Sen. Grassley targets SEC's 'revolving door'

A Senate panel has asked the inspector general of the Securities and Exchange Commission to examine the recent exit of a top SEC official to Getco LLC, a global high-frequency-trading firm and market maker. The former SEC official, Elizabeth King, worked in the commission's Division of Trading and Markets, which monitors, among other things, high-frequency trades. In a June 14 letter to David Kotz, the SEC inspector general, Sen. Charles Grassley, R-Iowa, requested that the IG “conduct a review of the circumstances surrounding Ms. King's departure from the SEC and disclose the results so that Congress and the public can more accurately assess the integrity of the SEC's operations.” Specifically, Mr. Grassley wants to know whether Ms. King was involved in the SEC “flash crash” review while in discussions with the firm to become its associate general counsel. According to her profile on MarketsWiki, Ms. King supervised her division's regulation of exchange-listed options and other derivatives. Getco maintains that it followed SEC ethics rules in recruiting and hiring Ms. King. "Consistent with SEC policies, she recused herself from matters affecting our business beginning in March and will also adhere to all other ethics policies applicable to former government staff," Sophie Sohn, Getco director of communications, said in a statement. "Elizabeth King has worked for 17 years at the SEC safeguarding the needs of institutional and individual investors," Ms. Sohn said. "We look forward to her helping Getco provide investors with access to liquidity while strengthening the overall vitality and health of the capital markets.” High-speed trades have come under increased scrutiny since May 6, when $1 trillion in stock market capitalization was wiped out in about 15 minutes of frantic trading. While the market made up most of those losses on the same day, the SEC has been examining whether high-speed trading on traditional exchanges — as well as dark pools — contributed to the “flash crash” or other market gyrations. Getco did not stop trading during the "flash crash." Mr. Grassley said the hiring of Ms. King raises questions about her involvement in the flash crash investigation, as well as the commission's overarching probe of high-frequency trading. “We need to ensure that SEC officials are more focused on regulation and enforcement than on getting their next job in the industry they are supposed to oversee," Mr. Grassley said in a statement released today. The ranking minority member of the Senate Finance Committee has been prodding the inspector general for months to review the steady stream of SEC officials who join companies they once regulated. Indeed, in his letter to the IG, Mr. Grassley asked for a summary of the other “revolving door” cases that Mr. Kotz is pursuing. In a June 15 letter responding to Sen. Grassley, Mr. Kotz said that he has already opened an investigation into the circumstances surrounding Ms. King's departure. Mr. Kotz also said he is reviewing improper disclosures about Bear Stearns to J.P. Morgan before J.P. Morgan took over the now-defunct investment bank. The inspector general also said he is looking into whether a Bear Stearns investigation was curtailed by the SEC's Miami office. “The Office of Inspect General has been vigilant in investigating allegations of violations of the criminal statutes and ethical standards pertaining to conflicts of interest, as well as improper attempts to influence SEC proceedings or actions by former SEC staffers,” Mr. Kotz wrote. Law firms and consultancies in Washington often recruit prospective employees based on expertise built at a federal agency. Those who depart senior SEC positions for jobs in the private sector are subject to some legal restrictions — most notably, they're barred from representing clients before the SEC for one year. Lower-level staffers who leave the SEC must, for two years, notify the agency of cases they're working on. The commission then decides whether a conflict of interest exits. A lawyer who formerly worked at the SEC believes the agency's current exit restrictions do limit problems arriving from the revolving door. "I think in general these rules work very well," said Russell Duncan, a partner at Orrick Herrington & Sutcliffe in Washington who served as SEC assistant chief litigation counsel from 2003-06. "I've never felt that anyone (at the SEC) gives me any more access or influence than what I've earned by the experience I've had and the arguments I make." But some senators remain skeptical. Sen. Edward Kaufman, D-Del., issued a statement lambasting Getco's recruitment of the former SEC staff member. “Ms. King, from the day she is hired, will be able to inform Getco of her knowledge of the current views of every commissioner and fellow staffers with whom she worked as to the meaning of the May 6 flash crash and the possible direction of future studies and rulemakings involving high-frequency trading.” Sen. Kaufman added: “This is another example of regulatory capture at its worst.”