Watchdog report raises concerns about SEC’s revolving door


President Obama stands next to Mary Jo White, a former United States attorney, after he announces her to be the next chairwoman of the Securities and Exchange Commission. Since White was nominated to lead the agency, some have cited her work with Wall Street clients. (LARRY DOWNING/REUTERS)
February 11, 2013

Usually it’s the government workers who come under scrutiny when they leave an agency and land a high-paying job that leverages their contacts within the bureaucracy.

But Mary Jo White, President Obama’s pick to head the Securities and Exchange Commission, is giving up a lot of money to join the government. And it’s her contacts on the outside that are causing the stir — specifically her most recent work defending Wall Street clients at Debevoise & Plimpton.

While Obama highlighted White’s reputation as a feisty New York prosecutor who took down terrorists and mobsters, investors’ advocates have questioned whether she’ll be as tough on Wall Street given her most recent stint in the private sector.

Now, two developments have refocused attention on these questions: a newly released list of White’s clients at Debevoise and a report from the Project on Government Oversight (POGO).

A few days ago, White disclosed her clients to the federal government as required by law. Among them were JPMorgan Chase, Deloitte & Touche, General Electric and Verizon Communications. Also listed were individuals such as Rajat Gupta, the former Goldman Sachs board member convicted of insider trading, and former Bank of America chief executive Kenneth Lewis. Three clients were left off the list because of attorney-client privilege, the disclosure form said.

In a letter to the SEC, White said she would not participate in any matter involving a former client for one year after working with that client, unless she is authorized to do so. White also said she would retire from ­Debevoise if confirmed and refrain from taking part in agency work involving the firm’s clients.

The retirement means that she will give up her law firm salary — about $2.4 million last year — for a government salary of about $164,000 a year for SEC chairmen. However, White has opted to receive a lump-sum payment of about $2 million in retirement pay within 60 days of taking the SEC job, according to disclosure forms.

But the POGO report, released Monday, concluded that it’s never that easy to cut off ties — or perceived ties — to a past client. The pervasiveness of the revolving door in extreme cases can lead to “regulatory capture,” a climate in which an agency is effectively taken over by the industry it regulates.

Inside and outside the SEC, many have said that hiring talent from industry to the agency gives the agency much needed expertise. Once they join the government they recuse themselves on a case-by-case basis when potential conflicts arise, the agency said.

But the POGO study concluded that the rules restricting those hires from handling work that could affect former clients do not go far enough, a sentiment echoed by Sen. Charles E. Grassley (R-Iowa).

“It’s especially important for the SEC to fix this problem with the arrival of a new chairman who, if confirmed, would bring a lot of good things to the commission but also a lot of connections to the securities industry she’d be regulating,” Grassley said in a statement Monday.

The report made a passing mention of White’s routine defense of Wall Street clients, but it devoted much more time to possible conflicts among current commissioners.

It mentions the background of SEC commissioner Daniel Gallagher, a Republican who represented powerhouse clients during his time at WilmerHale, including Bank of America, Deutsche Bank and GE Capital. Many of his former clients have come under SEC scrutiny or have a stake in the rules the SEC is crafting to comply with the Dodd-Frank financial overhaul, the report said.

Gallagher did not return calls seeking comment.

Through the Freedom of Information Act, POGO requested records showing how the SEC has handled Gallagher’s potential conflicts. The agency provided 10 pages and withheld about 1,500, POGO said.The report also questioned Democratic SEC commissioner Luis Aguilar’s role in derailing an effort to revamp the money market fund industry, where he worked for years before joining the SEC. Former chairman Mary Schapiro abandoned a plan to overhaul the industry when it became clear that three of the five commissioners did not support the it — Aguilar and the commission’s two Republicans.

Aguilar had been executive vice president of Invesco, a money management firm that opposed Schapiro’s proposal. Invesco officials met with Aguilar to complain about the plan, and Aguilar issued a statement that closely tracked Invesco’s arguments, the report said.

POGO stopped short of flatly concluding that Aguilar’s relationship with the industry influenced his similar point of view. In his response to POGO, Aguilar said he’s not “anybody’s puppet.” He said his background in money management enabled him to better assess the industry’s argument and put it in context. Recently, Aguilar has become more sympathetic to the idea of an industry overhaul.

POGO also listed a half-dozen SEC alumni who met with agency officials to argue against Schapiro’s plan but concluded that it’s “hard to know how much any of these alumni contributed to the at least temporary derailment” of the proposal.

One of the main points of the POGO study is that SEC lawyers who leave the agency end up representing clients who have matters before the SEC. The study found that from 2001 through 2010, 400 SEC alumni filed almost 2,000 disclosure forms saying they planned to represent an employer or client before the agency.

That’s just the “tip of the iceberg,” the report said, “because former SEC employees are required to file them only during the first two years after they leave the agency.”

John Nester, an SEC spokesman, said in an e-mail that the agency follows regulations and laws designed to deter conflicts.

“The report is a series of anecdotes that overlooks the fact that the commission has strong ethics rules in place that assure decisions are made on their merits according to the rules and regulations. Indeed, the report found that the outcomes were the same regardless of whether former employees were involved,” he said.

Almost 7 percent of the agency’s 4,000 workers turned over in 2012, Nester said. Half of them retired or transferred to other government agencies.

Dina ElBoghdady covers housing policy for The Washington Post.
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