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SEC Delays Revolving Door Restriction

Months ago, bowing to concern about regulators who leave government and then work their former colleagues on behalf of industry, the Securities and Exchange Commission (SEC) announced that it was tightening restrictions on the revolving door.

Specifically, the SEC decided to close a loophole in the ethics rules that allowed some “senior” SEC personnel to lobby the agency immediately after leaving instead of staying on the sidelines for a year or more, as employees at other federal agencies must do. The change in the rules—revoking a longstanding exemption for some SEC officials—appeared to be a rare stand against the revolving door at an agency that has long blurred the lines between the regulators and the regulated.

But not so fast.

A notice published in Monday’s edition of the Federal Register said that the Office of Government Ethics (OGE) was withdrawing the new rule at “the request of the SEC” so that the agency could have more time to “effectively educate affected employees before the exemption revocation takes effect.”

The rule, which was published as “final” on October 3, had been scheduled to take effect on January 2.

The ethics office said it expects to republish the rule in January 2014, but it then would take another 90 days for the rule to go into effect, according to Monday’s announcement. As a result, SEC employees who would be affected by the rule change—including supervisory accountants, attorneys, economists, analysts, and administrative specialists—will have even more time to take advantage of the loophole. As long as they leave before the rule change takes effect, they’ll still be able to lobby the agency during their first year out.

For the ethics office to withdraw a rule after it had been adopted but before it could take effect appeared to be an unusual event. POGO searched the Federal Register going back to 1994 (the earliest year available in the Government Printing Office's online archives) and found no other OGE notice containing the phrase "Withdrawal of Final Rule." We asked an OGE spokesman how frequently this has happened, but he declined to comment.

POGO highlighted the SEC's revolving door loophole in a February report and has supported longer timeout periods for federal regulators who come from or return to Wall Street.

The agency’s Inspector General recommended closing the loophole in a report issued almost three years ago. As early as October 2012, SEC spokesman John Nester told POGO the agency was “in the process of working with OGE” to remove the exemption.

So why does the SEC need even more time to finish the job? What is it doing to “educate” its employees, and why didn’t it do so sooner? By further delaying the rule change, who are the SEC and OGE enabling to go through the revolving door and take advantage of the loophole?

In an email to POGO Tuesday, SEC spokesman John Nester described the latest delay as temporary.

“We expect the final rule will take effect in April, 2014 and do not anticipate the need for another extension,” Nester said. “We recently requested postponement after we learned that a subset of affected staff had not received notice of the upcoming change and its application,” he added.

As of this past summer, Nester said, the SEC had determined “that more than 600 staff members were potentially affected.”

Another government official, speaking on condition of anonymity, said delaying the rule was a matter of fairness for federal employees who did not know they would be subject to the new criminal prohibition when they joined the SEC.

Apparently, some of them didn’t get the August memo.

This summer, according to news reports, the SEC announced it would be closing the loophole in order to put the agency “on an even footing with…peer regulators” and to protect “against even the appearance of impropriety when former employees take on new jobs.”

Will the SEC follow through on its plan to revoke their exemption from the standard “cooling off period”?  Watch this space.

By: Michael Smallberg
Investigator, POGO

Michael Smallberg, Investigator Michael Smallberg is an investigator for the Project On Government Oversight. Michael's investigations center on oversight of the financial sector.

Topics: Financial Sector

Related Content: Securities and Exchange Commission

Authors: Michael Smallberg

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