Exempting the Records of the SEC Fraud Surveillance Team from Reporting Obligations in the Privacy Act

Exempting the Records of the SEC Fraud Surveillance

Team from Reporting Obligations in the Privacy Act

The Securities and Exchange Commission is authorized by 5 U.S.C. § 522a( j )(2) of the

Privacy Act to exempt the records of the proposed Fraud Surveillance Team from re-

porting obligations in 5 U.S.C. § 552a(e)(3) of the Act.

July 3, 2012

MEMORANDUM OPINION FOR THE GENERAL COUNSEL

SECURITIES AND EXCHANGE COMMISSION

You have requested the views of this Office on whether the Securities

and Exchange Commission (“SEC” or “Commission”) may invoke the

authority provided by 5 U.S.C. § 522a( j )(2) of the Privacy Act to exempt

a proposed SEC special unit from reporting obligations imposed by

5 U.S.C. § 552a(e)(3) of the Act. See Letter for Virginia A. Seitz, Assis-

tant Attorney General, Office of Legal Counsel (“OLC”), from Mark D.

Cahn, General Counsel, SEC at 1 (Dec. 5, 2011) (“Request Letter”).

You explained that SEC staff is contemplating recommending to the

Commission that it authorize the creation of a special unit within the

SEC, to be called the Fraud Surveillance Team (“FST”), which would

investigate criminal violations of federal securities laws. To facilitate the

FST’s efforts, the staff may recommend that the Commission invoke

5 U.S.C. § 552a( j )(2), which permits an agency to promulgate a rule

exempting certain records systems connected with criminal law enforce-

ment from some of the Privacy Act’s requirements. Doing so would

allow the Commission to exempt the FST’s records of its investigations

from the reporting requirements of section 552a(e)(3), which generally

requires agencies seeking information from the public to inform those

from whom the information is sought of the authority for collecting the

information, the uses to which it will be put, and the consequences of not

providing it. Id.

We previously advised informally that section 552a( j )(2) authorizes the

Commission to exempt the FST’s record system from section 552a(e)(3).

See E-mail for Mark D. Cahn, General Counsel, SEC, from Matthew D.

Roberts, Senior Counsel, OLC, Re: OLC’s Informal Advice Regarding

Your Privacy Act Inquiry of December 5, 2011 (Feb. 6, 2012, 5:42 PM).

This memorandum memorializes that prior advice. Cf. Letter for Virginia

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Exempting the Records of the SEC Fraud Surveillance Team from the Privacy Act

A. Seitz, Assistant Attorney General, OLC, from Mark D. Cahn, General

Counsel, SEC at 1 (Apr. 6, 2012) (requesting written opinion). 1

I.

The Privacy Act sets forth certain requirements governing the collec-

tion, maintenance, use, and dissemination of personal information by

federal Executive Branch agencies, see S. Rep. No. 93-1183, at 1 (1974);

H.R. Rep. No. 93-1416, at 2 (1974), including independent agencies such

as the SEC, see 5 U.S.C. §§ 552a(a)(1), 552(f)(1) (2006). At issue here is

the requirement set forth in section 552a(e)(3), which provides that

[e]ach agency that maintains a system of records shall . . . inform

each individual whom it asks to supply information [of] . . . (A) the

authority . . . which authorizes the solicitation of the information and

whether disclosure of such information is mandatory or voluntary;

(B) the principal purpose or purposes for which the information is

intended to be used; (C) the routine uses which may be made of the

information . . . ; and (D) the effects on [the individual], if any, of

not providing all or any part of the requested information.

The Act also provides agency heads with the authority to exempt cer-

tain systems of records from section 552a(e)(3) and other Privacy Act

requirements. Most relevant here is section 552a( j )(2), which provides

that

[t]he head of any agency may promulgate rules, in accordance with

the requirements [for notice-and-comment rulemaking of the Admin-

istrative Procedure Act (“APA”), 5 U.S.C. § 553(b), (c) (2006)], to

exempt any system of records within the agency from any part of

[the Privacy Act] except [5 U.S.C. § 552a](b), (c)(1) and (2),

(e)(4)(A) through (F), (e)(6), (7), (9), (10), and (11), and (i) if the

system of records is . . . maintained by an agency or component

thereof which performs as its principal function any activity pertain-

1 In preparing this opinion, we sought the views of the Office of Management and

Budget (“OMB”), which is charged with “prescrib[ing] guidelines and regulations for the

use of agencies in implementing the provisions of” the Privacy Act and “provid[ing]

continuing assistance to and oversight of the implementation of” the Act “by agencies.”

5 U.S.C. § 552a(v). OMB indicated that it had no objections to the informal advice we

previously provided to you.

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36 Op. O.L.C. 186 (2012)

ing to the enforcement of criminal laws, including police efforts to

prevent, control, or reduce crime or to apprehend criminals, and the

activities of prosecutors, courts, correctional, probation, pardon, or

parole authorities, and which consists of . . . information compiled

for the purpose of a criminal investigation, including reports of in-

formants and investigators, and associated with an identifiable indi-

vidual.

As you explained in the Request Letter (at 2 & nn.2–3), the SEC is au-

thorized to investigate all conduct that may violate the federal securities

laws, and every “willful” violation of those laws constitutes a criminal

offense. See 15 U.S.C. § 77t(a) (2006) (authority to investigate potential

violations of the Securities Act of 1933); 15 U.S.C. § 78u(a)(1) (Supp. IV

2010) (same for the Securities Exchange Act of 1934); 15 U.S.C. § 80a-

41(a) (2006) (same for the Investment Company Act of 1940); 15 U.S.C.

§ 80b-9(a) (2006) (same for the Investment Advisers Act of 1940);

15 U.S.C. § 77x (2006) (criminal penalty for willful violation of the

Securities Act); 15 U.S.C. § 78ff (2006) (same for the Securities Ex-

change Act); 15 U.S.C. § 80a-48 (2006) (same for the Investment Com-

pany Act); 15 U.S.C. § 80b-17 (2006) (same for the Investment Advisers

Act). Although the SEC may investigate conduct that it suspects is crimi-

nal and may take action to remedy civil violations, the Commission

cannot prosecute criminal violations. Instead, if the SEC finds evidence

of a potential criminal violation, the Commission is authorized to trans-

mit that evidence to the Department of Justice (“DOJ”) or other crimi-

nal authorities, as appropriate, for possible criminal prosecution. See

15 U.S.C. § 77t(b) (2006) (Securities Act); 15 U.S.C. § 78u(d)(1) (2006)

(Securities Exchange Act); 15 U.S.C. § 80a-41(d) (2006) (Investment

Company Act); 15 U.S.C. § 80b-9(d) (2006) (Investment Advisers Act);

Request Letter at 2, 3, 6; see generally SEC v. Dresser Indus., Inc., 628

F.2d 1368, 1376 –77 (D.C. Cir. 1980) (describing SEC’s role in investi-

gating possible criminal violations of the securities laws and making

referrals to DOJ).

To enhance the Commission’s ability to identify, investigate, and facil-

itate prosecution of criminal violations of the securities laws, SEC staff is

considering recommending the creation of the Fraud Surveillance Team.

The FST’s primary mission would be to identify ongoing criminal viola-

tions of the federal securities laws, to develop evidence of such viola-

tions, and to refer that evidence to criminal law enforcement authorities

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Exempting the Records of the SEC Fraud Surveillance Team from the Privacy Act

for further investigation and possible criminal prosecution. Request

Letter at 3. SEC staff contemplates that a significant part of the FST’s

investigative efforts would involve contacting individuals suspected of

conducting criminal securities fraud schemes through e-mail, mail, or

telephone. Id. at 3–4. FST investigators would pose as potential investors

in the schemes and seek information from the promoters in an attempt to

develop evidence to support criminal prosecutions. Id. at 4.

A cadre of SEC staff members would be designated to serve on the FST

and would be specially trained and separately supervised in connection

with their FST activities. Request Letter at 4–5. 2 The FST would under-

take an investigation only if its staff had a bona fide basis to believe that

the targets were engaged in conduct amounting to a criminal violation of

one of the securities laws. Id. at 4. The FST would maintain the infor-

mation that it collected in its investigations in a separate system of rec-

ords, which would not be utilized for other purposes and would not be

generally accessible to Commission staff performing non-FST duties. Id.

at 5; E-mail for Matthew D. Roberts, Senior Counsel, OLC, from George

S. Canellos, Director, New York Regional Office, SEC (Dec. 22, 2011,

5:02 PM) (“Follow-up E-mail”). Limited, summary information in the

FST records system—for example, a description of the general nature of

the information that prompted the investigation, the persons or entities

contacted, and the other investigative steps taken—would, however,

subsequently be recompiled into another SEC records system or systems,

which would be more broadly available to Commission staff. Request

Letter at 5 & n.9; Follow-up E-mail.

2 At least initially, the members of the FST would be drawn from the enforcement and

inspection staffs of the Commission’s New York and Miami Regional Offices. Because

their duties for the FST probably would not require all of their time, FST staff members

would also continue to perform their existing enforcement and inspection duties on a part-

time basis. Those duties would not, however, include work on any civil investigation that

arose from or related to evidence gathered by the FST. FST staff members would be under

the immediate supervision of individuals at the level of Assistant Director in the SEC’s

Enforcement Division, who also would not participate in or supervise any civil investiga-

tion that arose from or related to evidence gathered by the FST. Those supervisors would,

in turn, be subject to supervision by the directors of the New York and Miami Regional

Offices, who currently are former federal prosecutors. See Request Letter at 4–5 & n.8;

E-mail for Matthew D. Roberts, Senior Counsel, OLC, from Brian A. Ochs, Counsel to

the General Counsel, SEC (Mar. 5, 2012, 12:27 PM).

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36 Op. O.L.C. 186 (2012)

When conducting an investigation, FST staff would consult on a regu-

lar basis with DOJ, as well as relevant state or local prosecutors, and

those criminal law enforcement authorities would have continuous and

open access to the FST’s records system. Request Letter at 4; Follow-up

E-mail. The FST would generally make a referral to criminal authorities at

the conclusion of its investigation if it determined that sufficient grounds

existed for criminal prosecution. Request Letter at 4. Civil enforcement

staff at the SEC would neither participate in FST investigations nor have

standing access to FST records. Follow-up E-mail. 3 Although the FST

would be able to make referrals to civil enforcement staff, the FST would

do so only after completing its criminal investigation; and, after a referral,

the FST would not undertake any further investigation. Id.; Request Letter

at 4.

II.

As you explained in the Request Letter, SEC staff believes that the un-

dercover operations described above would be impeded if FST members

had to identify themselves as associated with the SEC and provide the

notifications required by section 552a(e)(3) when contacting individuals

suspected of fraud. Request Letter at 1, 4. In your view, section 552a( j )(2)

of the Privacy Act authorizes the Commission to exempt the FST’s system

of records from section 552a(e)(3), thus relieving FST investigators of the

obligation to provide the targets of their investigations with the notifica-

tions specified in that provision. Request Letter at 5–8. We agree. 4

3 As discussed in note 2, some FST staff members would also independently perform

civil enforcement duties unrelated to their work on the FST. In this opinion, we use the

term “civil enforcement staff” to refer to enforcement staff members while they are in the

course of performing civil enforcement duties.

4 The exemption in section 552a( j )(2) is not self-executing. As we explained in our

informal advice, the Privacy Act requires that the Commission satisfy certain procedural

requirements of the APA in order to invoke the exemption, and the Privacy Act itself

imposes additional procedural requirements. See E-mail for Mark D. Cahn, General

Counsel, SEC, from Matthew D. Roberts, Senior Counsel, OLC, Re: OLC’s Informal

Advice Regarding Your Privacy Act Inquiry of December 5, 2011 (Feb. 6, 2012, 5:42

PM); see generally 61 Fed. Reg. 6428, 6435–39 (Feb. 20, 1996) (OMB guidance discuss-

ing the Privacy Act’s publication and reporting requirements). Commission staff charged

with implementing the FST proposal would be required to ensure compliance with the

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Exempting the Records of the SEC Fraud Surveillance Team from the Privacy Act

A.

The proposal described in your letter satisfies the substantive require-

ments for the section 552a( j )(2) exemption, because (1) the FST would be

a separate “component” of the SEC; (2) the FST’s “principal function”

would be an “activity pertaining to the enforcement of criminal laws”; and

(3) the FST’s records system would “consist of . . . information compiled

for the purpose of a criminal investigation . . . and associated with an

identifiable individual.” 5 U.S.C. § 552a( j )(2). 5

1.

The Privacy Act does not define the term “component,” and we are

not aware of any other federal statute that specifies the characteristics

necessary for a subdivision of an agency to be considered a “compo-

nent.” The ordinary meaning of the word “component” is “a constituent

part.” Webster’s Third New International Dictionary 466 (1993) (“Web-

ster’s Third ”); The Random House Dictionary of the English Language

419 (2d ed. 1987) (“Random House”). The language of section 552a( j )(2),

however, suggests Congress had a particular type of component in mind.

By referring to an “agency or a component thereof” whose “principal

function” pertains to the enforcement of the criminal laws, section

552a( j )(2) suggests that a “component” must not only be a constituent

part of an agency but also have a “principal” function of its own, name-

ly engaging in the enforcement of criminal law. We believe that the FST

would satisfy these criteria and thus qualify as a “component” of the SEC.

The FST would have its own particular mission within the context of

the SEC as a whole. As we explain in more detail below, while the SEC

enforces the securities laws generally, the FST’s principal purpose would

be criminal investigation. In addition, the FST would have a designated

staff and an independent records system that would not be broadly acces-

applicable procedural requirements of the Privacy Act and the relevant portions of the

APA.

5 Your letter assumes that FST staff would be required to provide the section

552a(e)(3) notifications if the exemption were not invoked. See Request Letter at 3 &

n.6. We make the same assumption in this opinion. Other agencies engaged in similar

undercover activities have suggested that section 552a(e)(3) would not apply to such

activities, see id., but we have not considered the analyses of those agencies or as-

sessed their validity.

191

36 Op. O.L.C. 186 (2012)

sible to other SEC staff. Although FST staff would likely also perform

other duties within the agency, we do not believe that the part-time nature

of its staff would preclude the FST from qualifying as a “component,”

because the FST would have its own special function and would be an

official, enduring “constituent part” of the SEC.

Moreover, as an agency subdivision that specialized in investigative

activities, the FST would resemble several other agency units that courts

have treated as “components” under section 552a( j )(2). See, e.g., Seldo-

witz v. Office of the Inspector Gen., No. 00-1142, 2000 WL 1742098, at

*4, 238 F.3d 414 (Table) (4th Cir. Nov. 13, 2000) (Office of the Inspector

General (“OIG”) in the Department of State); Gowan v. U.S. Dep’t of the

Air Force, 148 F.3d 1182, 1189–90 (10th Cir. 1998) (Office of Special

Investigations in the Department of the Air Force); Carp v. Internal

Revenue Serv., No. 00-5992, 2002 U.S. Dist. LEXIS 2921, at *16–17

(D.N.J. Jan. 28, 2002) (Criminal Investigation Division in the Internal

Revenue Service (“IRS”)); Anderson v. U.S. Postal Serv., 7 F. Supp. 2d

583, 586 n.3 (E.D. Pa. 1998) (Postal Inspection Service in the U.S. Postal

Service), aff’d, 187 F.3d 625 (Table) (3d Cir. 1999). The FST would also

resemble other units that agencies have viewed as “components” in regu-

lations claiming the section 552a( j )(2) exemption. See, e.g., 32 C.F.R.

§ 701.128(m) (2011) (Naval Criminal Investigation Service in the De-

partment of the Navy); 40 C.F.R. § 16.11(c) (2011) (Criminal Investiga-

tion Division and National Enforcement Investigations Center in the

Office of Criminal Enforcement, Forensics, and Training of the Environ-

mental Protection Agency). 6

2.

We also conclude that the FST would have as its “principal function”

an “activity pertaining to the enforcement of criminal laws.” 5 U.S.C.

§ 552a( j )(2). The FST’s principal activities would be investigating poten-

6 We note that entities viewed as separate agency “components” are usually established

through some formal mechanism, such as an internal agency order. See, e.g., Chairman

Levitt Announces Two Initiatives to Improve Investor Protection, SEC News Release No.

95-50, 1995 WL 119773 (Mar. 22, 1995) (announcing SEC Chairman’s creation of the

Office of Compliance, Inspections, and Examinations). We therefore recommend that the

mechanism used to create the FST entail the same level of formality that the SEC general-

ly uses in creating Commission components.

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Exempting the Records of the SEC Fraud Surveillance Team from the Privacy Act

tial criminal violations of the securities laws, developing evidence of such

violations, and providing that evidence to the appropriate authorities for

possible criminal prosecution. Request Letter at 3. We need not decide

whether those activities would themselves constitute criminal law en-

forcement, because the section 552a( j )(2) exemption is applicable so long

as a component’s principal activities “pertain[] to” criminal law enforce-

ment. 5 U.S.C. § 552a( j )(2). Moreover, the statute makes clear that crimi-

nal law enforcement includes the “activities” of both “police” and “prose-

cutors.” Id.

The FST’s activities—the identification of potential criminals and the

development of the evidence necessary to prosecute them—clearly would

“pertain[] to” the activities of “police” and “prosecutors,” because the

FST’s investigative activities would assist police and prosecutors in

performing their law enforcement duties of conducting investigations and

bringing criminal prosecutions. Moreover, numerous courts have con-

cluded that other agency components that engage in similar investigative

activities qualify for the section 552a( j )(2) exemption. See, e.g., Seldo-

witz, 2000 WL 1742098, at *4 (State Department OIG); Gowan, 148 F.3d

at 1189–90 (Air Force Office of Special Investigations); Carp, 2002 U.S.

Dist. LEXIS 2921, at *16–17 (IRS Criminal Investigation Division);

Anderson, 7 F. Supp. 2d at 586 n.3 (Postal Inspection Service).

It is true that assistance to criminal law enforcement would not be the

FST’s only activity. After the FST completed a criminal investigation and

made any referrals to criminal law enforcement authorities that it consid-

ered appropriate, the FST could also make a referral to SEC civil en-

forcement staff. Request Letter at 4; Follow-up E-mail. The civil en-

forcement staff would then determine (possibly after further investigation

in which the FST would not participate) whether a civil enforcement

action was warranted. Follow-up E-mail. In our view, however, the pro-

spect that the FST might refer some matters for potential civil enforce-

ment does not undermine the conclusion that the FST’s “principal” func-

tion would be assisting criminal law enforcement. “Principal” means “first

or highest in rank, importance, value, etc.”; “chief”; or “foremost.” Ran-

dom House at 1539; see also Webster’s Third at 1802 (defining “princi-

pal” as “most important, consequential, or influential”). Assisting criminal

law enforcement would be the FST’s “chief” and “most important” func-

tion. The FST would only undertake an investigation if it had reason to

believe that the targets were engaged in criminal conduct. Request Letter

193

36 Op. O.L.C. 186 (2012)

at 4. Criminal law enforcement authorities would have an active and

ongoing role in the FST’s investigations and standing access to the FST’s

records system, but the SEC’s civil enforcement staff would not. Follow-

up E-mail. And the FST would refer matters for possible civil enforce-

ment actions only upon completion of its criminal investigations, after

which the FST would perform no further investigative activities. Id. 7

3.

We further believe that the FST’s records system would consist of “in-

formation compiled for the purpose of a criminal investigation” and

“associated with an identifiable individual.” 5 U.S.C. § 552a( j )(2)(B). As

discussed above, the records system would consist of files compiled by

the FST to carry out its principal function of investigating potential crimi-

nal violations of the securities laws, and the system would be directly

accessible only to FST staff (and their supervisors) for use in connection

with their criminal investigations, and to criminal law enforcement au-

thorities participating in those investigations. In our view, these circum-

stances suffice to establish that the information in the system would be

“compiled for the purpose of a criminal investigation.” Id. The infor-

mation in the system also would be “associated with an identifiable indi-

vidual,” id., because it would be associated with the individuals whom the

FST investigators contacted in the course of their criminal investigations.

In two limited circumstances, information in the FST’s records system

would be shared with others in the SEC for purposes other than criminal

investigation and enforcement: At the conclusion of the FST’s criminal

investigation, information that supported the existence of a civil violation

of the securities laws would sometimes be referred to the SEC’s civil

enforcement staff for possible further investigation and civil enforcement

action. See Request Letter at 4. In addition, a limited amount of summary

7 Given our conclusions that the FST’s principal function would be assisting criminal

law enforcement, and that any involvement in civil law enforcement would be only a

secondary function, we need not decide whether a component may have more than one

“principal function” within the meaning of section 552a( j )(2), or whether the exemption

applies when “only one of the [component’s] principal functions . . . [is] the investigation

of criminal conduct.” Alexander v. Internal Revenue Serv., No. 86-0414-LFO, 1987 WL

13958, at *4 (D.D.C. June 30, 1987); see Anderson v. Dep’t of the Treasury, No. 76-1404,

slip op. at 6 (D.D.C. filed July 19, 1977) (concluding that section 552a( j )(2) does not

apply in that circumstance).

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Exempting the Records of the SEC Fraud Surveillance Team from the Privacy Act

information from the FST’s system would be recompiled into a separate

records system that would be used by SEC staff for market monitoring

and civil enforcement. Id. at 5 & n.9; see Follow-up E-mail. In our view,

however, those additional uses of the information in the FST’s records

system would not alter the conclusion that the system would be compiled

for the purpose of criminal investigations. The FST system would be

created for criminal enforcement purposes, and the sharing of the data in

the system with civil enforcement staff would merely be incidental to, or

an ancillary consequence of, the system’s creation. In addition, section

552a( j )(2) does not state that the information must be compiled for the

“sole” or even “principal” purpose of a criminal investigation.

The Privacy Act as a whole supports our conclusion. The Act makes

clear that records eligible for the criminal law enforcement exemption

may be disclosed to others in the agency with a need for the records,

which would include SEC employees using the FST records for market

monitoring and civil law enforcement purposes. Section 552a( j )(2) indi-

cates that the provisions of the Privacy Act governing disclosure apply to

records that are eligible for the exemption. See 5 U.S.C. § 552a( j ) (listing

5 U.S.C. § 552a(b)(1)–(12), the Act’s disclosure provisions, as provisions

from which the records may not be exempted). The Act’s disclosure

provisions, in turn, state that records may be disclosed for a variety of

purposes, including “to those officers and employees of the agency which

maintains the record who have a need for the record in the performance of

their duties.” 5 U.S.C. § 552a(b)(1). In the case of the SEC, which is

charged with ensuring compliance with the securities laws and is empow-

ered to bring enforcement actions for civil violations of those laws, such

officers and employees would include Commission employees who need-

ed the information compiled by the FST to carry out their monitoring and

civil enforcement responsibilities. The Privacy Act also provides that

records may be disclosed on request to another agency or government

entity “for a civil or criminal law enforcement activity if the activity is

authorized by law.” 5 U.S.C. § 552a(b)(7). We can think of no reason why

Congress would permit disclosure outside the agency for civil law en-

forcement purposes but forbid disclosure inside the agency for the same

purposes.

Case law also supports our analysis. For example, in Seldowitz, the

Fourth Circuit concluded that criminal investigation records compiled by

the State Department’s OIG were protected by the section 552a( j )(2)

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36 Op. O.L.C. 186 (2012)

exemption, even though information in the records was used to pursue a

civil prosecution, because the “OIG investigators contemplated a possible

criminal prosecution.” 2000 WL 1742098, at *3. And, in Doe v. Federal

Bureau of Investigation, 936 F.2d 1346, 1356 (1991), the D.C. Circuit

held that “information contained in a document qualifying for [the] sub-

section ( j ) . . . exemption . . . does not lose its exempt status when recom-

piled in a non-law enforcement record if the purposes underlying the

exemption of the original document pertain to the recompilation as well.”8

Additionally, our interpretation is consistent with the purposes of the

securities laws. As the Request Letter explained, investigators cannot

know at the start of a criminal investigation whether they will ultimately

assemble enough evidence to justify a criminal prosecution. Request

Letter at 8. If they prove unable to make out a criminal case, they may

nonetheless uncover sufficient evidence to establish a civil violation of

the securities laws. The purposes behind the securities laws would be ill-

served if the SEC were barred from using that information to stop the civil

violation and obtain relief for the victims.

B.

Because the SEC plans to recompile summary information from the

FST’s database into a separate records system that would be used for

market monitoring and civil law enforcement, we also considered wheth-

er that recompilation would independently trigger the requirement in

section 552a(e)(3) that investigators provide notifications when collect-

ing the information. In our view, the notification requirement would not

be triggered. The information would be initially entered into the FST’s

records system, and only subsequently recompiled from that system into

the other system, which would be used by other SEC staff in performing

their statutorily assigned duties. As we noted in Part II.A.3, the Privacy

Act contemplates that information from exempted records systems will

be shared within the agency for other purposes, see 5 U.S.C.

§ 552a(b)(1); in our view, recompilation into another database is a legit-

imate means of effectuating such information-sharing. This conclusion is

supported by interpretive guidance issued by the Office of Management

and Budget, which states that “records which are part of an exempted

8 We discuss the applicability of this standard to your proposal in Part II.B below.

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Exempting the Records of the SEC Fraud Surveillance Team from the Privacy Act

system may be . . . incorporated into . . . non-exempt records systems”

without losing their exempt status. 40 Fed. Reg. 28,948, 28,971 (July 9,

1975). 9

The D.C. Circuit suggested in Doe that recompilation of a criminal law

enforcement record into another non-law enforcement records system

would vitiate an otherwise properly invoked section 552a( j )(2) exemption

unless the reasons for exempting the criminal law enforcement records

also justified exempting the recompiled records. See 936 F.2d at 1356.

Assuming that this condition on the applicability of the section 552a( j )(2)

exemption exists, the recompilation contemplated by your proposal would

satisfy the condition. The reason for exempting the FST’s investigative

records system from the section 552a(e)(3) notification requirements is

that notice would compromise the FST investigations, because the targets

of those investigations would not provide the requested information if

they knew that it was being collected for possible criminal prosecutions.

The same rationale would apply to the recompiled records, which would

be used largely for civil law enforcement purposes: the sources of the

information would also likely be unwilling to provide it if they knew that

it would be used for civil law enforcement. Accordingly, we believe that

recompiling summary information from the FST’s records system into a

records system used for civil law enforcement and related purposes would

not preclude reliance on section 552a( j )(2) to exempt the FST’s infor-

mation collection from the section 552a(e)(3) notification requirements.

III.

In sum, we conclude that section 552a( j )(2) would permit the Commis-

sion to exempt the FST’s records system from section 552a(e)(3), provid-

ed that the Commission complies with the procedural requirements im-

posed by the Privacy Act.

VIRGINIA A. SEITZ

Assistant Attorney General

Office of Legal Counsel

9 We need not and do not decide whether the answer would be different if the infor-

mation were initially entered simultaneously into two systems, one maintained by the FST

for criminal investigations and another used for other purposes.

197