(The views expressed are the author’s own and not those of Reuters.)
(The following is by Robert Khuzami, Director of Enforcement at the Securities and Exchange Commission. It’s a response to a piece Alison Frankel wrote earlier this month -- “New study says SEC revolving door not important. Don’t believe it” -- which questioned the findings of the first empirical examination of the impact on SEC enforcement actions of the so-called “revolving door,” lawyers moving between the SEC and private practice. The study concluded the revolving door has no quantitative impact on how vigorously the SEC prosecutes enforcement actions. Frankel raised doubts about whether the authors could account for the subtle influence SEC alumni might exert on their former colleagues before matters become enforcement actions. When an SEC spokesman contacted her about Khuzami’s response, Reuters agreed that the enforcement director’s detailed comments about her piece should be highlighted as a guest post, with the hope of inspiring additional discussion. Khuzami’s response is unedited except to be consistent with Reuters’ grammatical style.)
Alison Frankel’s On the Case column challenged the findings of an academic study designed to measure the impact of the SEC’s so-called “revolving door.” The academic study, entitled “Does the Revolving Door Affect the SEC’s Enforcement Outcomes,” is the first to actually apply some rigorous analysis to the proposition that SEC staff let future job considerations affect their professional judgment. The outcome, not surprising to me, is an emphatic “no” -- employment considerations had no measurable impact on enforcement outcomes and that SEC alumni appear to have no measurable advantage on behalf of their clients facing investigation.
This conclusion has common sense in its corner. Enforcement staff, having landed a highly sought-after and difficult-to-obtain job, often passing up other opportunities in the process, would not risk reputation and career and even jail by undermining an investigation for a possible future job prospect. Any enforcement staff member who would consider such a betrayal would be so lacking in respect and credibility as to be of no value to future employers. Nor would they get hired -- to put it bluntly, would you hire someone so dishonest, so without principle and held in low esteem by former colleagues (which they would have to be to consider such an act of deceit) to represent you in matters of importance? I have seen no evidence of such a betrayal in my years at the SEC, or in my 15 years in public service. To believe the critics on this point is to have a disturbingly cynical and misguided view of public service and the dedicated and professional members of the Enforcement Division.
In addition, the reality is that enforcement case recommendations are made by teams of attorneys, with multiple levels of review and scrutiny throughout the agency -- all of which means that it is virtually impossible for any one person to make decisions on a case based on anything other than the facts, the evidence, and the law. This latest academic study simply confirms what I experience every day: that we bring our cases on the merits and the merits alone.
Yet Frankel rejects the study’s conclusion, arguing instead that the study was not sufficiently “statistically nuanced” to measure the purported influence of SEC alumni on enforcement staff. No amount of nuance will alter the fundamental fact that there is no evidence to support her view. She cites to a 2011 analysis by the Project on Government Oversight (POGO). Among other things, POGO’s work relies on four reports by the SEC’s Inspector General, none of which found any improper impact on the particular enforcement cases where SEC alumni were engaged as defense counsel. And, the POGO database mentioned in Frankel’s column is actually a compilation of the disclosure forms that must be filed by SEC alumni for two years after leaving the commission if retained by a client where an appearance before the commission is contemplated -- just one of several ethics protocols in place to ensure transparency. In fact, just two months after the POGO analysis cited by Frankel, in July 2011, the Government Accountability Office (GAO) completed a Dodd-Frank mandated study of the so-called “revolving door” and found that the SEC has a number of strong post-employment and conflict-of-interest controls in place to prevent undue influence by alumni. GAO’s singular recommendation was to standardize the documentation for ethics advice provided to departing employees.
The truth is that the enforcement staff are skilled and dedicated professionals who have chosen public service because they believe deeply in the SEC’s mission to protect investors and the markets from those who would commit securities fraud. Each day brings new proof of this professionalism, as cases are filed and wrongdoing exposed. In the face of overwhelming proof to the contrary, and armed with nothing but cynical assumptions and speculation, commentators perpetuating this revolving door myth do a disservice to the hard-working and dedicated enforcement staff. Equally importantly, they create unfounded cynicism about public institutions and public servants, and the last thing any of us need is more cynicism.
Robert Khuzami is the Director of Enforcement at the Securities and Exchange Commission.