WASHINGTON -- Former U.S. Securities and Exchange Commission staffers who now work in the private sector may have helped derail last year's effort to reform the $2.6 trillion money market fund industry, according to a report released on Monday.
The case study on money market fund lobbying is part of a 60-page report by the Project on Government Oversight (POGO). It is one example within a broader review by the non-profit government watchdog that examines in detail how the "revolving door" at the SEC may have impacted policy and enforcement decisions over a 10-year period.
The publication of the report comes a few weeks after President Barack Obama nominated Mary Jo White, a former prosecutor and high-profile white collar defense lawyer, to lead the SEC.
While White's nomination has generated little controversy so far, some have questioned whether her past defense of Wall Street executives could impact how she does on the job.
"The revolving door is deeply embedded at the SEC and throughout the federal government," the report said.
"The close linkage between the regulators and the regulated can influence the culture, the values and the mindset of the agency - not to mention its regulatory and enforcement policies."
The report calls for reforms to help prevent problems that may be posed by the revolving door. They include requiring agencies to post disclosure statements online, expanding the criteria for when staffers must file post-employment statements, and extending the cooling-off periods for employees who enter and leave the government.
POGO's report analyzes disclosure forms obtained through a Freedom of Information Act request that were filed by over 400 former employees representing clients or new employers before the SEC from 2001-2010.
As an example of how SEC alumni can help influence policy outcomes, the report points to a lengthy list of former commissioners and staffers, including former Commissioner Laura Unger, all of whom questioned the reforms proposed by then-Chairwoman Mary Schapiro for money market funds.
In Unger's case, she accompanied a delegation from Fidelity Investments to the SEC in her role as a special adviser with the advisory firm Promontory Financial Group.
Other SEC alumni who reached out to the agency about the fund rules included Susan Ferris Wyderko, who once held the top spot in the SEC's Division of Investment Management and is now president and CEO of the Mutual Fund Directors Forum.
Schapiro was concerned money funds were still at risk for runs like the one experienced by the Reserve Primary Fund in 2008 during the height of the financial crisis. She had sought to impose either a combination of capital buffers and redemption holdbacks, or a switch to a floating net asset value from a stable $1-per-share.
Three commissioners refused to support putting the plan out for public comment, leading the new Financial Stability Oversight Council of regulators to try to pressure the SEC to act.
It was only after Schapiro left the agency in December and after SEC economists completed a study requested by the three commissioners that a proposal began to gain some traction.
Currently, commissioners are reviewing an early-stage concept document and exploring courses of action.
POGO acknowledges that "it's hard to know how much any of these alumni contributed to" the temporary derailment.
However, it notes that SEC Democratic Commissioner Luis Aguilar, who once worked for the money management firm Invesco, helped tip the balance when he joined his two Republican colleagues in opposing a vote on the proposal.
"In March 2012, Invesco sent a team to meet with Aguilar at the SEC and tell him why tightening rules for money market funds was a bad idea," the report says.
Later, it noted, Aguilar issued a statement opposing Schapiro's plan "that closely tracked arguments made by the industry."
The report quotes Aguilar as saying that his prior relationship with the industry did not make him more receptive to its arguments. He told POGO that he follows the public interest and also noted that Invesco's leadership has changed since he left a decade ago.
"I don't think I'm anybody's puppet," Aguilar is quoted telling POGO.
On Monday, Aguilar told Reuters that he was initially reluctant to support Schapiro's plan because a study on the efficacy of 2010 money fund reforms had not been done at the time.
"I think we had to look before we leap," he said. He said many of his concerns were addressed in a study that was released in December 2012, and he is "optimistic" that the SEC will be able to put forth "a robust proposal in the very near future."
On Monday, SEC spokesman John Nester added that the SEC follows "government-wide regulations and laws that deter conflicts and ensure impartiality."
"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, and I'm not aware of any factual information to the contrary," Nester said.
He added that a recent study by the Government Accountability Office concluded that the SEC's controls are "as strong and consistent" with other federal agencies."
POGO's report also discusses Mary Jo White as an example of the revolving door.
It notes that White was previously hired by the Morgan Stanley board to determine whether its prospective chief executive, John Mack, had any exposure in an SEC insider-trading investigation of the hedge fund Pequot Capital Management.
In a 2007 investigative report by the minority staff of the Senate Finance Committee that looked into the firing of an SEC lawyer involved in the Pequot case, Senate staff questioned why White was directly contacting the SEC's enforcement director at the time, Linda Thomsen, about John Mack.
"By providing prominent individuals selective access to senior SEC officials, the SEC allowed bits of information about its non-public investigation of Pequot to leak to a potential defendant's prospective employer," Senate investigators said.
Iowa Republican Senator Charles Grassley, whose staff led the probe into the firing of the SEC attorney over Pequot, issued a statement on Monday calling on the agency to tighten rules surrounding potential revolving-door conflicts.
"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," he said in a statement.
"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."
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