“Franklin Delano Roosevelt established the SEC in 1934 and, to the surprise of many, appointed Joseph Kennedy—a reputed bootlegger and stock speculator—to be its first chairman. On that day, the revolving door began to spin,” CNBC’s Scott Cohn said as he introduced a panel discussion in New York last week.
“Asked why he would appoint someone many considered to be a crook to head the SEC as its first chairman, FDR is said to have replied: ‘It takes one to catch one,’” Cohn said. “So began the debate about the revolving door.”
The debate continued last Tuesday night, as panelists convened at the New York City Bar Association for a discussion on “The Financial Crisis and the ‘Revolving Door.’”
Cohn highlighted the Project On Government Oversight’s new report on the revolving door at the Securities and Exchange Commission (SEC). “POGO examined 10 years’ worth of disclosures, some filed within two days of leaving the agency, by people who wanted to go represent their new employers before their old employer,” Cohn remarked. “[The report] says that staffers routinely did in fact help corporations to influence rulemaking.”
On the other hand, Cohn said, an SEC spokesperson told him the report is “full of anecdotes that don’t reflect reality” and that “turnover at the SEC is actually quite low…thus discounting the revolving door hypothesis.” Cohn also cited a column by then-SEC enforcement chief Robert Khuzami, who recently left the SEC, in which he called the revolving door a “myth.”
“So which is it?” Cohn asked. “Is it spinning out of control or is it non-existent?”
Debating the revolving door
Some panelists acknowledged they had gone through the revolving door, but spoke in its defense.
“I am one of those folks who is trying to take the experience I gained in government and develop a private practice out of it,” said Thomas Perrelli, a former Associate Attorney General who is now a partner at Jenner & Block. “Notwithstanding the negative connotations of the revolving door,” he continued, “I would tell any lawyer in the world to spend some of their career in the private sector, and some of their career in government service.”
Matthew Biben—a former Assistant U.S. Attorney in the Southern District of New York who is now a general counsel in charge of consumer businesses at JPMorgan Chase—praised the revolving door.
“To my mind, the revolving door...is actually a good thing,” Biben said. “Indeed, I think part of what the government suffers from is that there’s not enough mobility in and out of government.” He pointed to the Department of Motor Vehicles as an office “where there is no mobility, there is no revolving door”; instead, he said, you’ll find “intransigence, bureaucracy, and a lack of innovation.” Cohn later joked: “If there was a revolving door at the DMV, where would people go?”—highlighting the fact that the DMV doesn’t regulate an industry.
Joseph Brenner—the chief counsel of the SEC’s Enforcement Division and a former partner at Wilmer Cutler Pickering Hale and Dorr LLP (WilmerHale), one of the top recruiters of SEC alumni—said the revolving door has aided the agency’s enforcement work.
But the SEC has been criticized for not responding more forcefully to the financial crisis. Some commentators have questioned whether Khuzami’s history at Deutsche Bank inhibited the agency from taking a tougher stand.
Brenner extolled the SEC’s performance, saying its “financial crisis enforcement cases have been a terrific success” in part because the agency “went out into the real word and hired experts from the industry to help us in investigating those cases.”
Other panelists raised concerns about the blurred line between government and industry.
Susan Antilla, a columnist for Bloomberg View, said that POGO’s research “shows the relationships between the defense bar and current SEC management” and raises the question: “What side are regulators on?”
Rachel Barkow, a professor at NYU Law School, said the problem is not the revolving door per se, but rather the idea that “regulators are really on the same team or focused in the same way as the entities they’re supposed to be regulating. I think that’s a valid concern.”
Reacting to POGO’s report
Throughout the discussion, panelists offered their reactions to POGO’s report.
Brenner dismissed some of POGO’s findings. “The POGO study is interesting, from my perspective, mostly for the facts that it reports as opposed to the speculation of what might have maybe possibly could have influenced somebody to do something,” he said.
“The POGO study focused on…a number of instances where former employees appeared on one side of [a regulatory] issue,” Brenner said. “And it concluded: you can’t really tell whether they had any influence or not. What it didn’t focus on is the former employees who appeared on the other side of that issue. I’m almost certain they must have.”
Antilla later pushed back on this argument, pointing out that industry groups tend to dominate the regulatory process.
“If you look at the rulemaking information that the SEC puts on its website, particularly if you look at the Dodd-Frank Act, you’ll see the preponderance of the meetings that the SEC has is with the industry or the Financial Services Roundtable or fill-in-the-blank with the bank’s name,” she said.
“Every once in a while you’ll see some poor, literally poverty-stricken consumer advocate in there too,” Antilla added, “but I can promise you, they are not at the cocktail parties with the SEC alumni and the current SEC people. You can just look at those filings and you’ll see there’s no [consumer] voice.”
In its report, POGO pointed out that “SEC alumni aren’t the only lawyers seeking waivers, and that you don’t have to be an alumnus to win one.” But we raised a concern that the revolving door can “shape the environment in which all SEC employees work and the institution’s mindset, to the benefit of companies accused of wrongdoing.”
“It’s hard to show on a case-by-case basis that the revolving door is a direct cause of weak SEC action,” POGO wrote, but “the revolving door may help shape the culture and ethos of employees throughout the SEC—and the institution’s prevailing way of doing business. This kind of influence is hard to measure, but it can still be beneficial to the companies and individuals regulated by the SEC.”
Not surprisingly, the panelists had many different ideas about how to address the potential problems stemming from the revolving door and regulatory capture.
Some panelists focused on the issue of transparency.
“I’m a big believer…in transparency,” Perrelli said. “Among other things, I think what’s most important about [POGO’s report] is it lets people have a debate and discussion. I’m one of the first to tell you that there’s a lot that happens in government that nobody actually knows about. Having that kind of information available for lots of different agencies, I think, would be a benefit to the public.”
At one point, I mentioned that POGO filed a FOIA request for information showing how the SEC has handled potential conflicts of interest involving Commissioner Daniel M. Gallagher, Jr., a former partner at WilmerHale. I noted that the agency withheld approximately 1,500 pages in response. As we said in our report, “[t]he sheer volume of the material suggests that sorting out Gallagher’s potential ethical conflicts takes an extensive effort.”
“I think we can agree…that you can’t get rid of conflicts,” Cohn remarked, “but one of the ways to cure them is disclosure. Fifteen hundred pages were withheld...isn’t there a problem with transparency, and isn’t that a way to deal with this revolving door?”
“I’m not sure it’s a problem,” Brenner said, “if those documents go, as I suspect they probably are, to matters in which [Gallagher] is not allowed to participate.”
“But we’ll never know,” Cohn responded.
Other panelists focused on recruiting employees from different backgrounds into public service.
“What people really want is the idea that the government is as focused about people on Main Street as it is about Wall Street corporate executives,” Barkow said. “You’re going to have this appearance problem unless the government does a little bit more to try and…get more voices on its regulatory bodies that have more diversity in background than just working for the financial sector.”
The debate over the revolving door continues as Congress considers the nomination of Mary Jo White, a former U.S. Attorney who spent the last decade at a white-collar defense firm, to serve as the agency’s next chairman.
Will White be able to view the SEC’s work through the lens of a consumer? What will happen over the course of her career when she’s in a position to oversee her past clients, such as JPMorgan or UBS? If nothing else, White’s nomination highlights the challenge that the SEC and many agencies face when senior officials have tangled ties to the industry they’re supposed to be regulating.