By Bruce Carton
Every year about four percent of the employees working at the Securities and Exchange Commission decide for various reasons to voluntarily leave the agency and seek greener pastures. Having spent years gaining experience and connections at the nation’s top financial regulator, these lawyers, accountants, economists, and others are often in high demand when they return to the private sector. This is particularly true for senior SEC officials returning to private practice.
In better economic times, this so-called “revolving door” of employees moving from public to private sector gets little scrutiny or criticism. When financial markets are rocky, however, and the SEC is inevitably questioned as to whether it has done all it could to prevent fraud, critics often point to the revolving door as a cause of the agency’s failings.
But why? What is the evidence that the movement of SEC employees to the private sector hurts the SEC’s enforcement or inspections efforts? And why shouldn’t companies benefit from the specialized knowledge of the securities laws and agency procedures that SEC employees gain through their service? (In the interest of full disclosure, I myself left the SEC for the private sector after serving as an attorney in the Enforcement Division from 1995-1997.)
The attacks that I’ve seen on the SEC’s revolving door cannot even seem to agree on why it is a scourge that must be eliminated. In 2009, for example, author Michael Lewis and hedge fund manager David Einhorn wrote in The New York Times that the exodus of SEC enforcement attorneys to high-paying Wall Street jobs was a problem because it caused the SEC to go easy on Wall Street. They asserted that:
[A]nything the SEC does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the SEC. Thus it seldom penalizes serious corporate and management malfeasance—out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined …
It’s not hard to see why the SEC behaves as it does. If you work for the Enforcement Division of the SEC you probably know in the back of your mind (and in the front too) that if you maintain good relations with Wall Street, you might soon be paid huge sums of money to be employed by it.
Lewis and Einhorn concluded that the “obvious” solution to this is to “forbid regulators, for some meaningful amount of time after they have left the SEC, from accepting high-paying jobs with Wall Street firms.”
Other critics of the revolving door argue the exact opposite position: that it causes regulators to be too harsh and overzealous in pursuing cases so that they can create a name for themselves before heading into private practice. Last year, well-known lawyer Harvey Silverglate laid out this argument on his “Injustice Department” blog at Forbes. He wrote that the revolving door rests upon a “pernicious underbelly of overzealous and often unfair prosecutions, [and] juked conviction stats” designed more to help make “prosecutors’ reputations on the scalps of private sector companies and executives, than for achieving true justice.”
Some critics take the “overzealous enforcement” argument one giant step further, saying that the revolving door motivates regulators and prosecutors not only to create demand for themselves, but for entire practice areas. In a May 2010 cover story, Forbes magazine implied that the recent surge in enforcement of the Foreign Corrupt Practices Act was attributable to FCPA prosecutors’ desire to “creat[e] a lucrative industry—FCPA defense work—in which they will someday be prime candidates for the cushy assignments.” Similarly, law professor Joseph Yockey wrote in July 2011 that:
A more cynical explanation for the government’s focus on the FCPA is based on the ‘revolving door’ between government and private-sector employment. The rise in FCPA enforcement has produced a cottage industry of FCPA experts, including lawyers, accountants, and consultants at prestigious firms, which [Department of Justice] and SEC personnel often join after leaving their federal jobs for considerably higher compensation.
Of course, potential conflicts of interest by departing SEC employees are well known, and already addressed by a detailed set of regulations governing post-employment restrictions. These restrictions include a lifetime prohibition on former SEC employees from appearing before the Commission on matters that they participated in while working at the agency; a one-year ban on certain former senior employees from appearing in a representative capacity before the Commission with the intent to influence the Commission on any matter; and a blanket requirement that for two years after leaving, all former SEC employees must file a post-employment statement with the agency if they expect to appear before the Commission, or communicate with it or its employees.
What the Research Says
In May, the Project on Government Oversight released a report entitled, “Revolving Regulators: SEC Faces Ethic Challenges With Revolving Door.” The POGO study reviewed nearly 800 post-employment statements filed from 2006 through 2010 to study whether the SEC had adequate policies and procedures in place to identify and mitigate any conflicts of interest involving former SEC employees. POGO found several instances through the years where enforcement actions “may have” been undermined by former employees, but did not point to any real systemic problem.
POGO ultimately recommended that the SEC impose a two-year period for all former employees during which they would not be permitted to represent any entity on any matter before the SEC. POGO also recommended that for two years after leaving the Commission, former employees should have to file a statement “whenever they are employed or retained by a client with business before the Commission, regardless of whether they intend to appear before the SEC on the client’s behalf.”
The U.S. Government Accountability Office released its own report on the subject in July. The GAO report similarly examined the extent to which employees leave the SEC to work for or represent regulated entities, the potential issues associated with such movements, and the internal controls the SEC has in place to mitigate potential conflicts. The GAO found that there were benefits and disadvantages to movement by employees between the SEC and the private sector.
On the benefits, the GAO found that former SEC employees provide firms in the private sector with better regulatory understanding and compliance and better communication with the SEC. Such movement also helps the SEC recruit individuals with specialized knowledge in areas that the SEC regulates, the GAO found. But the GAO report states that the revolving door also creates “challenges” including the possibility that “SEC employees may be influenced by the prospect of future employment opportunities to be more lenient or favor prospective future employers while undertaking SEC actions.” In addition, even if there is no actual conflict or effect on the enforcement process, the GAO stated that: “personal contact between current and former SEC employees may create the appearance of conflicts of interest,” thus undermining public confidence.
Neither of the recent reports reveals a significant revolving door problem in my view. While there may be “strong theoretical foundations” for the idea that the revolving door will lead to a more conciliatory approach by regulators (as one professor cited in the POGO report says), there does not appear to be much evidence of this in the real world. In fact, based on my own experience as an attorney in the SEC’s enforcement division, I believe few lawyers or other professionals at the SEC would agree, even privately, with the theory that the revolving door motivates lax enforcement. To the contrary, the true motivation to those who are interested in leaving the agency some day for private practice is to bring important, high-impact cases.
This incentive to bring high-impact cases does not mean that I believe for one second that securities regulators and prosecutors are, as last year’s Forbes article seemed to suggest, “ginning up” weak or non-existent cases to “feed the lawyers who used to have their jobs” or to fuel cottage industries such as FCPA defense work in anticipation of their own eventual exit through the revolving door. Rather, I continue to believe that the overwhelming majority of prosecutors and regulators in the securities area act with integrity and pursue the cases that they feel should be brought based on the law and the facts. There is a lengthy list of things that pose significant challenges to the SEC’s ability to enforce the securities laws, but I do not consider the revolving door to be one of them.
Originally published in Compliance Week. Reprinted with permission.
© 2011 Haymarket Media, Inc. All Rights Reserved. Compliance Week can be found at http://www.complianceweek.com. Call (888) 519-9200 for more information.