Sen. Charles Grassley (R., Iowa), the ranking minority member on the Senate Finance Committee, has asked the Securities and Exchange Commission’s inspector general, David Kotz, to investigate the SEC’s “revolving door,” through which many senior SEC officials transition to lucrative positions with the very securities firms regulated by the SEC. See “SEC ‘Revolving Door’ Under Review,” by Tom McGinty, Wall Street Journal, June 16, 2010.
Sen. Grassley’s request was apparently precipitated by the recent departure of Elizabeth King, an associate director in the SEC’s Division of Trading and Markets, reportedly overseeing the options and single-stock futures markets, who left the SEC after 17 years and went to work for Getco LLC, a Chicago-based high-frequency trading firm. Last summer, the SEC began examining the impact of high-frequency trading. In the wake of the recent “flash crash,” the examination became a priority. Some experts believe that the crash was caused or exacerbated by complex computer algorithms used by high-frequency trading firms.
Mr. Grassley said the hiring of Ms. King raises questions about her involvement in both the SEC’s flash-crash investigation and its general examination of high-frequency trading. The article noted, however, that Ms. King “did not have a meaningful role” in the SEC’s examination of high-frequency trading, according to people familiar with her responsibilities at the SEC.
Sen. Grassley said that many of these “revolving door” officials have begun representing new employers in matters before the SEC within days of leaving the SEC. A Getco spokeswoman reportedly told the WSJ that Ms. King had “recused herself from matters affecting our business beginning in March?well before the market events of May 6.”
“We need to ensure that SEC officials are more focused on regulation and enforcement than on getting their next job in the industry they are supposed to oversee,” Sen. Grassley was quoted as saying in a statement. “The inspector general’s work can be a valuable tool to help the SEC become more open and transparent about its employees’ ties to the industry it regulates,” he added.
Mr. Kotz commented: “We are currently conducting an investigation of allegations very recently brought to our attention that a prominent law firm’s significant ties with the SEC, specifically, the prevalence of SEC attorneys leaving the agency to join this particular law firm, led to the SEC’s failure to take appropriate actions in a matter involving the law firm.”
The SEC put out a statement saying that it has a “rigorous program for employees who are considering leaving the commission to help them comply not just with the letter but also with the spirit of the law.” As a senior staffer, Ms. King is subject to a one-year “cooling off” period during which federal law prohibits her from representing clients before the SEC, according to the article.
But that is not enough, according to Sen. Edward Kaufman (D., Del.). “Ms. King, from the day she is hired, will be able to inform Getco of her knowledge of the current views of every commissioner and fellow staffers with whom she worked as to the meaning of the May 6 flash crash and the possible direction of future studies and rule makings involving high-frequency trading,” Mr. Kaufman said. Congress or the SEC should consider prohibiting employees from going to work for firms affected by rule making in which they had a significant role during the previous year, he added.
Lower-level SEC face no cooling off period, and can legally appear at the SEC on behalf of clients the day after they leave, as long as they file letters disclosing the representation. One such employee – a senior accountant ? filed such a letter five days after leaving the SEC disclosing that he would be representing a client involved in a “nonpublic investigation” by his old division. Another employee – an enforcement division attorney ? began representing a client 11 days after leaving, according to the article.
In his response to Sen. Grassley’s request, Kotz noted that he had reported on a number of revolving-door conflicts in connection with other SEC investigations:
– In connection with SEC investigations of Allied Capital Corp., Kotz found that SEC staffers were unduly influenced by two former SEC employees, one of whom represented the firm in meetings with the SEC.
– In connection with SEC investigations of R. Allen Stanford, who is contesting SEC charges of operating a multibillion-dollar Ponzi scheme, Kotz found that a former SEC enforcement official repeatedly quashed probes of Stanford, after which he left the SEC and sought to represent Stanford in private practice.
– Kotz also found that enforcement director Linda Thomsen had given improper disclosures and assurances about SEC matters to a former enforcement director working for J.P. Morgan Chase & Co. The SEC later cleared Ms. Thomsen of any wrongdoing.
– In a 2008, Mr. Kotz found that the director of the SEC’s regional office in Miami had failed to vigorously enforce an action against Bear Stearns & Co. due to his personal relationship with a former SEC staff attorney who was representing Bear Stearns.
J. Boyd Page, senior partner of Page Perry, an Atlanta law firm that represents investors in securities matters, said, “This revolving door between the SEC and the securities industry makes it appear like “the fox is guarding the hen house.” It is offensive to investors who have been victimized by the likes of Madoff and other perpetrators of securities fraud. We need unconflicted and zealous enforcement by the SEC. We applaud the senators’ vigilance and efforts to further these goals. SEC employees should not be permitted to take knowledge which they gained through the SEC one day and use it as a saber to undercut the SEC’s efforts the next day.”