SEC Recusals Highlight Revolving Door Dangers

The toll of the revolving door between the government and the securities industry was dramatically illustrated last week when two of the top five officials at the Securities and Exchange Commission (SEC) sat on the sidelines as the agency approved a settlement with JPMorgan Chase & Co.

The Wall Street Journal reported that SEC Chair Mary Jo White and Commissioner Daniel Gallagher recused themselves from voting on the settlement because of legal work they had done for JPMorgan.

The remaining three commissioners voted two-to-one to approve the settlement, which included a rare admission of wrongdoing by JPMorgan.

Andrew Ceresney, the agency’s co-director of enforcement, also recused himself, the Journal reported, because he represented JPMorgan when he was White’s colleague at Debevoise & Plimpton, a major law firm.

The Project On Government Oversight has raised concerns about the dangers of the revolving door before, including reports in February and March highlighting White and Gallagher’s potential conflicts. For instance, Gallagher’s former clients include powerhouse financial firms such as Bank of America, Deutsche Bank AG, and GE Capital Corp., according to a financial disclosure statement filed with the Office of Government Ethics.

When POGO requested ethics records relating to Gallagher—documents that would show how he and the agency manage potential conflicts of interest when confronted with matters affecting his former clients and the like—the SEC provided 10 pages in part and withheld 1,500 pages in their entirety. That left the SEC’s handling of the potential conflicts largely shrouded from public scrutiny.

When asked last year if recusals ever hinder the SEC’s work, an agency spokesman told POGO that the SEC “is blessed with a deep pool of talented experts on just about any issue that comes up, so it really hasn’t been an issue.” But these deep ranks do little when it comes to the SEC’s five, irreplaceable commissioners, who are often barred under federal ethics rules from working on matters affecting their past clients, including some of Wall Street’s most powerful firms. During a recent two-year period, at least one commissioner didn’t vote in 59 of the agency’s 118 closed-door meetings, according to records obtained by The Wall Street Journal.

How effective can the SEC be when its commissioners are sitting on the sidelines? On the other hand, if the commissioners and other senior officials are permitted to work on issues affecting their former clients, how can the public be assured that the agency is acting with independence and objectivity? In either case, investors lose.

Even if the SEC cannot fully eliminate conflicts of interest, it should at least inform the public about how it handles those cases. In its February report, POGO called on the SEC and other federal agencies to provide online public access to recusals and other important ethics records.