Is SEC Really Too Cozy With Wall Street?

Bloomberg investigation appears to offer strong evidence of influence and access, but academy study based on averages shows opposite conclusion

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Revelations of the close ties of between a former SEC commissioner and key SEC policymakers are reviving questions about a so-called “revolving door” in which the lure of future high-paying jobs may improperly influence government decisions.

A Bloomberg investigative report published Wednesday documented the e-mail correspondence to the SEC from a former commissioner, Annette Nazareth, a lawyer representing large banks and securities firms for the Washington office of David Polk & Wardwell, an elite law firm.

Robert KhuzamiWhile those e-mails appear to exhibit a carefully cultivated relationship of influence and at least two revolving door-type anecdotes, the article is all the more interesting because it comes just a week after the SEC's enforcement chief, Robert Khuzami (left), published an opinion article denying there is any kind of revolving door in Washington.

What’s more, Khuzami cited as supporting evidence a new academic study published last month by four accounting professors who conclude the revolving door does not undermine SEC enforcement.

Bloomberg's investigation turned up numerous e-mails, obtained in a Freedom of Information request, that Nazareth sent former SEC colleagues.

In one e-mail, Nazareth attached an annotated copy of draft legislation, sent (before the start of the work week on a Sunday) two days after a 20-hour marathon session when legislators concluded negotiations on the rules that would become the Dodd-Frank Act.

In another e-mail, sent to SEC General Counsel and Senior Policy Director David Becker, Nazareth offered a summary of a 1,100-page Senate proposal regarding Dodd-Frank, to which Becker replied “more nap time for me,” implying his dependence on lobbyist Nazareth’s extensive efforts.

In another e-mail, Nazareth obtained an impromptu meeting with Becker, in another she scheduled a friendly lunch, and in still others the two exchanged thoughts on the “inanity” of Dodd-Frank’s proposed SEC investor advocate position and the new consumer protection agency which made Nazareth “feel ill.”

The revolving-door concept was best demonstrated in two e-mails, one in which Becker asked Nazareth to recommend a lawyer for an SEC job, and another in which Nazareth told Becker she recommended him for a legal position for which headhunters had called her. The Bloomberg article noted that SEC pay tops out at $240,000 for staff, but a partner at Nazareth’s firm can make as much as $2.3 million.

While these and other e-mails with SEC Chairwoman Mary Schapiro exhibited a relationship of friendliness and at times seeming reliance, its evidence does not contradict the findings of an academic study which refutes lax SEC enforcement, according to University of Washington research by Ed deHaan, one of the study’s authors.

In an interview with AdvisorOne, in which deHaan made clear he was offering his personal views and not those of his co-authors, the doctoral candidate said the new study was based on an average statistical effect, which does not rule out individual cases of impropriety.

Ed deHaan“We look at lawyers who leave the SEC to join law firms,” deHaan (left) says. “On average these lawyers are more aggressive in their enforcement efforts while at the SEC. So on average the revolving door does not seem to be causing a problem for these particular lawyers. But within that set (under study), there could be cases where there was this sort of unethical behavior.”

Specifically, deHaan and his colleagues found that SEC lawyers who left the agency to take legal jobs defending clients charged by the SEC on average were more aggressive in their regulatory enforcement than those who did not pass through the revolving door—under the theory that tougher enforcement is a better job qualification because it showcases their legal prowess.

DeHaan, who noted only a “cursory” reading of the Bloomberg article, further commented that “Certainly [Nazareth and SEC officials] have not done themselves any favors in not maintaining an appearance of independence, but to the extent that this led to compromised outcomes, I’m not sure—I can’t say one way or another.

“The fact that they speak in the vernacular [in a friendly manner] together doesn’t necessarily indicate that something nefarious occurred,” deHaan added.

Citing the example of the impromptu meeting Nazareth was able to schedule with Becker, deHaan offered to play devil’s advocate, saying: “Delaying that meeting might have been less efficient for the SEC; the fact that they had a meeting and she was given access to this meeting in an efficient manner, does not by itself mean [the meeting changed outcomes]. But this certainly gave the appearance that there was something going on.”

DeHaan acknowledged, however that improprieties in influence and access have been documented on an “anecdotal” basis in a 2011 review by the Project on Government Oversight, whose methodology he described as being more of a “case-by-case” analysis.

“In doing that sort of case-by-case analysis, they’re able to come up with more anecdotes where this kind of rent-seeking takes place,” he said.

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