Give Now

We must close the loophole that allows law enforcement to buy our personal data without a warrant.

Exposing Corruption and Preventing Abuse of Power

SEC to Close Revolving Door Loophole

The Securities and Exchange Commission (SEC) is closing a loophole that allowed certain employees to lobby the agency immediately after leaving.

The rule change, first reported last week by Bloomberg, strikes at the revolving door between the federal regulator and Wall Street, and has raised the hackles of some industry lawyers who served at the agency.

The Project On Government Oversight highlighted the ethics loophole in a February report on the revolving door. POGO’s report—based on disclosure statements filed by hundreds of SEC alumni—recommended longer timeout periods for employees who come from or return to Wall Street.

SEC records obtained by POGO show how one former litigator took advantage of the loophole, disclosing within months of leaving that he would be representing Merrill Lynch in more than 17 enforcement cases and other matters pending before the agency.

As POGO described in its report, Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture, the revolving door may cause staffers throughout the agency to identify too closely with the industry they oversee, effectively blurring the line between regulator and regulated. This can make it easier for private interests to sway SEC policy and may “help to explain why the agency does not take a tougher stand against the businesses it oversees,” POGO wrote.

Now, as a result of the new rule change, SEC alumni who made more than $155,440.50 a year will have to wait at least one year before they can represent clients before the agency, according to reports citing the ethics memo. For instance, a former SEC trial lawyer may have to wait a year before representing a defendant in an agency enforcement action, according to Reuters.

The rule change will not affect the agency’s most senior and highly-paid officials, who were never covered by the loophole and already had to wait at least one year before contacting the agency.

The new rule, expected to take effect in early 2014, reverses a stance taken by various SEC officials over the years.

Across the federal government, a standard “cooling-off” period essentially requires people leaving “senior” government positions to sit on the bench for one year before getting into the game of directly lobbying their former colleagues on official business. For “very senior” federal employees, the typical cooling-off period is two years.

But as early as 1991, the SEC sought to excuse certain of its senior employees from the one-year prohibition.

The SEC’s ethics official at the time argued that the agency needed the exemption in order to recruit talented litigators. Without the exemption, he wrote, senior litigators “would have difficulty conducting a securities law practice” after leaving because “Commission litigation is a major component of such a practice.”

The Office of Government Ethics (OGE) granted the SEC’s waiver request 22 years ago.

In 2003, the SEC wanted to exempt other highly-paid positions from the one-year timeout rule. The positions included supervisory accountants, attorneys, economists, analysts and administrative specialists—“quintessential government middle managers,” according to an agency ethics official at the time.

Once again, the SEC said the timeout rule would make it “exceptionally more difficult” for these employees to find work after leaving the agency. Once again, OGE agreed to waive the rule.

In January 2011, a federal watchdog criticized the exemption. The loophole had “enabled some SEC employees who are highly compensated and who hold prominent positions to evade the ban, despite [the fact] that they are the type of employees the ban was intended to cover,” the SEC Inspector General at the time wrote in a report about a former SEC official who had joined a financial firm.

A “counsel to a Commissioner who has a salary in excess of $200,000, has been privy to a wealth of confidential SEC information, and has high-level contacts at the SEC due to his position is currently able to leave the Commission and immediately represent industry interests to the Commission,” the watchdog observed.

The Inspector General concluded that the “blanket exemption...opens the door to potential abuse,” and urged the agency to work with OGE to narrow the loophole.

It has taken more than two and a half years for the watchdog’s recommendation to be implemented. SEC spokesman John Nester told POGO last year that the loophole was “no longer deemed necessary,” but he did not elaborate on how the agency made that determination, and he did not respond to POGO’s latest request for comment. An OGE spokesman said the agency does not comment on matters under regulatory review.

The new rule puts the SEC “on an even footing with...peer regulators and adds an additional layer of protection against even the appearance of impropriety when former employees take on new jobs,” according to the internal ethics memo announcing the rule change, as quoted in news reports.

In its report, POGO said the cooling-off rule isn’t an absolute impediment to former government officials cashing in on the revolving door. For example, it does not bar agency alumni from giving behind-the-scenes assistance to their private colleagues and clients, as long as the alumni don’t personally appear before the agency during their first year out. (In 2010, a bipartisan group of Senators introduced legislation aimed at preventing this kind of behind-the-scenes lobbying, but the measure was not adopted.)

What’s more, the ethics restrictions at the SEC are even looser than at some government departments. At the SEC, as at other independent regulatory agencies, the mandatory two-year cooling-off period for “very senior” personnel does not apply to even the top agency officials, such as the SEC chairman, commissioners, and division directors.

While a former Treasury Secretary would have to wait two years before representing a client before the executive branch, the SEC chairman and commissioners only have to wait one year, according to federal ethics rules.

“Every one of those commissioners should have the two-year ban,” Richard Painter, a professor at the University of Minnesota Law School, said in a 2012 Bloomberg article.

To mitigate the revolving door’s most adverse effects, POGO has recommended that Congress “require employees who leave the SEC and other federal agencies to wait at least two years before contacting the agency on behalf of anyone to discuss agency business, including regulations or rules, policymaking, federal funds, examinations, and enforcement matters.”

But as word spread last week about the SEC’s about-face, some SEC alumni told POGO that the new one-year ban could be particularly hard on the agency’s rank-and-file employees.

Alex Rue, who left the SEC in 2012 after serving for 22 years as a staff and trial attorney, said the one-year ban “is not a handicap to someone like” former SEC enforcement chief Robert Khuzami, who left the agency and joined a corporate law firm in July for a reported paycheck of $5 million.

“The firm can afford to support him for a year while he consults with clients and does other things,” Rue said.

On the other hand, he said, “if you look at assistants or trial attorneys,” who will now lose the exception and “aren’t perceived as having that sort of clout, there would be less willingness on the part of a big law firm to take somebody like that in if they could not be actively involved in SEC representation for a year.”

Rue said there may be a “substantial number of high mid-level people leaving before they’re subject to the new rule.”

Jorge deNeve, a former staff attorney in the SEC’s Los Angeles office, told POGO that law firms hire agency alumni because their “experience and expertise is the SEC—the rules, the process, that area of the law.”

“If you’re not dealing with the agency,” he said, “the skills and experience don’t transfer as well.”

“Obviously, if you’re a commissioner, director, senior officer of the agency, it’s an easier sell for a law firm to say, ‘Okay, you’re going to have to sit out for a year,’” deNeve explained. “It may be a harder sell for a lower-level attorney.”

SEC alumni had differing views on whether the rule change would affect the agency’s ability to recruit top talent in the future.

“I don’t think it’s good for morale,” deNeve said. He added that he was unsure whether a one-year ban would have changed his decision to join the SEC, “but if somebody had told me it would be harder for me to come out, it may have impacted my thinking.”

Amy Greer, a former trial counsel in the SEC’s Philadelphia office, told POGO that the standard one-year ban hasn’t stopped other agencies from “drawing in people who are interested in government service and want the benefits of working at an agency.”

“Most people will find that a year is a pretty short time in a career,” Greer said, “and there are a lot of ways to add value during that time before actually appearing before the Commission.”

The “prior ethics process largely worked,” she added, but “anything the agency can do to further engender the public’s trust, I think, is valuable.”