Project On Government Oversight

Dangerous Liaisons:
Revolving Door at SEC Creates
Risk of Regulatory Capture

February 11, 2013

OVERVIEW

A revolving door blurs the lines between one of the nation’s most important regulatory agencies
and the interests it regulates.

Former employees of the Securities and Exchange Commission (SEC) routinely help
corporations try to influence SEC rulemaking, counter the agency’s investigations of suspected
wrongdoing, soften the blow of SEC enforcement actions, block shareholder proposals, and win
exemptions from federal law.

The revolving door was on display in 2012 when the investment industry opposed one of the top
priorities of the SEC chairman, a plan to tighten regulation of money market funds. Former SEC
employees lobbied to block the plan, and an SEC Commissioner who previously worked for an
investment firm played a pivotal role in derailing it.

The movement of people to and from the financial industry is a key feature of the SEC, and it has
the potential to influence the agency’s culture and values. It matters because the SEC has the
power to affect investors, financial markets, and the economy.

Yet, the SEC has exempted certain senior employees from a “cooling off period” that would
have restricted their ability to leave the SEC and then represent clients before the agency. In
addition, the SEC has shielded some former employees from public scrutiny by blacking out
their names in documents they must file when they go through the revolving door.

The SEC is a microcosm of the federal government, where widespread revolving expands the
opportunities for private interests to sway public policy.

One academic study suggested that concerns about the SEC’s revolving door are misguided. But
the academics looked at only a sliver of the SEC’s work. They did not examine, for instance,
how the revolving door affects the SEC’s regulation of Wall Street, its granting of relief to
specific companies, its handling of cases related to the financial crisis, or its decisions to drop
investigations without bringing charges. The study sought to quantify any influence the
revolving door might have on SEC enforcement actions, but the subtleties involved do not lend
themselves to such simple measurement.

This report, the Project On Government Oversight’s (POGO) second on the SEC, is based in part
on interviews with current and former SEC officials and thousands of federal records obtained
through the Freedom of Information Act.

POGO found that, from 2001 through 2010, more than 400 SEC alumni filed almost 2,000
disclosure forms saying they planned to represent an employer or client before the agency. Those
disclosures are just the tip of the iceberg, because former SEC employees are required to file
them only during the first two years after they leave the agency.

POGO’s report examines many manifestations of the revolving door, analyzes how the revolving
door has influenced the SEC, and explores how to mitigate the most harmful effects.

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