Describing the Symptom, Not the Disease: The Revolving Door at the SEC
The Project On Government Oversight, a non-profit group known as POGO, has issued a detailed report entitled, “Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture.” The report painstakingly traces professionals, particularly lawyers, who have moved between the SEC and the private sector, and most importantly, their efforts to influence rulemaking, enforcement, and exemptions. The SEC’s failed attempt to promulgate new rules for money market funds, which I wrote about (“Killing Fundamental Reform: Money Market Funds”) in late October, serves as a case study in the report.
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This report doesn't undercover anything new. The influence of former employees over regulatory matters at the SEC and other government agencies is as old as government itself. Nonetheless, the details in this report are deeply disturbing because many very capable former-SEC staffers and commissioners are now working for money managers and investment banks to weaken Dodd-Frank and host of other important regulations. They are also helping their clients avoid the most serious sanctions sought by the SEC and Department of Justice. Once they pass into the private sector, their job is to be a zealous advocate for their clients, and they are very good at their jobs.
Even more problematic, is the report’s assertion that some current SEC professionals have not completely shed their clients’ interests when they join the agency. The evidence, however, for this proposition is murkier. Nonetheless, it is the central question facing the nomination of Mary Jo White to be SEC Chairman (see, “My Own Spin Through the Revolving Door.”).
After discussing a long list of troubling practices, the report falls short when it comes to recommendations. This is understandable because the real solutions are extremely unlikely. As expected, POGO calls on the SEC and Congress to further restrict the ability of professionals to pass through the revolving door too rapidly. It calls for greater consistency in applying the revolving door” restrictions, and recommends greater disclosure when ex-SEC commissioners and staffers appear before the Commission. Implementing these proposals will make us feel better, but they won’t change anything about how the SEC operates.
At its heart, this is a problem of attitude and culture, and those are difficult things to change. Long ago, the staff at the SEC lost their identities as civil servants. They, along with their colleagues at other agencies, became bureaucrats. Congressional Democrats and Republicans alike and successive administrations spent three decades telling the bureaucrats to get out of the way, and let the financial markets flourish. They appointed and confirmed Commissioners to the SEC who pushed this philosophy. After the credit crisis, most Democrats changed their tune, while a large swath of Republicans continue to try to emasculate the agency. At least, the Republican are honest about their intentions. Imagine what happens to an agency and its employees when it is continually berated and starved for resources. Many staff members eventually wilt under the assault and seek work elsewhere. And, departures beget even more departures. As the report points account, the folks departing the SEC have about 15 years of experience with the agency. Theirs was not a brief dalliance with the public sector in order to learn the ins and outs of the SEC on behalf of their future clients. No, many of these people were driven from the agency. And, eventually the agency started to resemble the caricature that the politicians had been painting.
The revolving door isn’t the disease at the SEC. It is a symptom of the disease. POGO’s report is a great clinical guide to those symptoms, but the disease will grow even if we address every one of POGO’s recommendations.