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, a report said.
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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 her 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 says.
"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 also 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.
Schapiro was concerned money funds were still at risk for runs like the one experienced by the Reserve Primary Fund in 2008 during 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.
But three commissioners refused to support putting the plan out for public comment, leading the new Financial Stability Oversight Council of regulators to try to apply some pressure on the SEC to act.
Only after Schapiro left the agency in December did the SEC start to get some traction on a proposal. 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.
SEC spokesman John Nester also downplayed the impact of the revolving door on the money market fund debate, telling POGO, "I imagine you could find alumni on all sides of this issue, but ... matters are decided on their merits."
POGO's report also discusses Mary Jo White as another 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 Mary Jo White was directly contacting then-Enforcement Director 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.
(Reporting By Sarah N. Lynch; Editing by Kenneth Barry)