25) and secondary credit, which is available to depository institutions "not eligible for primary credit." (26) Since the passage of the Monetary Control Act of 1980, (27) access to the discount window has been open to both member and nonmember institutions. (28) Although loans must be "secured to the satisfaction of the Reserve Bank providing the credit," (29) banks have broad discretion to determine what constitutes acceptable collateral. (30) During the financial crisis, the Fed created three new facilities to lend to financial institutions: the Term Auction Facility (TAF), (31) the Term Securities Lending Facility (TSLF), (32) and the Primary Dealer Credit Facility (PDCF). (33) The significant increase in the Fed's balance sheet (34) is attributable to increased lending through the discount window and these newly developed facilities. (35)

   2. FOIA Requests and Court Decisions

      In response to the vast increase in the Fed's lending, two news agencies submitted requests under FOIA for information regarding the Fed's lending practices. (36) The Fed has a standard policy of resisting attempts to compel disclosure. (37) The Board of Directors of the Federal Reserve System (Board) justifies this policy in part because it claims that the Fed releases broader aggregate information. (38) The Board's approach ultimately led to the litigation of both media outlets' FOIA requests. (39) Bloomberg filed its first request on April 7, 2008, requesting "[a]ll documents reflecting or concerning the portfolio of securities ... supporting the loan extended by the Federal Reserve in connection with the proposed acquisition of Bear Stearns Cos. by JP Morgan Chase & Co." (40) Bloomberg filed its second FOIA request on May 20, 2008, requesting documents related to the loans given and collateral accepted in transactions by the discount window, the TSLF, the TAF, and the PDCF. (41) The news outlet sought the information in order to evaluate the government's response and "[t]o discharge its obligation as the eyes and ears of the public." (42) After failing to receive a formal response to the request, Bloomberg filed its complaint in federal court on November 7, 2008. (43)

      Fox Business submitted its initial FOIA request on November 10, 2008, seeking "the names of institutions receiving Federal Reserve lending" and "an accounting of the collateral provided by these institutions in exchange for the lending." (44) Fox Business submitted a second FOIA request eight days later on November 18, 2008, requesting similar documents for the months of September and October 2008 and also requesting "records showing (a) the amounts borrowed by each named institution, (b) the collateral pledged by each institution, and (c) the collateral held by the Federal Reserve at the close of business on November 14, 2008." (45) Fox Business did not receive a response from the Fed regarding its first FOIA request and received a denial in response to the second request. (46)

      In the course of litigation of both cases in the district courts, the Fed asserted that all responsive records were exempt pursuant to Exemptions 4 and 5 of FOIA. (47) Significantly, the Fed asserted that Exemption 4 allowed the agency to withhold responsive records under a "third prong" of National Parks & Conservation Ass'n v. Morton, (48) the case that established the standards for withholdings under Exemption 4. (49) The Fed asserted that "exemption [4] also protects a governmental interest in administrative efficiency and effectiveness." (50) The Fed claimed that disclosure of the requested information would impair

      (i) the Board's ability to carry out its statutory responsibility "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates" specified in section 2A of the Federal Reserve Act ... 12 U.S.C. [section] 225a; (ii) its ability effectively to utilize its authority under section 13(3) of the FRA to permit lending by the Reserve Banks to individuals, partnerships or corporations to address "unusual and exigent circumstances" in the domestic economy; and (iii) and [sic] its ability under section 10B and related sections of the FRA to utilize [discount window] and TAF lending by the Reserve Banks as a safety valve. (51) Essentially, the Fed argued that disclosure of the identities of borrowing institutions would subject the institutions to stigmatization and would discourage...