SEC Alumni Help Firms Get a Break

Inside the Revolving Door

A revolving door blurs the lines between one of the nation’s most important regulatory agencies and the interests it regulates.

Former employees of the Securities and Exchange Commission (SEC) routinely help corporations try to influence SEC rulemaking, 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 revolving door was on display in 2012 when the investment industry opposed one of the top priorities of the SEC chairman, a plan to tighten regulation of money market funds. 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.

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. It matters because the SEC has the power to affect investors, financial markets, and the economy.

Yet, 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. In addition, the SEC has 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 SEC is a microcosm of the federal government, where widespread revolving expands the opportunities for private interests to sway public policy.

One academic study suggested that concerns about the SEC’s revolving door are misguided. But the academics looked at only a sliver of the SEC’s work. They did not examine, for instance, how the revolving door affects the SEC’s 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. The study sought to quantify any influence the revolving door might have on SEC enforcement actions, but the subtleties involved do not lend themselves to such simple measurement.

This report, the Project On Government Oversight’s (POGO) second on the SEC, is based in part on interviews with current and former SEC officials and thousands of federal records obtained through the Freedom of Information Act.

POGO found that, from 2001 through 2010, more than 400 SEC alumni filed almost 2,000 disclosure forms saying they planned to represent an employer or client before the agency. Those disclosures are just the tip of the iceberg, because former SEC employees are required to file them only during the first two years after they leave the agency.

POGO’s report examines many manifestations of the revolving door, analyzes how the revolving door has influenced the SEC, and explores how to mitigate the most harmful effects.

Scores of SEC Alumni Go to Bat for SEC-Regulated Companies

From 2001 through 2010, 419 former SEC employees filed at least 1,949 disclosure statements saying they planned to represent clients or new employers in matters pending at the SEC. One former official filed 46 of them. (See Appendix A)

POGO obtained the statements, which were previously unavailable online, through the Freedom of Information Act (FOIA). An earlier POGO report focused on disclosure statements filed between 2006 and 2010; the new data go back an additional five years and are searchable online through POGO’s SEC Revolving Door Database.

The 1,949 statements are just the tip of the iceberg, because former employees are only required to file them during the two-year period immediately after they leave the agency.

POGO found that many former SEC employees have helped businesses get a break from the agency.

SEC Alumni Have Helped Companies Charged with Wrongdoing Soften Blow of SEC Enforcement Actions

Many big, established companies enjoy a special privilege: they can issue and sell new securities—say, additional shares of stock—to investors without going through a fresh review by the agency. The privilege—known as “well-known seasoned issuer” or WKSI status—can save companies time and money. Conversely, losing the privilege could make it harder for companies to raise capital and could put them at a competitive disadvantage.

Companies that are found to have committed securities fraud—and, under certain circumstances, companies that agree to settle fraud charges—automatically lose their special status. The theory is that their financial disclosures are less trustworthy.

However, they can request a waiver allowing them to retain the privilege, and many do. A New York Times investigation found 350 instances since 2001 in which the SEC gave financial firms WKSI waivers and other forms of relief that softened the blow of enforcement actions. The Times reported that “[c]lose to half of the waivers went to repeat offenders—Wall Street firms that had settled previous fraud charges by agreeing never again to violate the very laws that the S.E.C. was now saying that they had broken.”

In many instances, POGO found, the companies were championed by former SEC officials.

In 2008, for example, the SEC alleged that UBS Securities LLC and UBS Financial Services Inc.—subsidiaries of UBS AG, the big Swiss bank—had “misled tens of thousands of...customers” about the risks of investing in products known as auction rate securities. As a result, “over forty thousand UBS customer accounts holding more than $35 billion in auction rate securities had their investments rendered virtually illiquid overnight,” according to the SEC’s complaint.

The agency charged the UBS subsidiaries with violating an anti-fraud provision of the federal securities laws, and it ordered them not to violate the same provision in the future. The UBS subsidiaries settled the charges without admitting or denying any wrongdoing.

Meanwhile, Kenneth J. Berman—an attorney at the law firm of Debevoise & Plimpton LLP, and a former associate director of the SEC’s Investment Management Division—requested and obtained a waiver allowing UBS AG, the parent company, to retain its WKSI privilege. He argued, among other things, that UBS AG and its subsidiaries had “strong records of compliance with the securities laws.”

In 2011, the SEC charged one of the same UBS subsidiaries—UBS Financial Services Inc.— with “fraudulently rigging at least 100 municipal bond reinvestment transactions in 36 states and generating millions of dollars in ill-gotten gains.” The subsidiary was charged with violating the same anti-fraud provision that it had promised not to violate in the auction rate securities case. This time, the firm paid $160 million to settle charges brought by the SEC and other authorities—without admitting or denying the SEC’s allegations—and agreed once again to stop violating the anti-fraud provision.

See the waiver the SEC granted.

Once again, Berman requested and received a waiver on behalf of UBS AG, arguing that “UBS AG and its affiliates have strong records of compliance with the securities laws.”

In 2012, another UBS subsidiary was charged with violating the anti-fraud provision.

This time it was UBS Financial Services Inc. of Puerto Rico, which was charged in May 2012 with “making misleading statements to investors” and “concealing a liquidity crisis,” among other things. The firm paid $26.6 million to settle the case, without admitting or denying the SEC’s allegations.

In this case, Colleen P. Mahoney—a partner at the law firm of Skadden, Arps, Slate, Meagher & Flom LLP and a former SEC deputy enforcement director who left the agency in 1998 after
15 years of service—requested a waiver on behalf of UBS AG. The SEC granted the waiver shortly after filing its charges.

The earliest WKSI waiver posted on the SEC’s website was granted in 2006. Of the 64 posted WKSI waivers granted from 2006 through 2012, more than half—at least 35 of them—were requested by SEC alumni.

Of the 64 posted WKSI waivers granted from 2006 through 2012, more than half—at least 35 of them—were requested by SEC alumni.

The numbers show that SEC alumni aren’t the only lawyers seeking waivers, and that you don’t have to be an alumnus to win one.

But the mere fact that so many waiver requests involve former officials could influence the way people at the agency think about regulatory relief, regardless of who asks for it. If an SEC official used to represent companies seeking waivers or envisions himself doing so in the future, it’s hard to see how he could remain completely neutral in evaluating such requests from others. He could identify with corporations seeking relief, and he could have a stake in the agency’s willingness to grant it. In that sense, the revolving door could shape the environment in which all SEC employees work and the institution’s mindset, to the benefit of companies accused of wrongdoing.

SEC Alumni Have Helped Companies Secure Other Accommodations that Took Some Sting Out of Enforcement Actions

Additional rules—variants on the WKSI theme—allow the SEC to issue waivers to companies facing the loss of a shortcut for small securities offerings.

When a business wants to raise funds by selling stock to the general public, it typically has to register the stock offering with the SEC. Some businesses, however, are allowed to raise a limited amount of capital by selling stock without having to register.

This shortcut is off-limits to businesses and underwriters that are the subject of certain SEC enforcement actions. But companies can avoid the ban by obtaining a waiver.

For example, in 2011, the agency charged that a subsidiary of JPMorgan had “misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet.” Responding to the charges, Herbert F. Janick III—an attorney at the law firm of Bingham McCutchen LLP and a former senior SEC enforcement staffer—requested a waiver for the JPMorgan subsidiary.

Among other things, Janick argued that “issuers may wish to retain J.P. Morgan Securities to participate in offerings of securities” that rely on the shortcut, and that the disqualification of the firm “could adversely affect J.P. Morgan Securities’ business operations.”

See the waiver JPMorgan received.

The agency granted the waiver one week after charging the JPMorgan subsidiary, according to agency records.

The earliest version of this waiver that’s posted on the SEC’s website was granted in 2003. The SEC issued at least 100 of these waivers from 2003 through 2012 to firms that faced a similar kind of disqualification. Of the 100 posted waivers, 40 were requested by SEC alumni.

Still other rules allow the SEC to give a break to companies that are in danger of being disqualified from providing bread-and-butter services such as underwriting to mutual funds because the companies or their affiliates are the subject of certain SEC enforcement actions.

For example, in July 2011, the SEC charged a JPMorgan subsidiary with “rigging at least 93 municipal bond reinvestment transactions in 31 states, generating millions of dollars in ill-gotten gains.” The firm had entered into secret arrangements to get an “illegal ‘last look’ at competitors’ bids,” according to the SEC’s charges.

After consenting to an injunction and other penalties—without admitting or denying the SEC’s allegations—JPMorgan and affiliated firms applied for an exemption that would allow them to continue offering key services to mutual funds.

It wasn’t the first time something like this happened. Since 2003, the SEC had granted exemptions to JPMorgan and its subsidiaries when they were charged with alleged misconduct relating to mortgage securities products, transactions with Enron, initial product offerings, and research analyst conflicts of interest, according to the application.

There were several contacts listed on the new application, including Stephanie Avakian, James E. Anderson, and John M. Faust—attorneys from the law firm of Wilmer Cutler Pickering Hale and Dorr LLP (WilmerHale). Avakian used to be a counsel to then-SEC Commissioner Paul R. Carey, while Anderson and Faust used to be attorneys in the SEC’s Investment Management Division, according to bios posted on the law firm’s website.

The SEC granted an exemption to JPMorgan and its subsidiaries the following month.

The SEC’s website features similar exemptions that have been granted since 2007, but POGO was only able to identify the requestors for exemptions granted since 2009. Of the 23 exemptions on the SEC’s website granted from 2009 through 2012 to firms facing a similar predicament, at least 16 were requested by legal teams that included SEC alumni.

The SEC’s willingness to spare big companies the potential consequences of enforcement actions—even when those companies are cited as repeat offenders—has fueled concern in some quarters that the agency is too sympathetic to powerful firms. The agency has said its waivers and the like are not meant to pull punches on any punishment but rather are intended to serve the public interest—for example, by avoiding collateral damage to customers of mutual funds that are advised by the firms. But perceptions of what is in the public interest are unavoidably subjective.

SEC Alumni Have Helped Clients Win Exemptions from Federal Law

The SEC is responsible for enforcing the federal securities laws, but it also has the power to exempt businesses from provisions of law on a case-by-case basis. Financial firms frequently argue they should be permitted to operate in ways that would otherwise be considered illegal.

For instance, the SEC can excuse a company from any provision of the Investment Company Act if the exemption is “necessary or appropriate in the public interest” and “consistent with the protection of investors.”

SEC alumni have represented businesses in the successful pursuit of such exceptions.

In 2012, for example, Federated Investment Management Company sought the SEC’s permission to market an exchange-traded fund (ETF), a financial product that is similar to a mutual fund but trades like a stock.

In order to provide this product, Federated asked to be exempted from several provisions of the Investment Company Act, including provisions that were designed to “prevent unreasonable, undisclosed or unforeseen delays in the actual payment of redemption proceeds” and to “prevent one investment company from buying control of another investment company.”

The point of contact listed on Federated’s application was Stacy L. Fuller, a former branch chief in the SEC’s Investment Management Division who, during her career at the agency, “oversaw the review of multiple exemptive applications for ETFs,” according to a bio posted on the website of the law firm where she currently works.

In June, the SEC agreed to provide the exemptive relief requested by Fuller on Federated’s behalf.

The SEC has stated that these rule exemptions are often necessary to “avoid the unintended consequences that could arise with the innovation of new financial products and services—such as those that may not have been envisioned when the securities law was passed.”

POGO examined all of these exemptions on the SEC website issued under the Investment Company Act in 2011 and 2012. Of the 158 issued during those two years, 58 of them were requested by legal teams that included SEC alumni.

SEC Alumni Have Helped Companies Obtain Letters from the Agency Giving Them Green Light to Venture into Regulatory Gray Zones Without Fear of Getting in Trouble

The SEC often issues advisory opinions known as “no-action letters” which assure companies that the SEC will not punish them if they take a particular course of action. The SEC sometimes describes no-action letters as a form of regulatory “relief.”

Former SEC officials have helped companies secure such letters.

Joan McKown

Joan McKown, a long-time SEC employee serving most recently as chief counsel in the Enforcement Division

Joan McKown worked at the SEC for 24 years, serving most recently as chief counsel in the Enforcement Division. She left the agency in 2010 and is now a partner at Jones Day.

In early 2012, she helped PNC Bank obtain no-action relief from an SEC regulation issued under Dodd-Frank. The regulation required more disclosure to help investors identify underwriting deficiencies in asset-backed securities—financial products backed by loans (such as residential mortgage, commercial, and student loans) that are bundled together and sold to investors. The no-action letter sets a precedent for PNC and other companies to avoid disclosing information about mortgage-backed securities guaranteed by Ginnie Mae, a government corporation that promotes home ownership.

On its website, Jones Day says that, as of February 2012, this was the “only no-action letter specifically interpreting an SEC regulation under Dodd-Frank that the SEC staff has issued and published so far.”

SEC Alumni Have Helped Companies Thwart Shareholder Proposals

Shareholders often try to use their voting power to influence a company’s policy on issues such as executive compensation. But companies can stop these proposals from even making it onto the ballot. Before blocking such proposals from coming to a vote, companies often seek the blessing of the SEC’s Division of Corporation Finance. SEC alumni have represented companies in the successful pursuit of such blessings, issued in the form of no-action letters.

Martin Dunn left the SEC in 2007 after 20 years of service, including stints as acting and deputy director of the Division of Corporation Finance, and became a partner at the law firm of O’Melveny & Myers LLP.

Less than two years later, Dunn wrote to the division on behalf of Alaska Air Group, Inc., the holding company for Alaska Airlines and Horizon Air. He asked for the division’s assurances that it would not recommend enforcement action if Alaska Air Group excluded several proposals, including one that would give shareholders more of a say on executive pay.

The division staff agreed that Alaska Air Group could exclude the proposals without running afoul of the law.

More recently, Dunn obtained favorable SEC responses to multiple requests for JPMorgan to exclude shareholder proposals. Those proposals would have required JPMorgan to disclose more information about the bank’s political contributions and lobbying expenditures; replace the bank’s independent auditor on a regular basis; assess the impact of mountaintop removal coal mining by the bank’s clients; take steps to prevent “illicit financial flows” such as tax evasion and money laundering; review the bank’s handling of foreclosures and loan modifications; and review the risks associated with “high levels of senior executive compensation.”

Dunn has also requested and received no-action letters on behalf of UnitedHealth Group, Inc. and Yahoo! Inc.

In a disclosure statement filed shortly after he left the SEC, Dunn said he was certain that matters on which he would be appearing before the agency did not relate to any matters he worked on during his SEC service.

However, in the same disclosure statement, Dunn showed how much his work as a lawyer for corporations had in common with his earlier work as a member of the SEC staff.

“I have been retained to represent [name of company withheld by SEC] in connection with the filing of a no-action request with regard to shareholder proposals received by that company,” he wrote. “During my tenure on the staff, I worked on a number of matters relating to shareholder proposals, including shareholder proposals submitted to [name of company withheld by SEC]. However, all shareholder proposal matters on which I worked while on the staff were resolved during that time and there were no such matters pending upon my departure,” he added.

Dunn wrote that he was so sure that none of this posed an ethical impediment that he was notifying the SEC of his plans “before receiving verbal clearance from the Ethics Office.” The disclosure statement does not say whether the Ethics Office ended up giving Dunn the green light.

The SEC receives hundreds of requests each year from companies that are seeking to exclude shareholder proposals. POGO found that many of these requests were submitted by legal teams that included SEC alumni.

The Money Market Industry Frequently Deployed SEC Alumni to Request Accommodations from the Agency During Period of Market Turmoil Beginning in 2007

In many cases, these accommodations gave the companies that manage money market funds a green light to prop up funds. To extend such support, the companies sought regulatory relief from the SEC’s Investment Management Division, which provided it through no-action letters.

In September 2008, at the height of the financial crisis, Jack W. Murphy—a former associate director in the SEC’s Division of Investment Management—requested the division’s approval on behalf of the Bank of New York Mellon Corporation and its affiliated money market funds. The division staff responded the following month to approve the proposed arrangement.

One section of the SEC’s website features 69 no-action letters granted during a period of market turmoil from 2007 through 2009 that provided the green light for corporate sponsors to prop up money market funds. Of these 69 letters, 28 were requested by SEC alumni.

Allowing the corporate parents to provide financial support for individual money market funds could have masked the degree of risk associated with those funds, giving investors an inflated sense of security. It also could have posed financial risks for the corporate parents and the shareholders of those companies, though a study by the Federal Reserve Bank of Boston said the companies might have been trying to protect their reputations in the marketplace—in other words, their brand names.

Image from the SEC.

Follow this link to view a full copy of POGO's report, Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture, including endnotes with explanatory text and citations.

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