Does FOIA Foil the SEC's Intent to Keep Investigations Confidential?

Abstract

The Securities Exchange Commission (SEC) has a long-standing policy to keep formal investigations confidential. In this study, we examine the extent to which compliance with the Freedom of Information Act (FOIA) provides investors with information about on-going SEC investigations. We exploit a unique empirical setting whereby the SEC denies FOIA requests due to ongoing enforcement proceedings (hereafter, exemption denials). We find that exemption denials predict a substantial number of ongoing and future SEC investigations. Exemption denials are also associated with significant negative future abnormal returns, which is consistent with exemption denials providing a noisy public signal that allows certain sophisticated investors to earn future abnormal returns. Overall, our findings suggest that information transparency laws, such as FOIA, have the potential to limit the SEC’s ability to maintain effective and confidential investigations.

Keywords: SEC Investigations, Freedom of Information Act, Exemption Denials

JEL Classification: G18, K22, M48