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Project on Government Oversight

Letter in Support of Grassley Amendment to Expose and Slow the Revolving Door at Financial Regulatory Agencies

Related Content: FINRA, Revolving Door
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May 13, 2010

United States Senate
Washington, DC 20510

Dear Senator:

We write in support of an amendment introduced by Senator Charles Grassley to improve the Restoring American Financial Stability Act (S. 3217) by exposing and slowing the revolving door between financial regulatory agencies and the industries they seek to regulate.

The revolving door has had a highly detrimental effect on our nation’s financial regulatory system in recent years, with scores of regulatory employees leaving government to go make handsome salaries attempting to influence their former agency on behalf of outside clients.[1] Many commenters have observed that the revolving door creates a situation in which enforcement officials take a lax approach to regulation in hopes of being employed by the regulated industry once they leave government.[2]

One recent investigation by the Securities and Exchange Commission (SEC) Office of Inspector General (OIG) found that the former head of enforcement at the SEC's Fort Worth office—who had played a big part in delaying and limiting the investigation of the Stanford Ponzi scheme—sought to represent Stanford on three separate occasions after leaving the agency, despite repeated warnings and denials from the ethics office.[3] Another OIG investigation revealed that a senior SEC enforcement attorney who had led an unwarranted investigation into the activities of a hedge fund manager at the request of Allied Capital later went to work as a lobbyist for Allied. While at Allied, he was caught illegally attempting to obtain the hedge fund manager's phone records. Apparently he was not the only former regulator at Allied, which was also represented at meetings with the SEC by several former enforcement staffers.[4]

The public only learned of these revolving door abuses after the OIG reports were obtained through Freedom of Information Act (FOIA) requests.

Senator Grassley’s amendment (SA 3966) introduces several important measures for exposing and limiting the harmful effects of the revolving door on financial regulatory agencies:

  • Current government-wide post-employment restrictions impose a one-year “cooling off” period during which certain senior government employees are prohibited from representing another entity before their former agency.[5] The Grassley amendment simply expands these restrictions to include certain financial regulatory employees who are paid a salary that is statutorily authorized above the standard government pay scale.
  • The Grassley amendment also requires financial regulatory agencies to maintain and publicly disclose a registry of former employees who represent clients before the agency. Specifically, former employees would be required to disclose their name, the job title they held at the regulatory agency, the name of the outside entity whom they seek to represent, a list of all the matters on which they will represent the outside entity, and a list of all matters on which they personally and substantially participated while working for the regulatory agency.
  • The Grassley amendment also would impose a two-year ban to prohibit former regulatory employees from representing outside entities that have matters pending before the employee's former agency. Former employees who violate the two-year ban would only receive a civil penalty of no more than $100,000. Although the lightness of the proposed civil penalty has raised concerns about the effectiveness of the ban at deterring revolving door abuses, the provision could be strengthened by making the two-year ban a criminal matter governed by existing post-employment restrictions in 18 U.S.C. § 207(a)(2).
  • Agencies covered by the Grassley amendment would include the SEC, Federal Reserve System, Farm Credit Administration, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Federal Housing Enterprise Oversight, Office of Thrift Supervision, and Commodity Futures Trading Commission.

Some agencies, such as the SEC, already require former employees to register when they want to represent outside entities before the agency, but these registries are not made available to the public. By extending this registration requirement to other regulatory agencies and requiring that the information be posted online in a searchable form, the Grassley amendment will provide an additional check on the types of revolving door abuses revealed in the SEC OIG reports on the Stanford and Allied investigations.

In addition, by requiring certain financial regulatory employees to observe a "cooling off" period, the Grassley amendment would prevent these employees from working at their agency one day, and then appearing at the same agency the next day attempting to exert influence on behalf of a powerful outside client.

We urge you to take a stand against revolving door abuses and to make financial regulators more transparent and accountable to the public by supporting Senator Grassley's SA 3966. We thank you in advance for your leadership on this important matter.

Sincerely,

David Arkush
Public Citizen

Danielle Brian
Project On Government Oversight

Beth Burrows
Edmonds Institute

Bob Edgar
Common Cause

Gail Hillebrand 
Consumers Union

Jane Fleming Kleeb
Bold Nebraska

_______________________

[1] An analysis by The Wall Street Journal revealed that 66 former employees of the Securities and Exchange Commission (SEC) filed 168 letters over a recent period of time disclosing clients they planned to represent before the agency, including 79 letters saying they would be representing clients in “ongoing public investigations,” and 36 saying the SEC’s enforcement division was involved. Tom McGinty, "SEC Lawyer One Day, Opponent the Next," The Wall Street Journal, April 5, 2010. http://online.wsj.com/article/SB10001424052702303450704575160043010579272.html (Downloaded May 12, 2010)

[2] Michael Lewis and David Einhorn, "The End of the Financial World as We Know It," The New York Times, January 3, 2009. http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html (Downloaded May 13, 2010)

[3] U.S. Securities and Exchange Commission, Office of Inspector General, Investigation of the SEC's Response to Concerns Regarding Robert Allen Stanford’s Alleged Ponzi Scheme (Case No. OIG-526), March 31, 2010. http://www.sec.gov/news/studies/2010/oig-526.pdf (Downloaded May 12, 2010)

[4] U.S. Securities and Exchange Commission, Office of Inspector General, Allegations of Conflict of Interest, Improper Use of Non-Public Information and Failure to Take Sufficient Action Against Fraudulent Company (Case No. OIG-496), January 8, 2010. http://pogoarchives.org/m/er/sec-oig-allied-report-20100108.pdf (Downloaded May 13, 2010)

[5] 18 U.S.C. § 207(c).

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