By Sarah N. Lynch
WASHINGTON Aug 22 The U.S. Securities and
Exchange Commission is making more of its staff who leave the
agency for the private sector subject to a one-year cooling-off
The reform is being embraced by those who say the SEC's
revolving door produces too many conflicts of interest, but
former SEC officials say the new policy could deepen the
agency's difficulty in recruiting top talent.
The SEC's top ethics counsel this week sent out an internal
memo dated Aug. 21 laying out the new post-employment
restrictions, which are expected to kick in around Jan. 1.
Under the new policy, anyone who makes more than $155,440.50
a year would be barred for one year from appearing before the
agency. Previously, only the SEC's most senior officers, such as
division directors, were subject to the rule.
The expansion of the cooling-off period "places us on even
footing with our peer regulators and adds an additional layer of
protection against even the appearance of impropriety when
former employees take on new jobs," SEC ethics counsel Shira
Pavis Minton wrote.
The change in the SEC's ethics rules will be a welcome
development for those who have accused the agency of having far
too many SEC staffers leave and work for legal and accounting
firms that represent companies that are regulated by the agency.
Senator Charles Grassley, an Iowa Republican and supporter
of the new rule, said in an email to Reuters on Thursday:
"There's good reason to enforce the cooling-off period. Senior
employees could undermine the commission's integrity if allowed
to practice before the commission right after leaving. This is
a common sense move from the SEC."
Michael Smallberg, an investigator for the Project on
Government Oversight, a non-profit watchdog that has been
critical of the SEC's revolving-door policies, said, "We're glad
the SEC has decided to eliminate an unnecessary loophole."
"SEC middle managers should have to follow the same
time-out period as alumni from other agencies. This cooling-off
rule makes it harder for alumni to exert undue influence on an
agency shortly after they leave," Smallberg said.
But the new policy is already drawing criticism from former
SEC attorneys. Some say applying a cooling-off period to
lower-level staffers could harm their careers and make
recruiting tough for the SEC.
"It is one thing for a firm to hire the enforcement director
... and then pay them a large salary to sit on the bench for a
year. It is quite another thing for somebody to take a line
trial attorney, for instance, with the knowledge that they will
not be able to practice their trade for an entire year," said
Toby Galloway, a former SEC trial attorney who is now a partner
at Kelly Hart & Hallman.
"It could be crippling or debilitating for someone's
SEC spokesman John Nester said in a statement that since
2003 the agency has sought exemptions from the cooling-off
period for highly paid staff who were not top officials.
He said the agency previously believed the restrictions
"were causing the agency an undue hardship in attracting and
retaining highly qualified personnel."
He said the agency no longer considers the exemptions
Former SEC lawyers say the changes could affect a large
number of people. That is because the SEC, unlike some other
federal government agencies, uses a higher pay scale so it can
better compete with Wall Street for staff.
The new cooling-off period is expected to cover the majority
of attorneys in the SEC's trial unit, for instance, and any
outsiders who are brought in to serve as counsel to the SEC's
It will prevent lawyers from representing defendants in
enforcement actions before the agency, and may also preclude
recently departed SEC lawyers from attaching their names to
securities registration statements for clients seeking to do
In addition, it may slow down the SEC's ongoing effort to
hire more lawyers, accountants and economists with deep industry
expertise in complicated areas such as derivatives,
exchange-traded funds and high-frequency trading.
Many of those kinds of employees are paid a higher salary,
and only stay on with SEC for a limited period of time.
"It will be more difficult for the commission to persuade
people who often have to take steep salary cuts to come to the
commission to serve in these expert positions if they then can't
return to private practice to make a living," said Robert Plaze,
the SEC's former deputy director of the investment management
division and a partner at Stroock & Stroock.
In addition to recruiting troubles, lawyers say the rule
will lead to an exodus at the SEC.
The agency is already suffering from high turnover, which
was expected after former Chair Mary Schapiro left the agency
late last year and current Chair Mary Jo White took over in the
"You could see a lot of people heading for the exits," said
Scott Kimpel, a partner at Hunton & Williams who previously
worked for former SEC Republican Commissioner Troy Paredes.
LONG TIME COMING
The ethics policy changes have been in the works for several
In March 2011, former SEC inspector David Kotz released an
investigative report that looked at whether a former SEC
official broke any rules during employment talks with a
high-speed trading firm.
Kotz found the employee did not breach any ethics
regulations. But he criticized the SEC's ethics program
generally, saying the agency should not have allowed higher paid
staffers to be exempt from a cooling-off period.
More recently, in February, the Project on Government
Oversight issued a report on revolving door concerns at the SEC
and called for the agency to subject mid-level managers to the
one-year time out.
Minton in her memo to SEC staff said the agency had applied
to the Office of Government Ethics to withdraw the exemptions,
and that the request was recently granted.