The SEC's Dangerous Liaisons

When four academics examined the Securities and Exchange Commission's revolving door seven months ago, they concluded that concerns about lax oversight were unfounded. If anything, they said, the prospect of future job opportunities for SEC lawyers resulted in more aggressive enforcement.

The Project on Government Oversight, a left-leaning Washington think tank, offers an alternative view. In a report out today, POGO devastatingly picks apart the earlier study. At the same time, POGO shows that the SEC's door isn't just revolving: It's spinning out of control.

From 2001 to 2010, POGO says, more than 400 SEC alumni filed about 2,000 disclosure forms (which POGO obtained using the Freedom of Information Act) saying they planned to represent an employer before the SEC. That may vastly understate the problem because, as POGO points out, former SEC employees must file such statements for only two years after departing.

The SEC has exempted some senior employees (even sometimes blacking out their names on SEC documents) from a one-year cooling-off period during which they are barred from representing clients before the agency, POGO found.

It's not news that SEC alumni have gone to work for financial institutions. The ex-employees try to soften the blow of regulations and enforcement actions or stop investigations altogether. They also seek to block shareholder proposals that clients dislike or win special exemptions from the law, the report says.

POGO doesn't uncover wrongdoing per se. But by putting a spotlight on the influence trade -- and how accepted it is as a part of Washington culture -- the report makes it seem more like a racket than a business.

Last year, for example, as the SEC sought to tighten the regulation of money-market mutual funds, five former agency employees lobbied or advocated against the plan on behalf of fund companies and trade groups. An SEC Commissioner, Luis Aguilar, who once worked for Invesco, an investment firm that sells money-market funds, was pivotal in the rule's demise.

Another case concerns UBS AG, the giant Swiss bank that has repeatedly paid fines and penalties in the last year for violating U.S. securities laws. When the bank faced the possibility that it might be barred from issuing new securities using a regulatory shortcut -- such SEC bypasses are usually revoked when a company commits securities fraud -- it hired former SEC enforcement lawyers to get the rule waived.

The report arrives at a sensitive time. Mary Jo White, a former U.S. attorney in Manhattan who, as a private-sector lawyer often defended financial-industry executives, is about to face Senate confirmation hearings to be the SEC chairman. The spinning door is likely to be a point of contention.

The report also comes days after the departure of the SEC's enforcement director, Robert Khuzami (he joined the agency from Deutsche Bank AG) for an as-yet unnamed Wall Street post. Most of his predecessors took lucrative jobs as general counsel at major Wall Street firms or joined law firms whose clients are financial companies.

So how did an earlier study conclude the opposite? POGO's analysis: The authors only considered employees who went to work for law firms, overlooking those who were hired by Wall Street firms directly.

The earlier study also focused on enforcement of existing laws and regulations without considering the revolving door's effect on new rulemaking. The study further relied on a database of cases involving only alleged accounting violations, leaving out some of the last decade's more celebrated cases involving conflicts of interest by research analysts, manipulative mutual-fund trading, misspelling of auction-rate securities and bid-rigging on municipal bonds. Those are big gaps.

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