SEC Revolving Door Fuels Wall Street's Too Big To Fail Problem


WASHINGTON -- The steady flow of officials from the Securities and Exchange Commission into top corporate jobs feeds a regulatory culture of weak law enforcement and preferential treatment for big banks, according to a new report from the Project on Government Oversight.

The group, a non-partisan investigative watchdog, said information it obtained through a Freedom of Information Act request shows 419 former SEC employees filed at least 1,949 disclosure statements revealing that they planned to represent a private-sector client with SEC business from 2001 to 2010. SEC employees are only required to file disclosure statements for the first two years after leaving the agency.

The flood of former SEC officials pressing the agency to go easy on their new private sector clients has influenced the outcome of dozens of cases in which the SEC issues official waivers exempting companies from standard penalties, the report said. These waivers appeared especially generous in cases involving repeat offenders -- companies that the SEC sanctions for multiple violations within a few years.

Big banks routinely receive this special treatment from the SEC, even after repeatedly breaking the law, the Project on Government Oversight said.

"Since 2003, the SEC had granted exemptions to JPMorgan and its subsidiaries when they were charged with alleged misconduct relating to mortgage securities products, transactions with Enron, initial product offerings, and research analyst conflicts of interest," the report said. JPMorgan Chase didn't reply to a request for comment.

Swiss banking giant UBS was granted waivers after the SEC charged the bank with violating the same anti-fraud provision of federal securities laws three different times from 2008 to 2012, according to the report. UBS declined to comment.

"The SEC has significant authority to crack down on companies that engage in wrongdoing, but too often the biggest Wall Street megabanks get a free pass in the form of penalty waivers and forbearance," Sen. Sherrod Brown (D-Ohio) told HuffPost. "It’s no wonder that the American public is so skeptical of the cozy relationship between Wall Street and Washington."

In recent years, the SEC granted 64 waivers that allowed companies to avoid new regulatory examinations. At least 35 were requested by former SEC employees, according to the report. Former SEC employees also secured 40 waivers that allowed offending companies to continue selling small amounts of stock without registering it. At least 16 former SEC officials helped their new private-sector employers continue to provide financial services that they would have been banned from supplying, the report said.

The SEC also at times simply exempts companies from some federal laws and provides so-called no-action letters informing firms they will not be pursued for legally ambiguous behavior.

"The revolving door is moving faster than ever," Sen. Chuck Grassley (R-Iowa) said. "This report documents exactly why it remains an ongoing concern. The SEC has to fix this problem once and for all. That involves more disclosure, more meaningful restrictions, and top-to-bottom application of the rules without waivers that make any restrictions meaningless."

Grassley emphasized the relevance of the revolving door with respect to Mary Jo White, President Barack Obama's nominee to succeed Mary Schapiro as Chairman of the SEC. White has a sterling record as an agressive prosecutor, but has also worked for top bankers involved in the financial crisis -- including former Bank of America CEO Ken Lewis -- as a defense attorney.

"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. "She’d need to operate under strict rules while at the commission and afterward if she returns to the private sector, and so should everyone else. Policing the revolving door is important to the integrity of rule-making and enforcement."

The Project on Government Oversight report shows that former SEC officials are often instrumental in securing special treatment for clients, with big banks some of the most fortunate. PNC, the ninth-largest American bank, with over $300 billion in assets, was the first company to receive a "no-action letter" based on new Dodd-Frank financial rules. As of February 2012, it was the only company to receive one. Although Dodd-Frank is aimed at reforming Wall Street, it includes new securities laws that apply to all companies -- not just financial firms. PNC declined to comment.

SEC spokesman John Nester said the the agency follows government regulations on conflicts. "We decide issues on their merits according to the rules and regulations governing the securities industry regardless of whether the requestors have an SEC background or not," he said. Nester added that the Government Accountability Office studied the SEC's revolving door, as it was required under Dodd-Frank, "and described the SEC’s controls as strong and consistent with those of other agencies."

In February 2012, the SEC responded to a New York Times story highlighting weak enforcement against big banks by saying that penalizing the firms for failures in specific divisions would hurt financial markets. The agency's explanation effectively acknowledged that the too-big-to-fail problem is ingrained in everyday enforcement.

"An SEC action against an investment bank -- for the conduct of one of its divisions -- could have the perverse effect of prohibiting that firm from managing mutual funds in a different division or subsidiary," three SEC officials wrote in a Feb. 3, 2011, New York Times letter to the editor. "Once abandoned by their advisers, these 'orphaned funds' could run the risk of serious losses, and customers could lose access to their money. It makes no sense for the commission to impose an unnecessary and artificial delay on a firm’s access to the capital markets for wholly unrelated conduct, especially if a delay would provide no benefit to investors and may harm the markets."

The barrage of advice and lobbying from ex-SEC staffers not only blunts enforcement efforts, it also appears to dilute or block new regulations, according to the report. In 2012, for example, SEC Chairman Mary Schapiro attempted to impose new rules on money market mutual funds, which had been lightly regulated. A frightening episode in the 2008 financial crisis was triggered when a large money market fund that had overinvested in Lehman Brothers was unable to make good on all of its obligations, sparking a massive run on other money market funds and threatening the entire financial system. The panic continued until the Federal Reserve stepped in to temporarily guarantee all money market investments.

The Project on Government Oversight report details how at least six former top SEC officials pressed the agency to drop new plans to regulate money market funds. They included a former top SEC lawyer, a former head of the Division of Investment Management, and Laura Unger, a former commissioner and acting chairman. The former SEC staff members wrote letters, met with SEC commissioners and even personally urged Schapiro to drop the effort, according to the report.

Schapiro ultimately abandoned the attempt to regulate money funds after Luis Aguilar, an SEC commissioner who usually favors strong regulations, indicated he would not support the new rules. Before joining the SEC, Aguilar worked for mutual funds.

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