'Revolving door' has SEC going in circles: Report

New study cites failure of money market fund reform as example

Feb 11, 2013 @ 3:55 pm

By Mark Schoeff Jr.

SEC, regulation, money market funds
+ Zoom
POGO: SEC has met the enemy -- and it is them.

A steady exodus of Securities and Exchange Commission officials to financial companies and law firms that represent them threatens to undermine the regulator's ability to make and enforce market rules, according to a new report from a government watchdog group.

The Project on Government Oversight found that from 2001 through 2010, 419 former SEC staff members filed 1,949 disclosure statements saying that they intended to represent a new employers or client before the SEC.

“Former employees of the Securities and Exchange Commission routinely help corporations try to influence SEC rule making, counter the agency's investigations of suspected wrongdoing, soften the blow of SEC enforcement actions, block shareholder proposals and win exemptions from federal law,” the report states. “The movement of people to and from the financial industry is a key feature of the SEC, and it has the potential to influence the agency's culture and values.”

The report, released Monday, cited the recent failure of money market fund reform as an example. Former SEC Chairman Mary Schapiro made a priority of tightening money market fund rules, saying that that runs on such funds pose a threat to the U.S. financial system. But Ms. Schapiro was unable to get the backing of three of the five commissioners to propose a rule.

The report notes that several former SEC staff members now work for financial industry lobbying groups that are fiercely opposing money fund reform. It also noted that SEC member Luis Aguilar, who previously was president of money management firm Invesco Ltd., was one of the commissioners opposing a rule.

Within the report, Mr. Aguilar denied that he was biased toward the fund industry's point of view. In addition, the report noted that the SEC may make a money fund proposal this spring. SEC Chairman Elisse Walter recently told reporters that “the entire dynamic around that project” has changed.

“Whether the 2012 regulatory stalemate … was a defeat or merely a delay for Schapiro's money market fund initiative, the episode illustrates a conspicuous feature of the SEC: the pervasiveness of the revolving door,” the report stated. “The constant spinning blurs the lines between the regulatory agency and the world it regulates.”

Another example the report used to illustrate the problem of the revolving door centered on financial firms' being allowed to keep their designation as a “well-known seasoned issuer” even after they have committed securities fraud. Of the 64 waivers granted between 2006 and 2012, 35 of them were requested by former SEC staffers, according to the report.

SEC spokesman John Nester noted that the math — about half of the time waivers were given to companies represented by former SEC staff members — indicates that companies had the same chance at the exemption regardless of who was petitioning the agency on its behalf.

“The report provides a series of anecdotes that overlooks the fact that the commission has strong ethics rules in place that assure decisions are made on their merits, according to the rules and regulations,” Mr. Nester wrote in an e-mail. “I'm not aware of any factual information to the contrary. Indeed, the report found that the outcomes were the same regardless of whether former employees were involved.”

The government watchdog called for strengthening the SEC's recusal and disclosure requirements for former employees.

The nominee to be the new SEC chairman, Mary Jo White, has both prosecuted white-collar crimes as a U.S. attorney and defended Wall Street firms and executives as head of the litigation department at Debevoise & Plimpton LLC, her most recent role.

In an ethics statement she filed Feb. 8, Ms. White said she would recuse herself for one year from matters before the SEC involving her former clients.

Increasing disclosures and restrictions around the revolving door is better than slamming it, according to Steven Wallman, chief executive of Foliofn Inc. and a former SEC commissioner. If people were banned from working at the SEC after working on Wall Street or from joining a financial firm once they leave the SEC, it would severely limit the agency's talent pool, he argued.

For instance, he said Ms. White's background can help make the agency more effective.

“Her experience [defending financial corporations] is pretty invaluable,” Mr. Wallman said. “She'll be able to bring to the commission an incredible wealth of experience about how people defending large institutions go about doing that.”

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Sep 26

Webcast

Investing 2017: Industry at a Crossroads

The advice industry is at a unique inflection point, as the way clients are investing has changed dramatically: Technology has evolved, access to innovative products has changed, and the active vs. passive debate continues to rage on. Advisers... Learn more

Featured video

INTV

Ed Slott: The conversation advisers need to have with spousal IRA beneficiaries

Clients who inherit IRAs from their spouses need to decide whether to remain beneficiaries or do spousal rollovers. One important factor in that decision is their age, according to Ed Slott, founder of Ed Slott's Elite IRA Advisor Group.

Latest news & opinion

Will Jeffrey Gundlach's Trump-like approach on Twitter work in financial services?

The DoubleLine CEO's attacks on Wall Street Journal reporters is igniting a discussion on what's fair game on social media.

Fidelity wins arb case against wine mogul but earns a rebuke from Finra

In the case of investor Peter Deutsch, Fidelity doesn't have to pay any compensation, but regulator said firm put its interests ahead of his.

Plaintiffs win in Tibble vs. Edison 401(k) fee case

After a decade of activity around the lawsuit, including a hearing before the U.S. Supreme Court, judge rules a prudent fiduciary would have invested in institutional shares.

Advisers get more breathing room to make Form ADV changes

RIAs can enter '0' in some new parts of the document before their annual filing next year.

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print