A senior regulatory official tasked with policing U.S. financial markets and high-speed trading used to represent firms with a major stake in the government’s oversight of those matters, according to an ethics disclosure form obtained by the Project On Government Oversight.
Stephen Luparello, named in February 2014 to head the Trading and Markets Division at the Securities and Exchange Commission (SEC), previously worked as an attorney at Wilmer Cutler Pickering Hale and Dorr (WilmerHale), a law firm that routinely represents big businesses before the SEC and other federal regulators.
During his stint at WilmerHale from 2012 until he joined the SEC this year, Luparello represented powerhouse Wall Street clients such as Bank of America, JPMorgan, Morgan Stanley, Goldman Sachs, and the Securities Industry and Financial Markets Association (SIFMA), according to his disclosure form.
Some of Luparello’s former clients have met with senior SEC officials to discuss a wide-ranging review of high-speed trading and other market issues. As an SEC division director, Luparello is now in a position where he can regulate those very same clients.
Luparello’s career path is illustrative of the revolving door between the SEC and Wall Street, and WilmerHale in particular. Luparello is one of several SEC officials who used to work at the law firm. In addition, WilmerHale is one of the top recruiters of agency alumni, according to records obtained by POGO that show how often former SEC personnel have represented the firm’s clients before the agency.
Many SEC alumni have gone to work for powerhouse firms in the world of high-frequency trading. An internal study conducted by the Royal Bank of Canada found that “more than two hundred SEC staffers since 2007 had left their government jobs to work for high-frequency trading firms or the firms that lobbied Washington on their behalf,” according to Michael Lewis’s book, Flash Boys: A Wall Street Revolt.
Lewis, giving voice to long-standing criticisms about high-speed trading, has alleged that the stock markets are essentially rigged and that the victims are “[e]veybody who has an investment” in those markets. In a widely publicized speech this month, SEC Chair Mary Jo White took a different view, arguing that the current market structure “is not fundamentally broken, let alone rigged.” Nonetheless, she announced a variety of additional measures the agency will be taking as part of its review. “[W]e must evaluate all issues through the prism of the best interest of investors,” she said.
As Luparello evaluates those issues, he may be overseeing some of the same firms he used to represent. It is unclear what steps, if any, he is taking to avoid actual or apparent conflicts of interest. (We asked the SEC for this information and will update this post with any relevant details.)
New government officials typically have to sit on the sidelines for at least one year before they can directly regulate a former client or employer. But that restriction does not necessarily apply when officials are working on industry-wide agency rules, an ethics loophole POGO wrote about in a 2013 report on the SEC revolving door.
Before he joined WilmerHale, Luparello was a senior executive at the Financial Industry Regulatory Authority (FINRA), an industry-funded self-regulatory organization that plays a critical role in the oversight of U.S. stock exchanges.
Luparello’s pay at FINRA and WilmerHale shows how the bread is often more heavily buttered on industry’s side of the revolving door. He earned around $2.3 million in “[l]aw partnership income” at WilmerHale in 2013 and 2014, according to the disclosure form obtained by POGO. And he took home nearly $1.3 million in salary and incentive compensation from FINRA in 2012, according to the self-regulatory group’s annual report.
"The SEC has a rigorous program in place to address any appearance of partiality in our work," a spokeswoman for the SEC told POGO. "Mr. Luparello complies with the Commission's stringent rules and policies, and he has and will continue to consult with the chief ethics counsel as appropriate."
Luparello did not immediately respond to POGO's request for comment.