By Sarah N. Lynch
WASHINGTON, Aug 22 (Reuters) - 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 period.
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 employment prospects."
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 necessary.
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 five commissioners.
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 public offerings.
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 spring.
"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.
The ethics policy changes have been in the works for several years.
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.