‘Revolving door’ making SEC dizzy: Report

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 employer 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 last 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 runs on such funds pose a threat to the U.S. financial system. But Ms. Schapiro was unable to get the backing of two of the four other commission members to propose a rule.

SWITCHING SIDES

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 general counsel for an Invesco Ltd. institutional business unit, was one of the commissioners opposing a rule.

In the report, Mr. Aguilar denies that he was biased toward the fund industry’s point of view. In addition, the report notes that the SEC may make a money fund proposal this spring. SEC Chairman Elisse Walter recently told reporters, “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 states. “The constant spinning blurs the lines between the regulatory agency and the world it regulates.”

Another problem the report cites is 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 staff members, 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.”

RECUSAL

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 dated Feb. 5, Ms. White said she would recuse herself for one year from matters before the SEC involving her former clients.

Increasing disclosures and restrictions on the revolving door is better than slamming it, according to Steven Wallman, chief executive of Foliofn Inc. and a former SEC member. If people were banned from working at the SEC after working on Wall Street or vice versa, 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.”

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