A new report argues that the revolving door between Wall Street and the U.S. Securities and Exchange Commission (SEC) is a real problem, and it recommends reforms to try and mitigate the impact of the practice.
The report, from the Project On Government Oversight (POGO), a Washington, DC-based government watchdog, found that between 2001 and 2010, more than 400 SEC alumni filed nearly 2,000 disclosure statements saying they planned to represent employers or clients before the agency. It says those disclosures are “just the tip of the iceberg”, as former SEC employees are only required to file them for the first two years after they leave the agency.
“These alumni have represented companies during SEC investigations, lobbied the agency on proposed regulations, obtained waivers to soften the blow of enforcement actions, and helped clients win exemptions from federal law. On the other side of the revolving door, when industry veterans join the SEC, they may be in a position to oversee their former employers or clients, or may be forced to recuse themselves from working on crucial agency issues,” it notes.
The report cites the recent squabble over efforts to tighten the regulation of money market funds as evidence of the impact of the revolving door. “Former SEC employees lobbied to block the plan, and an SEC commissioner who previously worked for an investment firm played a pivotal role in derailing it,” it says.
Additionally, the report says that the SEC has exempted certain senior employees from a ‘cooling-off period’ that would have restricted their ability to leave the SEC and then represent clients before the agency; and, it says that it has also shielded some former employees from public scrutiny by blacking out their names in documents they must file when they go through the revolving door.
The report aims to shoot down the conclusion of an earlier academic study, which found that concerns about the SEC’s revolving door are misguided. It says that study only looked at enforcement, which is only part of the SEC’s work. POGO stresses that this earlier study did not examine how the practice affects the regulation of Wall Street, its granting of relief to specific companies, its handling of cases related to the financial crisis, or its decisions to drop investigations without bringing charges.
To mitigate the effects of these problems, POGO makes several recommendations, including: requiring increased disclosure; providing online access to ethics records, including recusal agreements and waivers; increasing cooling-off restrictions both for new and former SEC employees; webcast meetings between SEC officials and industry representatives, along with other measures to improve transparency; provide more disclosure in enforcement actions; and, facilitate private litigation to lessen the reliance on the SEC for enforcement.
The group says it does not wish to hamper the SEC’s recruitment efforts, or eliminate all movement between the agency and the financial industry. “But when an employee leaves the SEC on Friday, and shows up on Monday working for a company he used to regulate, such a rapidly spinning revolving door can weaken the agency’s protection of investors, enable regulated entities to exert undue influence, demoralize other government employees, and damage the public’s trust,” it says.