B-204607.OM, DEC 31, 1981

B-204607.OM: Dec 31, 1981

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STEINHOFF: THIS MEMORANDUM IS TO ASSIST YOU WITH YOUR REVIEW OF SECURITIES AND EXCHANGE COMMISSION (SEC) PRACTICES FOR OBTAINING ACCESS TO INFORMATION ON INVESTOR FINANCIAL TRANSACTIONS. YOU HAVE ASKED US TO DELINEATE THE SIGNIFICANT DIFFERENCES BETWEEN THE RIGHT TO FINANCIAL PRIVACY ACT OF 1978 (RFPA) AND THE ALTERNATIVE RECORDS ACCESS PROCEDURES AVAILABLE TO THE SEC UNDER PUBLIC LAW 96-433. THESE RESTRICTIONS ARE DESIGNED TO INSURE THAT CUSTOMERS ARE AFFORDED PRIOR NOTICE AND THE OPPORTUNITY TO CONTEST THE GOVERNMENT'S ATTEMPTS TO GAIN ACCESS TO THEIR FINANCIAL RECORDS. DELAYED CUSTOMER NOTIFICATION: BECAUSE THE GENERAL RULE OF ACCESS UNDER THE RFPA IS ONE OF PRIOR CUSTOMER NOTICE. THE ABILITY OF ANY AGENCY TO DELAY NOTICE UNTIL AFTER ACQUISITION OF FINANCIAL RECORDS IS IMPORTANT.

B-204607.OM, DEC 31, 1981

SUBJECT: SECURITY AND EXCHANGE COMMISSION ACCESS TO FINANCIAL RECORDS UNDER THE RIGHT TO FINANCIAL PRIVACY ACT AND PUBLIC LAW 96-433 (FILE B-204607; CODE 908110)

GROUP DIRECTOR, AFMD - JEFFREY C. STEINHOFF:

THIS MEMORANDUM IS TO ASSIST YOU WITH YOUR REVIEW OF SECURITIES AND EXCHANGE COMMISSION (SEC) PRACTICES FOR OBTAINING ACCESS TO INFORMATION ON INVESTOR FINANCIAL TRANSACTIONS. YOU HAVE ASKED US TO DELINEATE THE SIGNIFICANT DIFFERENCES BETWEEN THE RIGHT TO FINANCIAL PRIVACY ACT OF 1978 (RFPA) AND THE ALTERNATIVE RECORDS ACCESS PROCEDURES AVAILABLE TO THE SEC UNDER PUBLIC LAW 96-433.

THE RFPA RESTRICTS THE ABILITY OF ANY FEDERAL AGENCY TO GAIN ACCESS TO THE FINANCIAL RECORDS OF CUSTOMERS OF FINANCIAL INSTITUTIONS. THESE RESTRICTIONS ARE DESIGNED TO INSURE THAT CUSTOMERS ARE AFFORDED PRIOR NOTICE AND THE OPPORTUNITY TO CONTEST THE GOVERNMENT'S ATTEMPTS TO GAIN ACCESS TO THEIR FINANCIAL RECORDS. THE RFPA SPECIFICALLY EXEMPTED THE SEC FROM THE ACT'S RESTRICTIONS FOR A 2-YEAR PERIOD. ALTHOUGH THE SEC BECAME SUBJECT TO THE RFPA ON NOVEMBER 10, 1980, PUBLIC LAW 96-433 (EFFECTIVE ON THAT SAME DATE) PROVIDED AN ALTERNATIVE SET OF RECORD ACCESS PROCEDURES SPECIFICALLY FOR THE SEC. AT PRESENT, THE SEC HAS THE OPTION OF PROCEEDING UNDER EITHER THE RFPA OR PUBLIC LAW 96-433. THE ALTERNATIVE PROCEDURES OF PUBLIC LAW 96-433 DIFFER FROM THOSE OF THE RFPA IN THREE AREAS: DELAYED CUSTOMER NOTIFICATION, SANCTIONS AVAILABLE TO CUSTOMERS FOR THE SEC'S FAILURE TO COMPLY WITH THE ACT, AND THE SEC'S TRANSFER OF RECORDS TO OTHER AGENCIES.

1. DELAYED CUSTOMER NOTIFICATION:

BECAUSE THE GENERAL RULE OF ACCESS UNDER THE RFPA IS ONE OF PRIOR CUSTOMER NOTICE, THE ABILITY OF ANY AGENCY TO DELAY NOTICE UNTIL AFTER ACQUISITION OF FINANCIAL RECORDS IS IMPORTANT. UNDER THE RFPA, NOTICE MAY ONLY BE DELAYED IN RELATIVELY EXIGENT SITUATIONS, FOR EXAMPLE WHERE THERE IS A DANGER THAT EVIDENCE MIGHT OTHERWISE BE DESTROYED. THE ALTERNATIVE DELAYED NOTICE PROVISIONS OF PUBLIC LAW 96-433, HOWEVER, ARE NOT SO LIMITED. THESE PROVISIONS PROVIDE THE SEC WITH THE ABILITY TO DELAY CUSTOMER NOTICE WITHOUT SHOWING THAT IMMEDIATE ACCESS TO FINANCIAL RECORDS IS WARRANTED. FOR EXAMPLE, NOTICE MAY BE DELAYED WHEN AN INVESTIGATION INVOLVES TRACING BENEFICIAL OWNERSHIP OF SECURITIES, OR WHEN THE CONDUCT UNDER INVESTIGATION IS BELIEVED TO INVOLVE THE DISSEMINATION OF FALSE OR MISLEADING INFORMATION.

2. SANCTIONS AVAILABLE TO CUSTOMERS:

IN THE EVENT THE SEC UNLAWFULLY OBTAINS A CUSTOMER'S FINANCIAL RECORDS, THE CIVIL PENALTIES AND SANCTIONS AVAILABLE AGAINST THE SEC UNDER PUBLIC LAW 96-433 ARE MORE LIMITED THAN THOSE OF THE RFPA. THE RFPA PROVIDES FOR THE AWARD OF ANY ACTUAL DAMAGES SUSTAINED BY THE CUSTOMER AS A RESULT OF THE DISCLOSURE. ORDINARY DAMAGES UNDER PUBLIC LAW 96-433 ARE LIMITED TO OUT-OF POCKET LOSSES. ACTIONS FOR PUNITIVE DAMAGES AND FOR DISCIPLINARY SANCTIONS MAY ONLY BE AWARDED FOR VIOLATIONS THAT ARE WILLFUL, INTENTIONAL AND WITHOUT GOOD FAITH; UNDER THE RFPA SUCH ACTIONS MERELY REQUIRE INTENTIONAL CONDUCT. INJUNCTIVE RELIEF UNDER PUBLIC LAW 96-433 IS LIMITED TO FUTURE SEC RECORD-ACCESS ATTEMPTS; THE RFPA CONTAINS NO SUCH LIMITATION. FINALLY, PUBLIC LAW 96 433 ONLY AUTHORIZES AN AWARD OF COSTS AND ATTORNEY'S FEES IN SUCCESSFUL ACTIONS FOR DAMAGES WHERE THE SEC'S CONDUCT WAS WILLFUL AND INTENTIONAL AND WITHOUT GOOD FAITH. UNDER THE RFPA, COSTS AND FEES MAY BE AWARDED IN ANY SUCCESSFUL ACTION FOR EITHER DAMAGES OR AN INJUNCTION.

3. SEC'S TRANSFER OF RECORDS

THE RECORDS TRANSFER PROVISION OF PUBLIC LAW 96-433 EXPANDS THOSE OF THE RFPA BY PERMITTING EITHER THE SEC OR THE RECEIVING AGENCY TO TAKE ADVANTAGE OF THE BROADER DELAYED NOTICE PROVISIONS OF PUBLIC LAW 96 433. ADDITIONALLY, PUBLIC LAW 96-433 PROVIDES A LIMITED EXCEPTION TO THE NOTICE OF TRANSFER REQUIREMENTS IMPOSED BY THE RFPA, WHERE THE RECEIVING AGENCY IS THE DEPARTMENT OF JUSTICE OR A STATE SECURITIES AGENCY AND THE RECORDS ARE SOUGHT IN AN INVESTIGATION ARISING OUT OF THE SAME COURSE OF CONDUCT.

A MORE DETAILED ANALYSIS IS ATTACHED.

ATTACHMENT

SECURITIES AND EXCHANGE COMMISSION ACCESS TO FINANCIAL RECORDS UNDER THE RIGHT TO FINANCIAL PRIVACY ACT AND PUBLIC LAW 96-433

DIGEST:

MEMORANDUM CONTRASTS SIGNIFICANT DIFFERENCES BETWEEN RIGHT TO FINANCIAL PRIVACY ACT (RFPA) AND ALTERNATIVE PROCEDURES AVAILABLE TO SECURITIES AND EXCHANGE COMMISSION (SEC) UNDER PUBLIC LAW 96-433. LATER LAW EXPANDS SEC'S ABILITY TO DELAY NOTIFICATION TO FINANCIAL INSTITUTION CUSTOMERS OF SEC'S ACCESS TO FINANCIAL RECORDS, LIMITS PENALTIES AND SANCTIONS AVAILABLE AGAINST SEC FOR VIOLATIONS OF ACT, AND EXPANDS SEC'S ABILITY TO TRANSFER RECORDS TO OTHER AGENCIES.

I. BACKGROUND

THE RIGHT TO FINANCIAL PRIVACY ACT (12 U.S.C. SECS. 3401 ET SEQ.) (RFPA) FORBIDS ANY GOVERNMENT AUTHORITY FROM OBTAINING ACCESS TO THE FINANCIAL RECORDS OF ANY CUSTOMER OF A FINANCIAL INSTITUTION, FN1 EXCEPT THROUGH FIVE SPECIFIED PROCEDURES. THESE PROCEDURES ARE DESIGNED TO INSURE THAT CUSTOMERS ARE AFFORDED PRIOR NOTICE AND THE OPPORTUNITY TO CONTEST THE GOVERNMENT'S ATTEMPTS TO GAIN ACCESS TO FINANCIAL RECORDS. IN CERTAIN SITUATIONS, HOWEVER, CUSTOMER NOTIFICATION MAY BE DELAYED. FINANCIAL RECORDS MAY BE MADE AVAILABLE TO AGENCIES THROUGH:

- PRIOR AUTHORIZATION BY THE CUSTOMER, EFFECTIVE FOR NO LONGER THAN THREE MONTHS AND SUBJECT TO REVOCATION (12 U.S.C. SEC. 3404);

- AN ADMINISTRATIVE SUBPOENA, A COPY OF WHICH IS TO BE SERVED ON THE CUSTOMER. THE SUBPOENA MUST BE AUTHORIZED BY LAW, AND STATE WITH REASONABLE SPECIFICITY THE NATURE OF THE LAW ENFORCEMENT INQUIRY TO WHICH THE RECORDS ARE BELIEVED TO BE RELEVANT. IT MUST BE ACCOMPANIED BY A DRAFT OF A MOTION TO CONTEST (12 U.S.C. SEC. 3405);

- A SEARCH WARRANT IN COMPLIANCE WITH THE FEDERAL RULES OF CRIMINAL PROCEDURE (12 U.S.C. SEC. 3406);

- A JUDICIAL SUBPOENA, WITH THE SAME NOTICE AND OPPORTUNITY TO CONTEST AS IS GIVEN TO A CUSTOMER IN THE CASE OF AN ADMINISTRATIVE SUBPOENA (12 U.S.C. SEC. 3407); OR

- A FORMAL WRITTEN REQUEST IN CASES WHERE NO ADMINISTRATIVE SUBPOENA IS AUTHORIZED. SIMILAR NOTICE AND OPPORTUNITY TO CONTEST IS GIVEN TO THE CUSTOMER (12 U.S.C. SEC. 3408).

THE SECOND OF THESE FIVE PROCEDURES IS LIKELY TO BE THAT MOST COMMONLY USED BY THE SEC, DUE TO THE BROAD ADMINISTRATIVE SUBPOENA POWERS GIVEN TO THE AGENCY BY THE CONGRESS. FN2

THE RFPA SPECIFICALLY EXEMPTED THE SEC FROM THE REQUIREMENTS OF THE ACT FOR A 2-YEAR PERIOD. 12 U.S.C. SEC. 3422. THIS EXEMPTION WAS INTENDED TO ALLOW THE CONGRESS TIME TO STUDY HOW BEST TO RECONCILE "PRIVACY INTERESTS OF BANK CUSTOMERS WITH THE SPECIAL AND CONTINUING NEED" OF THE SEC FOR ADEQUATE CUSTOMER ACCOUNT ACCESS. H.R.REP. NO. 96-1321, AT 2 (1980). FN3 ON NOVEMBER 10, 1980 THE SEC BECAME SUBJECT TO THE RFPA. AT THE SAME TIME, HOWEVER, PUBLIC LAW 96-433 CAME INTO EFFECT, PROVIDING THE SEC WITH AN ALTERNATIVE LIST OF EXCEPTIONS TO THE PRIOR NOTICE REQUIREMENTS OF THE RFPA. 15 U.S.C.A. SEC. 78UH)(2) (WEST SUPP. 1981). THESE ALTERNATIVE DELAYED NOTICE PROVISIONS ARE SIGNIFICANTLY BROADER THAN THOSE PROVIDED IN THE RFPA ITSELF. THE SEC HAS THE OPTION OF PROCEEDING UNDER EITHER STATUTE.

THE DIFFERENCES BETWEEN THE DELAYED NOTICE PROVISIONS OF THE RFPA AND PUBLIC LAW 96-433 ARE KEY TO AN UNDERSTANDING OF THE SEC'S RESPONSIBILITIES. OUR ANALYSIS WILL THEREFORE CONCENTRATE ON A COMPARISON OF THE TWO DELAYED NOTICE ALTERNATIVES AND THE REASONS THAT CONGRESS HAD FOR GIVING THE SEC AN ELECTION. AGENCY ACCESS TO RECORDS, HOWEVER, IS NOT THE ONLY AREA WHERE THE TWO STATUTES DIFFER. PROVISIONS RELATED TO SANCTIONS AVAILABLE TO CUSTOMERS FOR THE SEC'S FAILURE TO COMPLY WITH THE RFPA, AND TRANSFER OF RECORDS TO OTHER AGENCIES, ARE ALSO SIGNIFICANTLY DIFFERENT. THESE DIFFERENCES WILL BE DISCUSSED BELOW.

II. ANALYSIS

1. DELAYED CUSTOMER NOTIFICATION:

A. RFPA

ALTHOUGH THE GENERAL RULE OF THE RFPA IS ONE OF PRIOR CUSTOMER NOTICE, SECTION 1109 PROVIDES FOR DELAYED (POST-ACQUISITION) NOTICE IN FIVE LIMITED CASES. NOTICE MAY BE DELAYED FOR 90 DAYS BY COURT ORDER IF THERE IS REASON TO BELIEVE THAT PRIOR NOTICE WILL RESULT IN:

- THE ENDANGERMENT OF THE LIFE OR SAFETY OF ANY PERSON;

- FLIGHT FROM PROSECUTION;

- DESTRUCTION OR TAMPERING WITH EVIDENCE;

- INTIMIDATION OF POTENTIAL WITNESSES; OR

- SERIOUS JEOPARDY TO ANY INVESTIGATION OR OFFICIAL PROCEEDING RISING TO THE LEVEL OF ANY OF THE OTHER FOUR SITUATIONS.

SEE 12 U.S.C. SEC. 3409(A)(3)(A)-(E). IF ONE OF THE ABOVE SITUATIONS IS PRESENT, A COURT MAY APPROVE THE DELAYED NOTICE ONLY IF THE INVESTIGATION IS PURSUANT TO LAWFUL AUTHORITY AND THE RECORDS SOUGHT ARE RELEVANT TO A LEGITIMATE LAW ENFORCEMENT INQUIRY. FN4 12 U.S.C. SEC. 3409(A)(1)-(2). APPLICATION FOR A DELAY OF NOTICE ORDER MUST BE MADE WITH "REASONABLE SPECIFICITY." FN5 THE COURT MAY ORDER NOTICE TO BE DELAYED FOR A RENEWABLE 90-DAY PERIOD, AND ONCE NOTICE IS SENT TO THE CUSTOMER IT MUST SPECIFY THE REASON FOR THE DELAY AND THE PURPOSE OF THE INVESTIGATION. 12 U.S.C. SEC. 3409(C).

ALTHOUGH OTHER SECTIONS OF THE STATUTE PROVIDE FOR MORE EXTREME SITUATIONS WHERE PRE-ACQUISITION NOTICE WOULD NOT BE REQUIRED, FN6 THE LIMITED DELAYED NOTICE PROVISIONS UNDER THE RFPA APPLY ONLY TO RELATIVELY EXIGENT SITUATIONS. WITHOUT AN EXEMPTION FROM THE RFPA AND WITHOUT SOME OTHER PROVISION FOR DELAY OF NOTICE, THE MAJORITY OF SEC INVESTIGATIONS INTO THE FINANCIAL RECORDS OF INDIVIDUALS PROBABLY WOULD REQUIRE PRIOR NOTICE AND AN OPPORTUNITY TO CONTEST. IN PUBLIC LAW 96 433, CONGRESS PROVIDED THE SEC WITH AN ALTERNATIVE TO THE RESTRICTIVE PROVISIONS OF THE RFPA.

B. PUBLIC LAW 96-433

COMPARED TO THE RFPA'S RATHER RESTRICTIVE DELAYED NOTICE PROVISIONS, PUBLIC LAW 96-433 PROVIDES THE SEC WITH BROAD EXCEPTIONS TO THE PRIOR NOTICE REQUIREMENT OF THE RFPA.

THE DANGER THAT PRE-ACCESS LITIGATION BY INDIVIDUALS COULD TIE UP SEC INVESTIGATIONS AND ACTIONS APPEARS TO HAVE BEEN ONE OF THE PRIMARY MOTIVATING FACTORS FOR THE EXPANDED DELAYED NOTICE PROVISIONS OF PUBLIC LAW 96-433. ACCORDING TO THE HOUSE REPORT ON H.R. 7939, LATER TO BECOME PUBLIC LAW 96-433: FN7

"THESE CRITERIA OF THE NEW DELAYED NOTICE PROVISIONS RELATE TO THE COMMISSION'S PARTICULAR NEED TO OBTAIN PROMPT ACCESS TO FINANCIAL RECORDS WITHOUT THE PRE-ACCESS LITIGATION WHICH COULD RESULT UNDER THE RIGHT TO FINANCIAL PRIVACY ACT." H.R.REP. NO. 96-1321, AT 6 (1980)

ADDITIONALLY, THESE EXPANDED DELAYED NOTICE PROVISIONS WERE PROVIDED THE SEC IN RECOGNITION OF THE ADMINISTRATIVE STRAIN THAT FULL COMPLIANCE WITH THE PRIOR NOTICE PROVISIONS OF THE RFPA WOULD REQUIRE:

"*** WE ARE ALSO CONCERNED THAT IF THE COMMISSION BECOMES SUBJECT TO THE RIGHT TO FINANCIAL PRIVACY ACT, IT WOULD, IN LIGHT OF THE COMMISSION'S CONTINUING AND SUBSTANTIAL NEED FOR ACCESS TO SUCH FINANCIAL RECORDS, BE FORCED TO DEVOTE SUBSTANTIAL RESOURCES TO DEFENDING SUITS WHICH EXPERIENCE BY THE COMMISSION HAS SHOWN, IN MANY CASES, WOULD BE FILED SOLELY TO DELAY ITS INQUIRY, AND WHICH MIGHT IMPEDE THE SWIFT REMEDIAL ACTION OFTEN REQUIRED TO PROTECT THE INVESTING PUBLIC. H.R. 7939, WHILE PROTECTING THE LEGITIMATE PRIVACY RIGHTS OF BANK CUSTOMERS, AVOIDS UNDUE INTERFERENCE WITH THE LAW-ENFORCEMENT EFFORTS OF THE COMMISSION, AND ENSURES THAT THE ASSERTION OF PRIVACY RIGHTS DOES NOT SERVE AS A SWORD FOR DELAY AND OBSTRUCTION." ID. AT 4.

THE NEED FOR FAST ACTION BY THE SEC IN A NUMBER OF CASES IS CITED AS AN ADDITIONAL BASIS FOR THE LEGISLATION. ID. AT 8. IT APPEARS, HOWEVER, TO BE SECONDARY TO THE PREVENTION OF USE OF THE RFPA TO OBSTRUCT SEC INVESTIGATIONS.

PUBLIC LAW 96-433, LIKE SECTION 1109 OF THE RFPA, PERMITS THE SEC TO APPLY TO A UNITED STATES DISTRICT COURT FOR AN EX PARTE ORDER GRANTING THE REQUESTED DELAY OF CUSTOMER NOTIFICATION FOR A PERIOD NOT TO EXCEED 90 DAYS. AS IS THE CASE WITH PROCEEDINGS UNDER THE RFPA, THE ATTEMPT TO GAIN ACCESS TO FINANCIAL RECORDS MUST BE PURSUANT TO THE SEC'S SUBPOENA AUTHORITY UNDER THE SECURITIES LAWS. 15 U.S.C.A. SEC. 78UH)(2).

THE FIRST SET OF CIRCUMSTANCES FOR WHICH SUCH A DELAYED NOTICE ORDER WOULD BE APPROPRIATE IS QUITE SIMILAR TO THE LIMITED DELAYED NOTICE PROVISION OF THE RFPA ITSELF. NOTICE MAY BE DELAYED WHERE THERE IS A DANGER OF:

- INJURY TO INVESTORS THROUGH IMPROPER CONVERSION OF INVESTOR ASSETS;

- DESTRUCTION OR TAMPERING WITH EVIDENCE;

- TRANSFER OF ASSETS OR RECORDS OUTSIDE THE UNITED STATES; OR - LOSS OF ABILITY TO TRACE THE SOURCE OR DISPOSITION OF FUNDS INVOLVED IN SECURITIES TRANSACTIONS. 15 U.S.C.A. SEC. 78UH)(2)(A)(I)-(V).

THESE SITUATIONS ARE ESSENTIALLY THE SAME AS THE EXIGENT ONES REQUIRED FOR COURT-ORDERED DELAY OF NOTICE UNDER THE RFPA, EXCEPT THAT THEY HAVE BEEN SPECIFICALLY ADAPTED TO THE SEC. "INJURY" IS FINANCIAL INJURY TO INVESTORS, RATHER THAN PERSONAL OR PROPERTY DAMAGE. "LOSS OF EVIDENCE" AND "JEOPARDIZATION OF INVESTIGATIONS" ARE REPHRASED IN TERMS OF SITUATIONS COMMONLY INCURRED BY THE SEC, PARTICULARLY WHERE IMMEDIATE SEC ACTION IS REQUIRED TO PREVENT PRINCIPALS FROM HIDING THEIR RESPONSIBILITY FOR FINANCIAL TRANSACTIONS. FN8

OF THE REMAINING DELAYED NOTICE PROVISIONS OF PUBLIC LAW 96-433 (15 U.S.C.A. SEC. 78UH)(1)(B)-(D)), ONLY ONE WAS INTENDED TO BE LIMITED TO EXIGENT SITUATIONS WHERE IMMEDIATE SEC ACTION IS NECESSARY. MOST OF THESE OTHER DELAYED NOTICE PROVISIONS ENCOMPASS NONEMERGENCY SITUATIONS WHERE DELAY OF NOTICE MIGHT STILL BE JUSTIFIED.

FIRST, PUBLIC LAW 96-433 PROVIDES THE SEC WITH A BROAD EXCEPTION TO THE PRIOR NOTICE REQUIREMENT WHENEVER THE SEC'S PURPOSE IN OBTAINING THE FINANCIAL RECORDS IN QUESTION IS TO TRACE "THE RECORD OR BENEFICIAL OWNERSHIP INTEREST IN ANY SECURITY." 15 U.S.C.A. SEC. 78UH)(2)(B). PROVISION IS MADE TO LIMIT THE APPLICATION OF THIS EXCEPTION TO THOSE CASES WHERE THERE IS DANGER OF DESTRUCTION OF EVIDENCE OR FLIGHT TO AVOID PROSECUTION, EITHER IN THE STATUTE OR ITS LEGISLATIVE HISTORY. RATHER, THE PRINCIPAL JUSTIFICATION FOR THIS PROVISION APPEARS TO BE THE ADMINISTRATIVE CONVENIENCE OF THE SEC: THE HOUSE REPORT STRESSES THAT THESE HIDDEN OWNERSHIP INVESTIGATIONS INVOLVE EXAMINATION OF "COMPLEX AND VOLUMINOUS RECORDS." H.R.REP. NO. 96-1321, AT 7 (1980). THE HOUSE REPORT IMPLIES THAT TO PERMIT EACH ACCOUNT OWNER TO HAVE NOTICE AND AN OPPORTUNITY TO CONTEST SUCH AN EXAMINATION WOULD SLOW SEC INVESTIGATIONS TO THE POINT OF IMPRACTICABILITY.

THE NEXT MAJOR DELAYED NOTICE PROVISION IN PUBLIC LAW 96-433 IS DESIGNED TO COVER SITUATIONS WHERE THE ACTS UNDER INVESTIGATION ARE BELIEVED TO INVOLVE

"*** THE DISSEMINATION OF MATERIALLY FALSE OR MISLEADING INFORMATION CONCERNING ANY SECURITY, ISSUER, OR MARKET, OR THE FAILURE TO MAKE DISCLOSURES REQUIRED UNDER THE SECURITIES LAWS, WHICH REMAIN UNCORRECTED." 15 U.S.C.A. SEC. 78UH)(2)(C)(I).

THIS NATURALLY COVERS A GREAT MANY OF THE SEC'S INVESTIGATIONS, INCLUDING ALMOST ALL RULE 10B-5 INVESTIGATIONS. FN9 ACCORDING TO THE LEGISLATIVE HISTORY OF PUBLIC LAW 96-433, THIS BROAD DELAYED NOTICE PROVISION IS JUSTIFIED BECAUSE "THE SLIGHTEST DELAY IN OBTAINING ACCESS TO FINANCIAL RECORDS CAN HAVE AN ADVERSE IMPACT UPON THE INVESTING PUBLIC." H.R.REP. NO. 96-1321, AT 7 (1980). THERE IS, HOWEVER, NO REQUIREMENT THAT THE SEC MAKE A SHOWING THAT DELAY CAUSED BY COMPLIANCE WITH THE RFPA WOULD HARM A PARTICULAR INVESTIGATION BEFORE RECEIVING COURT APPROVAL TO DELAY NOTICE. THE SEC NEED ONLY SHOW THAT IT HAS REASON TO BELIEVE THAT THE ACTS OR PRACTICES UNDER INVESTIGATION INVOLVE THE DISSEMINATION OF MATERIALLY FALSE OR MISLEADING INFORMATION IN THE MARKETPLACE.

A SIMILAR DELAYED NOTICE PROVISION TO THAT DESCRIBED ABOVE IS ONE WHICH ALLOWS THE SEC TO DELAY NOTICE WHERE IT BELIEVES THAT ACTIONS UNDER INVESTIGATION WILL INVOLVE:

"*** A FINANCIAL LOSS TO INVESTORS OR OTHER PERSONS PROTECTED UNDER THE SECURITIES LAWS WHICH REMAINS SUBSTANTIALLY UNCOMPENSATED." U.S.C.A. SEC. 78UH)(2)(C)(II).

THE BROAD LANGUAGE OF THIS PROVISION MIGHT ALSO APPLY TO A LARGE NUMBER OF THE SEC'S INVESTIGATIONS, AGAIN PARTICULARLY THOSE DEALING WITH FRAUD IN THE MARKETPLACE. ALTHOUGH THE TERM "SUBSTANTIALLY UNCOMPENSATED" IS NOT DEFINED, EITHER IN THE STATUTE OR ITS LEGISLATIVE HISTORY, IT IS LIKELY THAT A GREAT NUMBER OF THE SEC'S INVESTIGATIONS ARE IN REGARD TO CONDUCT FALLING IN THIS CATEGORY. AGAIN, THERE IS NO REQUIREMENT THAT A SPECIFIC NEED FOR DELAY MUST BE SHOWN. THE ONLY LIMITATIONS ARE THAT THE SEC BELIEVES THAT THE ACTS UNDER INVESTIGATION INVOLVE A SUBSTANTIALLY UNCOMPENSATED LOSS TO INVESTORS, AND THAT THE SEC SHOWS THAT IT HAS REASON TO BELIEVE THAT "THOSE WHO MAY HVE SUFFERED THE UNCOMPENSATED FINANCIAL LOSS FALL WITHIN THE CATEGORIES OF PERSONS WHOM CONGRESS WISHED TO PROTECT UNDER THE SECURITIES LAWS." H.R.REP. NO. 96-1321, AT 7 (1980). THIS LATTER LIMITATION DOES NOT REQUIRE THE SEC TO IDENTIFY SPECIFIC INDIVIDUALS "WHO MAY HAVE BEEN ADVERSELY AFFECTED BY THE ACTIVITIES UNDER INVESTIGATION." ID.

THE FINAL DELAYED NOTICE PROVISION OF PUBLIC LAW 96-433 IS ALSO VERY BROAD, AT LEAST IN TERMS OF THE STATUTORY LANGUAGE. IT PERMITS THE SEC TO DELAY NOTICE, PURSUANT TO COURT ORDER, WHENEVER:

"THE ACTS, PRACTICES OR COURSE OF CONDUCT UNDER INVESTIGATION -

(1) INVOLVE SIGNIFICANT FINANCIAL SPECULATION IN SECURITIES; OR

(II) ENDANGER THE STABILITY OF ANY FINANCIAL OR INVESTMENT INTERMEDIARY." 15 U.S.C.A. SEC. 78UH)(2)(D).

ACCORDING TO THE LEGISLATIVE HISTORY, THE JUSTIFICATION FOR THIS PROVISION IS THE SAME AS THE SEC'S EXEMPTION FROM THE GOVERNMENT IN THE SUNSHINE ACT, 5 U.S.C. SEC. 552(B): PUBLIC ACCESS TO INFORMATION CONSIDERED BY THE SEC IN ITS INVESTIGATION MIGHT LEAD TO INCREASED FINANCIAL SPECULATION IN, OR INSTABILITY OF, INSTITUTIONS UNDER INVESTIGATION. H.R.REP. NO. 96-132 AT 8 (1980). THE PRINCIPAL CONCERN APPEARED TO BE THAT THE SEC'S ABILITY TO UTILIZE PROMPT REMEDIAL ACTION, FOR EXAMPLE TEMPORARY SUSPENSION OF TRADING IN A REGISTERED SECURITY, WOULD BE JEOPARDIZED IF INVESTIGATIONS OF PURPORTED SPECULATION BECAME DRAWN OUT DUE TO THE NOTICE AND APPEAL PROVISIONS OF THE RFPA. ID. THUS, ALTHOUGH THE LANGUAGE OF THE STATUTE WOULD APPEAR TO JUSTIFY DELAYED NOTICE WHENEVER THERE IS A DANGER OF FINANCIAL SPECULATION, THE DRAFTERS APPEAR TO HAVE INTENDED THIS PROVISION TO BE USED BY THE SEC ONLY IN CASES WHERE DELAY WOULD IMPEDE THE SEC'S ABILITY TO TAKE FAST REMEDIAL ACTION. FN10 INDEED, THE HOUSE REPORT WARNS THAT

"*** THE COMMITTEE INTENDS THAT PARAGRAPH (D) BE USED JUDICIOUSLY AND WILL TAKE SPECIAL NOTICE OF THE OCCASIONS ON WHICH THE COMMISSION RELIES THEREON TO OBTAIN ACCESS TO FINANCIAL RECORDS OF THE CUSTOMERS." ID.

IN EFFECT, THIS LAST PROVISION, LIKE THE FIRST SET (15 U.S.C.A. SEC. 78UH)(2)(A)), IS INTENDED TO BE USED ONLY IN EMERGENCY CASES, WHERE IMMEDIATE ACTION BY THE SEC IS NECESSARY.

TO SUMMARIZE, ALTHOUGH THE SEC'S EXCLUSION FROM THE REQUIREMENTS OF THE RFPA ENDED IN NOVEMBER OF 1980, PUBLIC LAW 96-433 PROVIDED THE AGENCY WITH AN EXPANDED SET OF EXCEPTIONS TO THE PRIOR NOTICE REQUIREMENTS OF THE RFPA. SOME OF THESE ALTERNATIVE DELAYED NOTICE PROVISIONS ARE SIMILAR TO THOSE AVAILABLE UNDER THE RFPA ITSELF, IN THAT THEY ARE LIMITED TO RELATIVELY EXTREME OR EMERGENCY SITUATIONS. OTHERS, HOWEVER, ARE NOT SO LIMITED. THEY PROVIDE THE SEC WITH THE ABILITY TO DELAY NOTICE TO CUSTOMERS OF FINANCIAL INSTITUTIONS WITHOUT SHOWING THAT IMMEDIATE ACCESS TO FINANCIAL RECORDS IS WARRANTED.

ONE DRAWBACK TO THE SEC'S UTILIZATION OF THESE BROAD DELAYED NOTICE PROVISIONS IS THAT APPLICATION MUST STILL BE MADE FOR A COURT ORDER PERMITTING THE DELAY. THIS LATTER FACT MAY EXPLAIN THE SEC'S CONTINUED RELIANCE ON THE PRIOR NOTICE PROVISIONS OF THE RFPA IN CASES WHERE IT MIGHT OTHERWISE USE THE DELAYED NOTICE PROCEDURES OF PUBLIC LAW 96 433. THE EFFECT OF THE NEW DELAYED NOTICE PROVISIONS, HOWEVER, IS THAT, WHERE THE SEC BELIEVES THAT PRE-ACCESS LITIGATION COULD TIE-UP AN INVESTIGATION, THE AGENCY WILL OFTEN HAVE THE OPTION OF GOING TO COURT FOR AN ORDER TO DELAY NOTICE.

2. SANCTIONS FOR SEC FAILURE TO COMPLY WITH RECORD ACCESS REQUIREMENTS

A. DAMAGES.

UNDER SECTION 1117 OF THE RFPA, ANY AGENCY OR FINANCIAL INSTITUTION OBTAINING OR DISCLOSING FINANCIAL RECORDS IN VIOLATION OF THE REQUIREMENTS OF THAT STATUTE IS LIABLE FOR AN AMOUNT EQUAL TO THE SUM OF:

"(1) $100 WITHOUT REGARD TO THE VOLUME OF RECORDS INVOLVED;

(2) ANY ACTUAL DAMAGES SUSTAINED BY THE CUSTOMER AS A RESULT OF THE DISCLOSURE;

(3) SUCH PUNITIVE DAMAGES AS THE COURT MAY ALLOW, WHERE THE VIOLATION IS FOUND TO HAVE BEEN WILLFUL OR INTENTIONAL; AND

(4) IN THE CASE OF ANY SUCCESSFUL ACTION TO ENFORCE LIABILITY UNDER THIS SECTION, THE COSTS OF THE ACTION TOGETHER WITH REASONABLE ATTORNEY'S FEES AS DETERMINED BY THE COURT." 12 U.S.C. SEC. 3417(A).

SHOULD THE SEC OBTAIN FINANCIAL RECORDS UNDER THE RFPA PROCEDURES, A VIOLATION OF THOSE PROCEDURES WOULD SUBJECT THE COMMISSION TO ANY OF THE ABOVE DAMAGES PROVISIONS. IF INSTEAD THE COMMISSION DECIDES TO OPERATE UNDER THE ALTERNATIVE RECORDS ACCESS PROVISIONS OF PUBLIC LAW 96-433, A SEPARATE LIST OF REMEDIES IS AVAILABLE FOR CUSTOMERS WHO CAN SHOW THAT A STATUTORY VIOLATION HAS TAKEN PLACE. WHILE THESE REMEDIES ARE SIMILAR TO THOSE OF THE RFPA, A CLOSE EXAMINATION REVEALS A NUMBER OF DIFFERENCES FAVORABLE TO THE SEC.

THE CIVIL PENALTIES PROVISIONS OF PUBLIC LAW 96-433 STATE THAT WHERE THE DELAYED NOTICE PROCEDURES OF THE STATUTE HAVE NOT BEEN COMPLIED WITH, THE CUSTOMER MAY REOPEN THE DISTRICT COURT PROCEEDING THAT RESULTED IN THE DELAYED NOTICE ORDER. THE PRESIDING JUDGE THEN "MAY ORDER" FN11 THE SEC TO PAY:

"(1) $100 WITHOUT REGARD TO THE VOLUME OF RECORDS INVOLVED;

(II) ANY OUT-OF-POCKET DAMAGES SUSTAINED BY THE CUSTOMER AS A DIRECT RESULT OF THE DISCLOSURE; AND

(III) IF THE VIOLATION IS FOUND TO HAVE BEEN WILLFUL, INTENTIONAL, AND WITHOUT GOOD FAITH, SUCH PUNITIVE DAMAGES AS THE COURT MAY ALLOW, TOGETHER WITH THE COSTS OF THE ACTION AND REASONABLE ATTORNEY'S FEES AS DETERMINED BY THE COURT." 15 U.S.C.A. SEC. 78UH)(7)(A).

THE $100 PENALTY PROVISION IN PUBLIC LAW 96-433 IS IDENTICAL TO THAT OF THE RFPA. INSTEAD, HOWEVER, OF ADDITIONAL "ACTUAL DAMAGES" REQUIRED BY THE RFPA, THE SEC'S LIABILITY UNDER PUBLIC LAW 96-433 IS LIMITED TO "OUT- OF-POCKET" DAMAGES OCCURRING AS A "DIRECT RESULT" OF THE DISCLOSURE. THE LEGISLATIVE HISTORY EXPLAINS THIS TERM AS FOLLOWS:

"THE TERM "OUT-OF-POCKET DAMAGES" SHALL BE CONSTRUED TO INCLUDE ONLY SUCH INJURY TO THE CUSTOMER WHICH HAS BEEN ESTABLISHED TO HAVE A DIRECT LINK WITH THE DISCLOSURE IN QUESTION AND SHALL NOT INCLUDE SUCH SPECULATIVE MATTERS AS INJURY TO REPUTATION AND TO PROSPECTIVE BUSINESS OPPORTUNITIES." H.R.REP. NO. 96-1321, AT 10 (1980).

"ACTUAL" OR COMPENSATORY DAMAGES ARE ORDINARILY CONSTRUED TO INCLUDE INJURY TO REPUTATION AND LOSS OF BUSINESS. SEE GENERALLY H. OLECK, CASES ON DAMAGES 37 (1962). THE ORDINARY DAMAGES PROVISION OF PUBLIC LAW 96-433 IS THEREFORE MORE RESTRICTIVE THAN THAT OF THE RFPA. THIS RESTRICTION, HOWEVER, HAS THE EFFECT OF MAKING THE DAMAGES AVAILABLE AGAINST THE SEC UNDER THIS STATUTE CONSISTENT WITH THE TYPES OF DAMAGES MOST OFTEN RECOVERED AGAINST ONE WHO HAS VIOLATED THE SECURITIES LAWS. SEE ABRAHAMSON V. FLESCHNER, 392 F.SUPP. 740, 746 (S.D.N.Y. 1975) REVERSED ON OTHER GROUNDS, 568 F.2D 862 (2D CIR. 1977) ("ACTUAL DAMAGES" IN A RULE 10B -5 ACTION LIMITED TO OUT-OF-POCKET LOSS). SEE GENERALLY COBINE, ELEMENTS OF LIABILITY AND ACTUAL DAMAGES IN RULE 10B 5 ACTIONS, 1972 U.ILL.L.F. 651.

AS FOR PUNITIVE DAMAGES, THE RFPA PERMITS A COURT TO MAKE SUCH AN AWARD WHERE THE VIOLATION WAS EITHER "WILLFUL" OR "INTENTIONAL." UNDER PUBLIC LAW 96-433 THE VIOLATION MUST HAVE BEEN BOTH "WILLFUL AND INTENTIONAL," AS WELL AS "WITHOUT GOOD FAITH."

NONE OF THESE TERMS IS DEFINED IN EITHER STATUTE OR THEIR LEGISLATIVE HISTORIES. HOWEVER, A "WILLFUL" VIOLATION OF A STATUTE IS GENERALLY CONSIDERED TO BE ONE INVOLVING VOLUNTARY ACTION, DONE EITHER WITH A KNOWING DISREGARD OF, OR PLAIN INDIFFERENCE TO, THE STATUTORY REQUIREMENTS. SEE, E.G., GEORGIA ELECTRIC CO. V. MARSHALL, 595 F.2D 309, 317 (5TH CIR. 1979) ("WILLFUL VIOLATION" OF OSHA REQUIREMENTS). USUALLY CONNOTES A DELIBERATE VIOLATION OF A KNOWN LEGAL DUTY. UNITED STATES V. SWANSON, 509 F.2D 1205 (8TH CIR. 1975) (WILLFUL VIOLATION OF TAX LAWS). ALTHOUGH IN SOME CONTEXTS THE TERMS "WILLFUL" AND "INTENTIONAL" ARE USED INTERCHANGEABLY, THE LATTER TERM MORE OFTEN IS USED TO DISTINGUISH SITUATIONS WHERE THE ILLEGAL ACT ITSELF IS VOLUNTARY AND DELIBERATE, BUT CARRIED OUT WITHOUT THE SPECIFIC PURPOSE OF VIOLATING THE STATUTE. SEE, E.G., HAYNES V. LOGAN FURNITURE MART, INC. 503 F.2D 1161, 1166 (7TH CIR. 1974) (TRUTH IN LENDING ACT).

"WILLFUL" VIOLATIONS ARE USUALLY ENCOMPASSED BY A REFERENCE TO "INTENTIONAL" VIOLATIONS. THE LANGUAGE "WILLFUL OR INTENTIONAL" IN THE RFPA INDICATES, THEREFORE, THAT PUNITIVE DAMAGES MAY BE AWARDED FOR MERE "INTENTIONAL" VIOLATIONS, BUT THAT A COURT MAY ALLOW GREATER PUNITIVE DAMAGES FOR "WILLFUL" VIOLATIONS, I.E., THOSE COMMITTED WITH A KNOWING OR INDIFFERENT DISREGARD OF THE STATUTORY REQUIREMENTS. THE LANGUAGE OF PUBLIC LAW 96-433 IS FAR MORE RESTRICTIVE. MERE "INTENTIONAL" VIOLATIONS ARE NOT A SUFFICIENT BASIS FOR A COURT TO AWARD PUNITIVE DAMAGES. THE VIOLATION MUST ALSO HAVE BEEN "WILLFUL" OR KNOWING. ADDITIONALLY, UNDER PUBLIC LAW 96-433 THE VIOLATION MUST HAVE BEEN "WITHOUT GOOD FAITH." THIS LATTER TERM IS ALSO UNDEFINED IN EITHER PUBLIC LAW 96-433 OR ITS LEGISLATIVE HISTORY. GENERALLY SPEAKING, HOWEVER, GOOD FAITH IS:

"*** AN INTANGIBLE AND ABSTRACT QUALITY WITH NO TECHNICAL MEANING OR STATUTORY DEFINITION, AND IT ENCOMPASSES, AMONG OTHER THINGS, AN HONEST BELIEF, THE ABSENCE OF MALICE AND THE ABSENCE OF DESIGN TO DEFRAUD OR TO SEEK AN UNCONSCIONABLE ADVANTAGE. *** IN COMMON USAGE THIS TERM IS ORDINARILY USED TO DESCRIBE THAT STATE OF MIND DENOTING HONESTY OF PURPOSE, FREEDOM FROM INTENTION TO DEFRAUD, AND GENERALLY SPEAKING, MEANS BEING FAITHFUL TO ONE'S DUTY OR OBLIGATION."

BLACK'S LAW DICTIONARY 623-24 (5TH ED. 1979).

IN THE CONTEXT OF PUBLIC LAW 96-433, IT IS LIKELY THAT THE TERM "GOOD FAITH" REFERS TO THE MOTIVE OF THE SEC, ITS OFFICERS AND EMPLOYEES: WHETHER THERE WAS AN HONEST INTENTION THAT THE ATTEMPT TO GAIN ACCESS TO FINANCIAL RECORDS FURTHER A LAWFUL SEC INVESTIGATION. ATTEMPTS TO GAIN RECORDS FOR PERSONAL GAIN OR HARRASSMENT PURPOSES, FOR EXAMPLE, WOULD NOT BE IN "GOOD FAITH."

B. INJUNCTIONS

THE RFPA BROADLY STATES THAT INJUNCTIVE RELIEF IS AVAILABLE TO ENSURE COMPLIANCE WITH THE STATUTE:

"IN ADDITION TO ANY OTHER REMEDY CONTAINED IN THIS TITLE, INJUNCTIVE RELIEF SHALL BE AVAILABLE TO REQUIRE THAT THE PROCEDURES OF THIS TITLE ARE COMPLIED WITH. IN THE EVENT OF ANY SUCCESSFUL ACTION, COSTS TOGETHER WITH REASONABLE ATTORNEY'S FEES AS DETERMINED BY THE COURT MAY BE RECOVERED." 12 U.S.C. SEC. 3418.

IT WOULD APPEAR, THEREFORE, THAT WHEN A COURT FINDS THAT AN AGENCY HAS ACQUIRED FINANCIAL RECORDS WITHOUT COMPLYING WITH THE RFPA, IT MIGHT ENJOIN THE AGENCY FROM USING THOSE RECORDS IN ITS INVESTIGATION OR PROCEEDING. SUCH A RESULT, HOWEVER, IS UNLIKELY UNDER PUBLIC LAW 96 433. FIRST, THE STATUTE PROVIDES:

"UPON A FINDING THAT THE COMMISSION HAS OBTAINED FINANCIAL RECORDS OR INFORMATION CONTAINED THEREIN IN VIOLATION OF THIS SUBSECTION ***, THE COURT, IN ITS DISCRETION, MAY ALSO OR IN THE ALTERNATIVE ISSUE INJUNCTIVE RELIEF TO REQUIRE THE COMMISSION TO COMPLY WITH THIS SUBSECTION WITH RESPECT TO ANY SUBPENA WHICH THE COMMISSION ISSUES IN THE FUTURE FOR FINANCIAL RECORDS OF SUCH CUSTOMER FOR PURPOSES OF THE SAME INVESTIGATION." 15 U.S.C.A. SEC. 78UH)(7)(B).

FURTHER ON, PUBLIC LAW 96-433 APPEARS TO AUTHORIZE SEC'S USE OF ANY INFORMATION WHICH IT HAS ACQUIRED IN VIOLATION OF EITHER THE RFPA OR PUBLIC LAW 96 433:

"NOTHING HEREIN OR IN THE RIGHT TO FINANCIAL PRIVACY ACT OF 1978 SHALL BE DEEMED TO PROHIBIT THE USE IN ANY INVESTIGATION OR PROCEEDING OF FINANCIAL RECORDS, OR THE INFORMATION CONTAINED THEREIN, OBTAINED BY A SUBPOENA ISSUED BY THE COMMISSION." U.S.C.A. SEC. 78UH)(8).

THIS PROVISION OF PUBLIC LAW 96-433 APPLIES EVEN WHEN THE SEC HAS CHOSEN TO OPERATE UNDER THE RFPA.

C. COSTS AND ATTORNEY'S FEE'S

UNDER THE CIVIL PENALTIES PROVISION OF THE RFPA, COSTS AND REASONABLE ATTORNEY'S FEES ARE AVAILABLE TO ANY CUSTOMER WHO BRINGS A SUCCESSFUL ACTION FOR DAMAGES OR AN INJUNCTION. 12 U.S.C. SECS. 3417, 3418. PUBLIC LAW 96-433, HOWEVER, IS MORE RESTRICTIVE.

UNLIKE THE RFPA, PUBLIC LAW 96-433 DOES NOT SPECIFICALLY PERMIT A PLAINTIFF TO RECOVER COSTS AND ATTORNEY'S FEES IN A SUCCESSFUL ACTION FOR AN INJUNCTION. SEE 15 U.S.C.A. SEC. 78UH)(7)(B). A PLAINTIFF WHO BRINGS A SUCCESSFUL ACTION FOR DAMAGES MAY ONLY RECOVER COSTS AND ATTORNEY'S FEES WHEN THERE HAS BEEN A FINDING THAT THE SEC HAD ACTED IN A WILLFUL AND INTENTIONAL MANNER AND "WITHOUT GOOD FAITH." 15 U.S.C.A. SEC. 78U (H)(7)(A). FN12

ONE OTHER PROVISION RELATING TO COSTS AND ATTORNEYS FEES IS ALSO SIGNIFICANT. UNDER PUBLIC LAW 96-433, IF AN ACTION FOR DAMAGES OR INJUNCTION BY A CUSTOMER AGAINST THE SEC IS UNSUCCESSFUL,

"*** THE COURT SHALL AWARD THE COSTS OF THE ACTION AND ATTORNEY'S FEES TO THE COMMISSION IF THE PRESIDING JUDGE OR MAGISTRATE FINDS THAT THE CUSTOMER'S CLAIMS WERE MADE IN BAD FAITH." 15 U.S.C.A. SEC. 78UH)(8).

THE TERM "BAD FAITH" IS DESCRIBED IN THE LEGISLATIVE HISTORY OF PUBLIC LAW 96-433 AS REFERRING TO THOSE CLAIMS FOUND BY THE COURT TO BE FRIVOLOUS OR BROUGHT FOR THE PURPOSES OF OBSTRUCTION OR DELAY. H.R.REP. NO. 96-1321, AT 10 (1980). SUCH PROVISION EXISTS UNDER THE RFPA. SUBSECTION 78UH)(8) DEPARTS FROM THE GENERAL RULE UNDER THE SECURITIES LAWS THAT THE SEC MAY NOT BE AWARDED COSTS OF UNSUCCESSFUL PROCEEDINGS. FN13 BECAUSE OF ITS LIMITATION TO SITUATIONS WHERE THERE HAS BEEN A FINDING OF BAD FAITH, THERE SHOULD BE NO GREAT EFFECT ON BONA FIDE CHALLENGES TO SEC ACTIONS. THE MAJOR EFFECT OF THIS PROVISION SHOULD BE TO DISCOURAGE IMPROPER USE OF LITIGATION TO DELAY SEC INVESTIGATIONS, ONE OF THE PRINCIPAL REASONS FOR THE ENACTMENT OF PUBLIC LAW 96-433. SEE H.R.REP. NO. 96-1321, AT 4 (1980).

D. DISCIPLINARY ACTIONS

UNDER SECTION 1117 OF THE RFPA, WHENEVER A COURT DETERMINES THAT AN AGENCY HAS VIOLATED THE RECORD ACCESS REQUIREMENTS OF THE STATUTE AND THERE IS A QUESTION OF WHETHER AN OFFICER OR EMPLOYEE ACTED "WILLFULLY OR INTENTIONALLY" WITH RESPECT TO THE VIOLATION, THE OFFICE OF PERSONNEL MANAGEMENT (OPM) SHALL

"*** PROMPTLY INITIATE A PROCEEDING TO DETERMINE WHETHER DISCIPLINARY ACTION IS WARRANTED AGAINST THE AGENT OR EMPLOYEE WHO WAS PRIMARILY RESPONSIBLE FOR THE VIOLATION. OPM AFTER INVESTIGATION AND CONSIDERATION OF THE EVIDENCE SUBMITTED, SHALL SUBMIT ITS FINDINGS AND RECOMMENDATIONS TO THE ADMINISTRATIVE AUTHORITY OF THE AGENCY CONCERNED AND SHALL SEND COPIES OF THE FINDINGS AND RECOMMENDATIONS TO THE OFFICER OR EMPLOYEE OR HIS REPRESENTATIVE. THE ADMINISTRATIVE AUTHORITY SHALL TAKE THE CORRECTIVE ACTION THAT OPM RECOMMENDS." 12 U.S.C. SEC. 3417(B).

PUBLIC LAW 96-433 CONTAINS A PROVISION WHICH IS IDENTICAL EXCEPT AS TO ONE POINT. UNDER THIS PROVISION, THE OFFICE OF PERSONNEL MANAGEMENT IS TO CONDUCT AN INVESTIGATION ONLY UPON A COURT'S DETERMINATION THAT THERE IS A QUESTION OF WHETHER AN SEC OFFICER OR EMPLOYEE ACTED IN A "WILLFUL AND INTENTIONAL MANNER AND WITHOUT GOOD FAITH." 15 U.S.C.A. SEC. 78UH)(7)(C).

AS IS THE CASE WITH PUNITIVE DAMAGES, THE REQUIREMENT THAT THE ACTION HAVE BEEN BOTH INTENTIONAL AND WILLFUL, AND THE ADDITIONAL REQUIREMENT THAT THE OFFICIAL INVOLVED ACTED WITHOUT GOOD FAITH, ARE SIGNIFICANT CHANGES. FN14 ALTHOUGH THESE TERMS ARE AGAIN UNDEFINED, IT IS LIKELY THAT THEY WILL RESTRICT THE USE OF THIS ADMINISTRATIVE SANCTION TO FAIRLY EXTREME CASES, WHERE THE OFFICER OR EMPLOYEE ACTED IN OTHER THAN AN HONEST BELIEF THAT HIS ACTIONS WERE TO FURTHER A LAWFUL SEC INVESTIGATION.

TO SUMMARIZE, IN THE EVENT THE SEC UNLAWFULLY OBTAINS A CUSTOMER'S FINANCIAL RECORDS, THE CIVIL PENALTIES AND SANCTIONS AVAILABLE AGAINST THE SEC UNDER PUBLIC LAW 96-433 ARE SIGNIFICANTLY MORE LIMITED THAN THOSE AVAILABLE UNDER THE RFPA. THE RFPA PROVIDES FOR THE AWARD OF ANY ACTUAL DAMAGES SUSTAINED BY THE CUSTOMER AS A RESULT OF THE DISCLOSURE. UNDER PUBLIC LAW 96-433 ORDINARY DAMAGES ARE LIMITED TO OUT-OF-POCKET LOSSES. PUNITIVE DAMAGES AND DISCIPLINARY SANCTIONS ARE ONLY AVAILABLE UPON A SHOWING THAT A VIOLATION WAS WILLFUL, INTENTIONAL AND WITHOUT GOOD FAITH, IN CONTRAST WITH THE "INTENTIONAL" CONDUCT STANDARD OF THE RFPA. INJUNCTIVE RELIEF UNDER PUBLIC LAW 96-433 IS LIMITED TO FUTURE SEC RECORD- ACCESS PROCEEDINGS; THE RFPA CONTAINS NO SUCH LIMITATION. IN ADDITION, COSTS AND ATTORNEY'S FEES ARE ONLY AUTHORIZED BY PUBLIC LAW 96-433 IF THE SEC'S CONDUCT WAS WILLFUL, INTENTIONAL AND WITHOUT GOOD FAITH; UNDER THE RFPA THEY MAY BE AWARDED IN ANY SUCCESSFUL ACTION FOR DAMAGES OR AN INJUNCTION.

3. SEC TRANSFER OF RECORDS TO OTHER AGENCIES:

UNDER SECTION 1112 OF THE RFPA, FINANCIAL RECORDS OBTAINED UNDER THE STATUTE MAY NOT BE TRANSFERED TO ANY OTHER AGENCY UNLESS THE TRANSFERRING AGENCY CERTIFIES IN WRITING THAT THERE IS REASON TO BELIEVE THAT THE RECORDS ARE RELEVANT TO A "LEGITIMATE AGENCY OR DEPARTMENT." 12 U.S.C. SEC. 3412(A). ADDITIONALLY, NOTICE OF THE TRANSFER MUST BE GIVEN TO THE CUSTOMER WITHIN 14 DAYS, OR UPON THE EXPIRATION OF ANY APPLICABLE 90 DAY RENEWABLE PERIOD AUTHORIZED UNDER THE DELAYED NOTICE PROVISIONS OF THE ACT. ID., SECS. 3412(B)-(C).

THE FIRST PROVISION OF PUBLIC LAW 96-433 PERTAINING TO TRANSFERES OF RECORDS PROVIDES THAT WHEN THE SEC OPERATES UNDER THE TRANSFER OF RECORDS PROVISION OF THE RFPA, NOTICE TO THE CUSTOMER OF SUCH A TRANSFER MAY BE FURTHER DELAYED UPON AN EX PARTE SHOWING BY THE SEC THAT ONE OR MORE OF THE ALTERNATIVE DELAYED NOTICE PROVISIONS OF PUBLIC LAW 96-433 APPLY. U.S.C.A. SEC. 78UH) (9)(A). THIS EX PARTE SHOWING IS IDENTICAL TO THAT REQUIRED OF THE SEC IN AN INITIAL PROCEEDING TO ACQUIRE RECORDS WITHOUT PRIOR NOTICE. SEE H.R.REP. NO. 96-1321, AT 11 (1980).

THE OTHER PROVISION OF PUBLIC LAW 96-433 PERTAINING TO TRANSFERES OF RECORDS PERMITS THE SEC TO TRANSFER FINANCIAL RECORDS OR INFORMATION TO THE DEPARTMENT OF JUSTICE OR TO STATE SECURITIES AGENCIES WITHOUT HAVING TO FOLLOW THE RECORDS TRANSFER REQUIREMENTS OF THE RFPA. THE SEC NEED NOT SHOW THAT THE TRANSFER IS PURSUANT TO A "LEGITIMATE LAW ENFORCEMENT INQUIRY," AS REQUIRED UNDER THE RFPA. NEITHER MUST THE SEC MAKE THE EX PARTE SHOWING REQUIRED UNDER THE FIRST RECORDS TRANSFER PROVISION OF PUBLIC LAW 96-433. 15 U.S.C.A. SEC. 78UH)(9)(B). THE ONLY LIMITATION ON THE SEC'S ABILITY TO TRANSFER RECORDS TO THE JUSTICE DEPARTMENT OR STATE SECURITIES AGENCIES IS THAT THE PURPOSE FOR WHICH THE TRANSFER IS SOUGHT MUST "ARISE OUT OF" OR RELATE TO THE SAME ACTS, PRACTICES, OR COURSES OF CONDUCT INVESTIGATED BY THE SEC. ID. FN15

TO SUMMARIZE, THE RECORDS TRANSFER PROVISIONS OF PUBLIC LAW 96-433 EXPAND THOSE OF THE RFPA IN TWO WAYS. FIRST, THEY PERMIT THE RECEIVING AGENCY OR THE SEC TO TAKE ADVANTAGE OF THE EXPANDED DELAYED NOTICE PROVISIONS AVAILABLE UNDER PUBLIC LAW 96-433. SECOND, THEY PROVIDE WHAT AMOUNTS TO A LIMITED EXCEPTION TO THE CUSTOMER NOTICE REQUIREMENTS IMPOSED BY THE RFPA WHERE THE RECEIVING AGENCY IS THE DEPARTMENT OF JUSTICE OR A STATE SECURITIES AGENCY AND THE RECORDS ARE SOUGHT IN AN INVESTIGATION ARISING OUT OF THE SAME CONDUCT. PRESUMABLY, MOST CASES WHERE THE SEC HAS AN INTEREST IN TRANSFERRING FINANCIAL RECORDS WOULD FIT INTO THIS EXCEPTION.

CONCLUSION

ALTHOUGH THE SEC IS NOW SUBJECT TO THE REQUIREMENTS OF THE RFPA, NEW PROCEDURES MADE AVAILABLE UNDER PUBLIC LAW 96-433 GUARANTEE THAT, WHEN THE SEC CHOOSES TO DO SO, IT MAY AVOID MANY OF THE RESTRICTIONS OF THE RFPA. MOST IMPORTANT ARE THE ACCESS TO RECORDS PROVISIONS OF PUBLIC LAW 96-433, WHICH PROVIDE THE SEC WITH AN EXPANDED LIST OF SITUATIONS WHERE NOTICE TO BANK CUSTOMERS MAY BE DELAYED. ALSO SIGNIFICANT ARE THE LIMITATIONS WHICH HAVE BEEN PLACED ON THE REMEDIES AVAILABLE TO CUSTOMERS WHOSE RECORDS HAVE BEEN ACQUIRED IN VIOLATION OF THE STATUTORY REQUIREMENTS. FINALLY, RESTRICTIONS ON TRANSFERS OF RECORDS TO THE DEPARTMENT OF JUSTICE AND STATE SECURITIES AGENCIES HAVE BEEN LOOSENED.

FN1 "CUSTOMER" IS DEFINED AS ANY INDIVIDUAL OR PARTNERSHIP OF FIVE PERSONS OR LESS (OR REPRESENTATIVE OF SUCH AN INDIVIDUAL OR PARTNERSHIP) UTILIZING ANY SERVICE OF A FINANCIAL INSTITUTION. 12 U.S.C. SEC. 3401(5).

FN2 FOR EXAMPLE, SECTION 21(B) OF THE SECURITIES AND EXCHANGE ACT OF 1934 STATES:

"FOR THE PURPOSE OF ANY *** INVESTIGATION, OR ANY OTHER PROCEEDING UNDER THIS CHAPTER, ANY MEMBER OF THE COMMISSION OR ANY OFFICER DESIGNATED BY IT IS EMPOWERED TO ADMINISTER OATHS AND AFFIRMATIONS, SUBPOENA WITNESSESS, COMPEL THEIR ATTENDANCE, TAKE EVIDENCE, AND REQUIRE THE PROCUCTION OF ANY BOOKS, PAPERS, CORRESPONDENCE, MEMORANDA, OR OTHER RECORDS WHICH THE COMMISSION DEEMS RELEVANT OR MATERIAL TO THE INQUIRY." 15 U.S.C. SEC. 78UB).

FN3 ANOTHER VIEW OF THE BASIS FOR THE EXEMPTION WAS GIVEN BY CONGRESSMAN ROUSSELOT:

"*** THE SECURITIES AND EXCHANGE COMMISSION CLAIMED THAT IT COULD NOT LIVE WITH THE BILL, AND I BELIEVE IT IS FAIR TO SAY THAT THE SEC THREATENED TO KILL THE BILL IF IT WERE NOT GRANTED AN EXEMPTION. *** IN ORDER TO DIFFUSE THE SEC'S OBJECTIONS TO THE BILL, IT WAS AGREED THAT THE SEC WOULD ENJOY A 2-YEAR EXEMPTION FROM THE ACT ***." 126 CONG.REC. H9326 (DAILY ED. SEPT. 22, 1980). FN4 A LEGITIMATE "LAW ENFORCEMENT INQUIRY" MEANS: "*** A LAWFUL INVESTIGATION OR OFFICIAL PROCEEDING INQUIRING INTO A VIOLATION OF, OR FAILURE TO COMPLY WITH, ANY CRIMINAL OR CIVIL STATUTE OR ANY REGULATION, RULE, OR ORDER ISSUED PURSUANT THERETO." U.S.C. SEC. 3401(7).

THIS LANGUAGE IS INTENDED TO IMPOSE A LOWER STANDARD THAN PROBABLE CAUSE. H.R.REP. NO. 95-1383, AT 51 (1978). THUS, IN THE CASE OF THE SEC, ANY LEGITIMATE INQUIRY REGARDING POTENTIAL VIOLATIONS OF THE SECURITIES LAWS OR SEC REGULATIONS WOULD COMPLY WITH THIS REQUIREMENT. FN5 THIS TERM IS NOT DEFINED EITHER IN THE RFPA OR ITS LEGISLATIVE HISTORY. IT IS, HOWEVER, SIMILAR TO THE TERM "REASONABLY DESCRIBED", INTENDED TO MEAN "AS SPECIFICALLY AS POSSIBLE." H.R.REP. NO. 95-1383, AT 50 (1978). IN HUNT, ET AL. V. SECURITIES AND EXCHANGE COMMISSION, 520 F.SUPP. 580 (N.D.TEX. 1981), ENJOINING THE SEC FROM FURTHER VIOLATIONS OF THE RFPA, THE COURT FOUND THAT THE SEC HAD FAILED TO DESCRIBE WITH "REASONABLE SPECIFICITY" THE NATURE OF ITS LAW ENFORCEMENT INQUIRY, AS REQUIRED BY SECTION 1105 OF THE RFPA. ID. AT 604. BECAUSE THE CUSTOMER HAD ACTUAL KNOWLEDGE, HOWEVER, THIS WAS DEEMED TO BE A TECHNICAL VIOLATION ONLY, AND THE COURT'S INJUNCTION WAS BASED UPON OTHER GROUNDS.

AN IDENTICAL REQUIREMENT EXISTS IN PUBLIC LAW 96-433. ACCORDING TO THE DRAFTERS OF THAT STATUTE, THIS REQUIREMENT "SHOULD NOT BE CONSTRUED TO COMPEL THE COMMISSION TO MAKE OUT ITS CASE IN CHIEF AT THE INVESTIGATORY STAGE." H.R.REP. NO. 96-1321, AT 9 (1980).

FN6 FOR EXAMPLE, PRIOR NOTICE IS NOT REQUIRED FOR SECRET SERVICE AND FOREIGN INTELLIGENCE INVESTIGATIONS (NO NOTICE), OR IMMEDIATE DANGER OF INJURY TO PERSONS OR PROPERTY (DELAYED NOTICE). 12 U.S.C. SEC. 3414.

FN7 THERE IS NO CONFERENCE REPORT ON H.R. 7939, THE SENATE HAVING PASSED THE BILL WITHOUT AMENDMENT. SEE 126 CONG.REC. S13450 (DAILY ED. SEPT. 25, 1980). THERE WERE ALSO NO HEARINGS ON THE ISSUE OF THE SEC'S NEED FOR SPECIAL CUSTOMER ACCOUNT ACCESS PROCEDURES, A FACT STRONGLY CRITICIZED DURING DEBATE IN THE HOUSE. SEE 126 CONG.REC. H9326 (DAILY ED. SEPT. 22, 1980) (REMARKS OF REPRESENTATIVE ROUSSELOT).

FN8 ACCORDING TO THE HOUSE REPORT ON H.R. 7939, THIS FIRST SET OF DELAYED NOTICE PROVISIONS WAS CONTEMPLATED BY THE COMMITTEE TO APPLY TO "TIME IS OF THE ESSENCE" SITUATIONS. H.R.REP. NO. 96-1321, AT 6-7 (1980).

FN9 17 C.F.R. SEC. 240.10B-5 (1980), IMPLEMENTING THE ANTIFRAUD PROVISIONS OF SEC. 10(B) OF THE SECURITIES EXCHANGE ACT OF 1934, 15 U.S.C. SEC. 78(B). ALSO COVERED WOULD BE INVESTIGATIONS UNDER THE ANTIFRAUD PROVISIONS OF SEC. 17 OF THE SECURITIES ACT OF 1933, 15 U.S.C. SEC. 77G.

FN10 NONETHELESS, IF THE INVESTIGATION ALSO INVOLVES TRACING THE BENEFICIAL OWNERSHIP OF SECURITIES, OR DISSEMINATION OF MATERIALLY FALSE OR MISLEADING INFORMATION (OR FAILURE TO MAKE REQUIRED DISCLOSURES), DELAYED NOTICE MIGHT BE PERMITTED UNDER OTHER SECTIONS OF PUBLIC LAW 96-433. SEE DISCUSSION ABOVE.

FN11 THIS DISCRETIONARY LANGUAGE DIFFERS FROM THAT OF THE RFPA. COMPARE 15 U.S.C.A. SEC. 78UH)(7)(A) (" *** JUDGE OR MAGISTRATE *** MAY ORDER ***") WITH 12 U.S.C. SEC. 3417(A) ("*** AGENCY IS LIABLE ***"). IT IS QUESTIONABLE, HOWEVER, WHETHER THIS CHANGE WOULD AFFECT A COURT'S DECISION REGARDING THE SEC'S LIABILITY FOR DAMAGES.

FN12 THIS IS THE SAME STANDARD AS FOR DETERMINING WHETHER PUNITIVE DAMAGES ARE AVAILABLE AGAINST THE SEC. SEE DISCUSSION ABOVE.

FN13 SEE, E.G., 15 U.S.C. SECS. 77V, 78AA (1976). IT SHOULD BE NOTED, HOWEVER, THAT COSTS ARE GENERALLY NOT AWARDED AGAINST THE SEC EITHER. ID.

FN14 SEE DISCUSSION ABOVE.

FN15 ONCE HAVING ACQUIRED THE RECORDS, HOWEVER, THE JUSTICE DEPARTMENT OR STATE SECURITIES AGENCY MAY DISCLOSE OR USE THE RECORDS FOR ANY OTHER PURPOSE, SO LONG AS NOTICE IS GIVEN TO THE CUSTOMER WITHIN A 30-DAY PERIOD, OR WITHIN ANY PERIOD APPLICABLE UNDER THE DELAYED NOTICE PROVISIONS OF THE RFPA. SEE 15 U.S.C.A. SEC. 78UH)(9)(B).