NEW YORK CITY BAR ASSOCIATION COMMITTEE ON GOVERNMENT ETHICS COMMITTEE ON BANKING LAW
THE FINANCIAL CRISIS AND THE “REVOLVING DOOR” TUESDAY, FEBRUARY 12, 2013, 6:30 P.M. HOUSE OF THE ASSOCIATION 42 WEST 44TH STREET
PROGRAM MATERIALS
Tab DOCUMENT DATE Articles, Reports, and Statements 1 Statement of Rachel E. Barkow July 8, 2009 PDF Before the House Subcommittee on Commerce, Trade, and Consumer Protection 2 Law Profs Seek to Jam the Revolving Door January 13, 2011 Hyperlink (Corporate Crime Reporter) 3 Drug Makers’ Feared Enemy Switches Sides, as Their Lawyer June 4, 2011 Hyperlink by Duff Wilson (N.Y. Times) 4 Revolving Regulators: SEC Faces Ethics Challenges with May 13, 2011 PDF Revolving Door Project on Government Oversight 5 Securities and Exchange Commission: Existing Post- July 2011 PDF Employment Controls Could Be Further Strengthened U.S. Government Accountability Office 6 Wall Street’s Big Swingers Get the Biggest Breaks January 3, 2012 Hyperlink by Susan Antilla (Bloomberg) 7 Prosecutor in Insider Crackdown Leaving U.S. Attorney’s Office February 7, 2012 Hyperlink by Peter Lattman (N.Y. Times) 8 Does the Revolving Door Affect the SEC’s Enforcement July 2012 Hyperlink Outcomes? by Ed deHaan, Simi Kedia, Kevin Koh, and Shivaram Rajgopal 9 Study Questions Risk of S.E.C. Revolving Door August 5, 2012 Hyperlink by Edward Wyatt (N.Y. Times) 10 New Study says SEC revolving door not important. Don’t August 6, 2012 Hyperlink believe it by Alison Frankel (Thomson Reuters) 11 Cynics perpetuate SEC’s “revolving door” myth August 29, 2012 Hyperlink by Robert Khuzami (Thomson Reuters) 12 Top Bank Lawyer’s E-Mails Show Washington’s September 5, 2012 Hyperlink Inside Game by Robert Schmidt and Jesse Hamilton (Bloomberg) 13 The Value of the Revolving Door: Political Appointees and the September 17, 2012 PDF Stock Market & Hyperlink by Simon Luechinger and Christoph Moser 14 Under Investigation, and Doing the Investigation September 24, 2012 Hyperlink by Peter J. Henning (N.Y. Times) 15 Study: Defense firms see stocks rise when their execs get hired October 1, 2012 Hyperlink by the Pentagon by Brad Plumer (Wash. Post) 16 Law firms’ revolving door turns faster as election draws near October 14, 2012 Hyperlink by Catherine Ho (Wash. Post) 17 Should Bank Examiners Have to Make a Lifetime Commitment? October 15, 2012 Hyperlink by Jeanine Skowronski (American Banker) 18 How to Lock the Revolving Door November 13, 2012 Hyperlink by Andrew Kahr (American Banker) Official Guidance 19 U.S. Department of Justice: Leaving Government - PDF U.S. Department of Justice 20 Federal Reserve Bank of New York: Code of Conduct - PDF Federal Reserve Bank of New York 21 Before Leaving Government - PDF U.S. Office of Government Ethics 22 After Leaving Government - PDF U.S. Office of Government Ethics Statutory and Regulatory Materials 23 18 U.S.C. 207 - PDF 24 Overview of 18 U.S.C. 207 - PDF U.S. Office of Government Ethics 25 Overview of 5 C.F.R. 2635 - PDF U.S. Office of Government Ethics 26 Overview of 5 C.F.R. 2641 - PDF U.S. Office of Government Ethics 27 17 C.F.R. 200.735-8 - PDF
Statement of Rachel E. Barkow Professor of Law Faculty Director, Center on the Administration of Criminal Law New York University School of Law
The Proposed Consumer Financial Protection Agency: Implications for Consumers and the FTC Before the House Subcommittee on Commerce, Trade, and Consumer Protection July 8, 2009
Mr. Chairman and Members of the Subcommittee: Thank you for inviting me to testify before you regarding the Consumer Financial Protection Agency Act of 2009 (CFPA Act or Act). It is an honor to appear before you to discuss this landmark legislation.
At the center of the Act is the creation of an agency charged with protecting and informing consumers in the increasingly complicated world of financial services and products. The Act itself gives few substantive standards for financial products and services. Instead, it leaves it to the Consumer Financial Protection Agency (CFPA) to set benchmarks for this field. Thus, whether the Act will succeed or fail in its mission “to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services” will depend entirely on whether the agency it creates succeeds or fails.
My testimony therefore explores the structure and powers of the proposed CFPA to determine if it has been designed in the most effective way to achieve its stated statutory mission. I take no position on the merits of that mission or whether there is a need for a new agency to regulate this field. Rather, my focus is on whether the CFPA has been designed as effectively as it can be to achieve the goals of the legislation.
After reviewing the Act in light of the experience of other agencies charged with protecting consumer interests, I have five recommendations and a note of caution. To briefly summarize, they are as follows (listed in the approximate order of importance):
First, I recommend including a provision that would limit the CFPA’s membership to no more than three members of the same political party. Unlike virtually all other legislation that governs multi-member independent agencies, including the Federal Trade Commission (FTC), Securities and Exchange Commission (SEC), and Consumer Products Safety Commission (CPSC), the CFPA Act does not require a political balance among the agency’s membership. The absence of such a provision in the CFPA Act could lead to a politically-polarized agency that dramatically changes positions from one extreme to another with each new presidential administration. This is unhealthy for the regulation of any market, and there is no apparent justification for the Act’s current design of the CFPA.
1 Second, although the CFPA has elements that are designed to prevent capture by the industry actors the agency will be regulating, there is room for improvement. Specifically, I propose taking a close look at the Act’s consultation requirement. This mandate will inevitably cause delays and legal challenges to the CFPA’s regulations, so unless Congress is of the view that these costs are outweighed by the benefits of coordination, I recommend modifying this provision to make clear that consultation is at the discretion of the CFPA and not subject to judicial review.
Third, I advise modifying the statute of limitations provision in the Act to begin running from the time the CFPA discovers a violation, not from the time a violation has occurred.
Fourth, I suggest including a limitation on the ability of CFPA Board members to practice before the CFPA for a period of time after their terms of service on the Board have expired. This restriction would limit the negative effects caused by the revolving door between agencies and the industries they regulate.
Fifth, I recommend giving the CFPA’s research unit a mandate to analyze and report on the suppliers of financial services and products and on the regulations imposed on those suppliers by other regulators.
Finally, my last major point is to raise the issue of the relationship between the CFPA and the President. It is unclear from the Act as it is currently written whether the CFPA will be subject to presidential directives and oversight, including review by the Office of Information and Regulatory Affairs (OIRA) in the President’s Office of Management and Budget (OMB). I take no position on whether or not the agency should be subject to this type of review. Rather, I highlight the lack of clarity and discuss the implications of having the CFPA be treated like other executive agencies for purposes of presidential oversight.
My statement will proceed in three parts. First, I will offer some lessons from other efforts to create agencies with mandates to protect consumer interests. Many of these agencies fall short in their efforts to protect consumers because they become captured by the industries they are charged with regulating. The experience of these agencies therefore offers some valuable insights in thinking about how to structure the CFPA. Second, and with these lessons in mind, I will turn to the proposed CFPA Act to highlight how the Act could be improved to maximize the CFPA’s effectiveness. Third and finally, I will address the question of the CFPA’s independence. Although there is language in the Act aiming to make the CFPA an independent agency, it departs from the traditional independent regulatory agency model in several respects that, as currently written, give the President considerable power over the agency’s operation.
2 I. Lessons from Other Agencies: The Threat of Capture
In evaluating the CFPA, it is helpful to look at the experience of other agencies that have been charged with promulgating rules, bringing enforcement actions, and reporting to Congress in an effort to protect consumers. On many occasions agencies with such mandates have stalled in their efforts to regulate because the industries they have been charged with regulating have been far more powerful and well-financed than the consumer interests they have been charged with protecting. This is the well-known phenomenon of agency capture, and it is important to consider some of the causes so that the pitfalls of capture can be avoided or at least limited through agency design.
One sees a familiar story repeat itself when one looks at the history of the many agencies charged with protecting consumers. Even if an agency has a promising beginning of “vigorous and independent regulation,” it “often becomes closely identified with and dependent upon the industry it is charged with regulating.”1 Thus, as a leading administrative law scholar has observed, “[i]t has become widely accepted, not only by public interest lawyers, but by academic critics, legislators, judges, and even by some agency members, that the comparative overrepresentation of regulated or client interests in the process of agency decision results in a persistent policy bias in favor of these interests.”2 This is true across many industries, including financial services.3
This bias may not be intended – on the contrary, the goal may well be to avoid it at all costs – but several dynamics push in favor of giving regulated interests disproportionate influence with the agency charged with policing them.
First, regulated industries are wealthy and well-organized, especially when compared to consumers. Industry groups are well positioned to monitor agencies closely and challenge any and all agency decisions that will negatively affect them.4 All else being equal, agencies would prefer not to become mired in legal challenges, so they may seek to work with, rather than against, these organized interests. Although there are some important and influential groups representing consumer interests that may also threaten litigation, these interest groups do not have the funding or resources of industries. Thus, they often cannot monitor and challenge all the potentially negative rules and orders from an agency or marshal the same resources as industry representatives when they do bring a
1 Thomas W. Merrill, Capture Theory and the Courts: 1967-1983, 72 CHI.-KENT L. REV. 1039, 1060 (1997) (citing the work of MARVER H. BERNSTEIN, REGULATING BUSINESS BY INDEPENDENT COMMISSION 79-94 (1955)). 2 See Richard B. Stewart, The Reformation of American Administrative Law, 88 HARV. L. REV. 1669, 1713(1975). 3 Raj Date, Regulator Unbound: Solving an Old Problem at a New Regulatory Agency 2-5 (July 2, 2009), available at http://www.cambridgewinter.org/Cambridge_Winter/Regulator_Unbound_files/regulator%20 unbound%20070209.pdf. 4 Mark Seidenfeld, Bending the Rules: Flexible Regulation and Constraints on Agency Discretion, 51 ADMIN. L. REV. 429, 464 (1999).
3 challenge.5 As a result, agencies tend to be less likely to worry about satisfying consumer groups than the more powerful regulated industries.
The experience of the CPSC illustrates this phenomenon. The CPSC was created in 1972 to “protect the public against unreasonable risks of injury associated with consumer products.”6 At the time it was established, the CPSC was charged with enforcing statutes that were then administered by other agencies and given new powers as well.7 The CPSC was heralded as the “most powerful Federal regulatory agency ever created.”8 But it soon became apparent that the CPSC was unable to fulfill its statutory mandate. The major reason is that the CPSC has been chronically underfunded and understaffed relative to its mandate.9 As a result, the CPSC has been no match for the industry participants it is charged with regulating.
Product manufacturers have used their resource advantage to capitalize on various procedural rules in the Consumer Product Safety Act (CPSA). For instance, Section 7 of the CPSA created what was known as the offeror process, which required the CPSC to solicit and use people from outside the agency to draft its safety standards. The CPSC would put out a notice in the Federal Register describing the need for some standard and inviting people to propose a standard or to offer to develop a standard. After the offeror submitted its proposal, the CPSC could adopt or revise it and then had to seek comments on the resulting standard. In theory, offerors could be consumer groups, standard-setting organizations, other agencies, or industry groups. In reality, the process was dominated by industry. Because submitting a proposal was resource-intensive, consumer groups and standards organizations found the process too burdensome; the process was “affordable only to industry groups with an economic stake in the outcome.”10 Industry representatives did not just dominate the drafting stage, they often controlled the outcomes. Industry representatives brought successful challenges to most of the CPSC’s rules in court.11 Ultimately, Congress viewed the offeror process as a failure and abolished it.
Section 10 of the CPSA, which was designed to give consumers a greater say with the agency, suffered a similar fate. Section 10 established a process whereby interested persons could petition the agency to issue rules and the CPSC would have to respond to those requests with reasons and face de novo judicial review. This framework was enacted with the intent to allow the public to “overturn bureaucratic inertia.”12 In fact,
5 Seidenfeld, supra note 4, at 464 (“A regulated entity frequently is a large corporation with resources to appeal agency decisions at every level.”). 6 15 U.S.C. § 2051(b)(1). 7 Robert S. Adler, From “Model Agency” to Basket Case – Can the Consumer Product Safety Commission Be Redeemed?, 41 ADMIN. L. REV. 61, 63 (1989). 8 Teresa M. Schwartz, The Consumer Product Safety Commission: A Flawed Product of the Consumer Decade, 51 GEO. WASH. L. REV. 32, 43-44 (1982) (quoting Swit, An Overview of Public Law 92- 573¸Proceedings of the Briefing Conference on the Consumer Product Safety Act 7 (1973) (sponsored by the Product Safety Letter, Inc.)). 9 See id. at 44. 10 Id. at 63-64. 11 Id. at 66. 12 118 Cong. Rec. 21,854 (1978) (remarks of Sen. Magnuson).
4 however, the process itself impeded the agency from fulfilling its mandate because the CPSC was overrun with petitions, including from industry participants who had economic incentives to get the agency to pass particular standards. Section 10 was therefore also ultimately revoked in 1981.
The story of the CPSA and the CPSC is thus a cautionary tale of how even well- intended provisions can cut against the ultimate success of a statute. Procedural rights aimed at benefitting consumers and creating better policy can become hijacked by well- financed and well-organized industry representatives.
Agency capture is further exacerbated by the fact that industry groups are also well positioned to contribute to political campaigns and to lobby, which in turn gives them influence with the agency’s legislative overseers. For example, Arthur Levitt, the chair of the SEC from 1993-2001, describes the SEC during his tenure as being constantly threatened with budget cuts by the SEC’s congressional overseers if it pursued aggressive regulations.13
Second, capture is also the result of the well-documented phenomenon of a “revolving door” between agencies and the industries they regulate. While serving on an agency’s board, agency heads may also be thinking about their prospects in the private sector when their term at the agency expires. This outlook may make these officials reluctant to impose regulations that an industry views as too aggressive or obtrusive. It may dim an official’s job prospects or make that job more difficult if the official has to live with the rules upon leaving the agency.14
The effect of the revolving door is often cited as one of the reasons why the SEC has failed to address some pressing problems in the trading industry. For example, although late trading and market timing were widespread and well known, the SEC did not act to regulate the practices and stepped in only after the New York Attorney General (AG) brought an enforcement action under state law. Similarly, it was the New York AG who led the fight to stop investment firm bankers from influencing the reports of firm analysts. Experts on SEC practice have noted that the SEC did not initially address these problems because of a prevailing view among SEC officials that, given the “rapidly revolving door between the SEC and private legal practice,” “unless an issue has become high profile, it is best not to rock the boat.”15 The SEC became overpopulated with members who “identified with the market participants they were ostensibly regulating.”16 These pressures may have led the agency to adopt an overly lax view of its enforcement
13 ARTHUR LEVITT, TAKE ON THE STREET 123, 132 (2002) 14 JERRY L. MASHAW & DAVID L. HARFST, THE STRUGGLE FOR AUTO SAFETY 16 (1990) (noting that agency officials may take into account “social and business relations and the prospects of further career opportunities in the private sector”). 15 John C. Coffee, Jr., A Course of Inaction, LEGAL AFFAIRS 46 (Apr. 2004). 16 Jonathan R. Macey, State-Federal Relations Post-Eliot Spitzer, 70 BROOK. L. REV. 117, 128 (2004).
5 and regulatory functions, which in turn created a void that was filled by the New York AG’s office.17
Finally, another key factor that helps to give regulated entities disproportionate influence is their information advantage. For an agency to regulate an industry effectively, it needs to know how the industry works and what it is capable of doing. But that information is often in the exclusive control of the regulated entity.18
The factors that push toward agency capture can be minimized in various ways. Although it is not possible to adjust the relative resources of industries and consumers, one way to keep the agency from being overwhelmed by industry challenges is to provide it with the resources it needs to carry out its mandate. Additionally, it is important to ensure that the agency will not face insurmountable procedural obstacles in adopting its rules or be subject to unnecessary challenges regarding the scope of its mandate. Second, the revolving-door phenomenon can be curbed by imposing post-employment restrictions on agency officials. Finally, the agency can be assisted in obtaining information by imposing statutory reporting requirements on regulated entities and giving the agency subpoena power. While there is no perfect or complete solution to agency capture, efforts such as these can mitigate its effects and assist an agency in fulfilling a mandate to protect consumers.
II. Protecting the CFPA from Capture
These lessons serve as a helpful backdrop to analyzing the proposed structure of the CFPA. Although the legislation contains some protections for the agency that will assist it in achieving its statutory mission, there are areas that could be improved.
A. Leveling the Regulatory Playing Field
As noted above, agencies can become hampered in their ability to fulfill their mandates when regulated interests leverage procedural rights under a statute to their advantage. The CFPA Act generally relies on the standard requirements in the Administrative Procedure Act (APA) that apply to most independent and executive agencies. But the Act goes beyond the APA by establishing an additional procedural requirement of consultation before the CFPA can promulgate rules under the Act. That consultation requirement has the potential to bog down the CFPA as it tries to establish regulations for this field.
There is language throughout the Act that requires the CFPA to consult with other agencies before it promulgates rules. For instance, in Sections 1022(b)(2) and
17 Rachel E. Barkow, The Prosecutor as Regulatory Agency, in PROSECUTORS IN THE BOARDROOM: USING CRIMINAL LAW TO REGULATE CORPORATE CONDUCT (Anthony Barkow & Rachel Barkow, eds., NYU Press forthcoming), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1428934. 18 Stewart, supra note 2, at 1714; Seidenfeld, supra note 4, at 464. For a discussion of how industry participants used their information advantage to avoid regulation of credit default swaps and possible remedies to this problem in the context of consumer financial products and services, see Date, supra note 3, at 6-9.
6 1031(d), the CFPA is required to “consult with the Federal banking agencies, or other Federal agencies, as appropriate, regarding [or concerning] the consistency of a proposed rule with prudential, market, or systemic objectives administered by such agencies.” In Section 1035(c), the agency is again required to consult with Federal banking and other agencies, as well as with “State authorities.”
These provisions are likely to make it difficult for the CFPA to promulgate rules in a timely manner. These provisions apply to a large number of agencies because so many agencies regulate related fields. And when consulting each of these agencies, the CFPA is charged with considering all of the prudential, market, and systemic objectives of these other agencies – that is, anything of any importance to the consulted agency. This consultation process is therefore likely to delay the promulgation of CFPA rules. This is especially so because failing to take these provisions seriously will make any rules that the CFPA does pass vulnerable to innumerable legal challenges on the ground that the CFPA did not adequately consider a competing agency’s objectives. This is the kind of sweeping substantive standard that allows industry participants to tie up agency rules for years with challenges.19
Congress may wish to keep this language to ensure rigorous consultation and coordination, even if that means slowing down the CFPA’s regulatory progress. But if Congress is concerned that this provision will create unnecessary litigation, it could likely achieve substantial coordination without subjecting the CFPA to as many challenges if the language were to make clear that it is left to the CFPA’s discretion how and when to consult. For example, the section could be modified to state that the agency shall “consult with the federal banking agencies, or other Federal agencies, as the Agency in its judgment deems appropriate . . .” and further clarify that the consultation requirement is not subject to judicial review. Again, however, whether the Act should be modified along these lines depends on Congress’s considered judgment as to the relative importance of coordination.
The need for the current consultation requirement may also depend on whether the CFPA is an executive agency for purposes of presidential oversight, as discussed more fully below in Part III. If it is an executive agency for oversight purposes, then OIRA can serve the coordinating function of the Act’s consultation provisions and make sure that the CFPA’s rules are consistent with other agencies.20 In other words, with
19 Section 1038 imposes a similar consultation requirement. It provides that “the CFPA shall, when prescribing any rule under this section, consult and coordinate with Federal banking agencies and the Federal Trade Commission” to, among other things, “ensure that the rules impose substantially similar requirements on covered persons.” This requirement lacks the “as appropriate” language, so it is broader than the other provisions in that it seems to be a prerequisite any time the CFPA seeks to prescribe rules on consumer access to information. On the other hand, this provision is narrower than the other consultation provisions because the CFPA need only consult the banking agencies and the FTC. But to the extent this consultation requirement subjects the CFPA to challenges that it fails adequately to take into account the requirements of the banking agencies or the FTC, it, too, subjects CFPA rules to broad challenges. 20 U.S. Gov’t Accountability Office, Report to the Chairman, Committee on Oversight and Government Reform, House of Representatives, Federal Rulemaking: Improvements Needed to Monitoring and Evaluation of Rules Development as Well as to the Transparency of OMB Regulatory Reviews 8 (April
7 OIRA review, this provision may be largely duplicative and simply serve to delay and impede CFPA regulations.
There is an additional obstacle the Act puts in front of the CFPA when it seeks to bring an enforcement action. Section 1054(g)(1) sets out the statute of limitations for the Act, and it provides that “no action may be brought under this title more than 3 years after the violation to which an action relates.” Because violations by sophisticated business interests are often not discovered for years, this provision may hamper the CFPA in its enforcement efforts because the clock starts running from the time of the violation, not from the time when the agency discovers the violation.
In related areas, Congress has been careful to trigger the running of the statute of limitations to the time of discovery. For example, suits brought for violations of the Right to Financial Privacy Act may be brought “within three years from the date on which the violation occurs or the date of discovery of such violation, whichever is later.”21 Similarly, the Federal Deposit Insurance Corporation is allowed to bring suit to recover an underpaid amount on an assessment “until 3 years after the date of discovery of the false or fraudulent statement.”22 Suits for false statements or the omission of material facts with regard to securities sales and suits for false registration statements may be brought “within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.”23
Given the sophistication of the suppliers of consumer financial products and instruments, it would seem that there is even greater reason than in these other contexts to allow suit to begin from the time of discovery of the violation. As with suits regarding false statements regarding securities, a provision can be added to the CFPA Act noting that the clock starts running from the time of discovery or after such discovery should have been made by the exercise of reasonable diligence. This would protect the interests of suppliers in case the agency was unreasonably slow in its pursuit of violations, but would also protect consumers when a violation was, despite all reasonable efforts, not discovered for a period of time after the violation itself.
While the consultation requirement and the current statute of limitations provision seem to cut in favor of regulated entities, the Act has other provisions that work as counterweights to capture. One of these is Section 1042, which allows State attorneys general to enforce provisions of the Act. As noted above, attorneys general have served a checking function when the SEC has failed to police an area of industry abuse. Section 1042 would allow State AGs to serve a similar function in the context of the CFPA Act. If the CFPA is unwilling or unable to address a problem with consumer financial products or services, State AGs can provide additional resources to police the Act.
2009) (noting that OIRA is responsible for making sure that “decisions made by one agency do not conflict with the policies or actions taken or planned by another agency”). 21 12 U.S.C. § 3416. 22 12 U.S.C. § 1817(g)(2)(C). 23 15 U.S.C. § 77m.
8 Moreover, because the CFPA retains the right to intervene in these actions, it can ensure that its views are known if it is concerned that the AG’s action may lead to bad policy.24 The Act thus effectively uses AGs as a check on capture while respecting the expert judgment of the CFPA.
The Act also provides in Section 1041(a)(1) that states may continue to regulate the field of consumer financial products and services, as long as state laws are not inconsistent with the CFPA Act. The Act further specifies in various provisions that state laws are not inconsistent with the CFPA Act if the “protection such statute, regulation, order, or interpretation affords consumers is greater than the protection provided under this title, as determined by the Agency.”25 These provisions are likely to generate controversy and litigation, because whether a state law is more or less protective of consumers will not always be clear and may depend on one’s view of regulation in general. Thus, whether a state law is preempted may well depend on the regulatory orientation of the CFPA’s Board and whether or not it tends to trust market forces more or less. For example, if a majority of the CFPA’s Board is of the view that market forces better protect consumers than do regulations, the agency may seek to preempt state laws that regulate industry more heavily than CFPA regulations that do not go as far. The effect of this provision on capture is therefore contingent on the views of the CFPA Board and how much deference courts give those views. This provision will provide a check on industry bias only to the extent the CFPA is an accurate judge of what is more protective of consumers.
B. Stopping the Revolving Door
There is another way in which Congress can give the CFPA greater immunity from capture, and that is to impose limits on the ability of the CFPA Board members to work for the very industry actors they are charged with regulating.
Congress has imposed such limits in other contexts. For example, legislation creating the Public Company Accounting Oversight Board (PCAOB) charges the PCAOB with “establish[ing] ethics rules and standards of conduct for Board members and staff, including a bar on practice before the Board (and the [SEC], with respect to Board-related matters) for 1 year for former members of the Board, and an appropriate period (not to exceed 1 year) for former staff of the Board.”26 The Federal Board of Governors also imposes post-employment restrictions on its members, making them “ineligible during the time they are in office and for two years thereafter to hold any office, position, or employment in any member bank.”27 Members of the Board of the Farm Credit Administration are also ineligible to work for “any institution of the Farm Credit System” while they are in office and for two years thereafter.28
24 See Barkow, supra note 17, at 25-27. 25 See, e.g., Section 1041(a)(2); Section 5136C(c)(2); Section 5136C(d)(2); and Sections 6(c)(2) and (d)(2)(B). 26 15 U.S.C. § 7211(g)(3). 27 12 U.S.C. § 242. This restriction does “not apply to a member who has served the full term for which he was appointed.” Id. 28 12 U.S.C. § 2242.
9
The legislation creating the CPSC does not address Board members’ post-service employment but it does place restrictions on who can be named a commissioner in the first place. Specifically, it provides that a person cannot hold the office of a commissioner if he or she is “in the employ of, or holding any official relation to, any person engaged in selling or manufacturing consumer products” or owns “stock or bonds of substantial value in a person so engaged” or “is in any other manner pecuniarily interested in such a person.”29 In addition, CPSC commissioners are also barred from “engaging in any other business, vocation, or employment.”30
The CFPA Act does not presently contain any pre- or post-employment restrictions on its Board members. Because the Act in Section 1012 seeks Board members with relevant experience “related to consumer financial products or services,” pre-employment restrictions like those that apply to the CPSC seem unwise. Many of the most qualified people may well be currently employed in the market for consumer financial products or services or own stock in a company because of prior service. It would be feasible, however, to include post-employment restrictions along the lines of those that apply to the PCAOB, the Board of Governors, and the Members of the Farm Credit Administration. The framework that applies to the PCAOB seems particularly well suited to the CFPA because they govern similar industries. Just as it makes sense to try to limit the revolving door between the PCAOB and the accounting industry, so, too, does it make sense to limit the back-and-forth between the CFPA and those who supply financial products and services. The PCAOB legislation also has the advantage of addressing this phenomenon not just at the Board level, but at the staff level as well.
C. Access to Information
The proposed Act is attentive to the value of information to the agency. It gives the CFPA broad access to information, including allowing the agency to seek reports from covered persons (Section 1022(c)(1)), to access to the reports of other regulators (Section 1022(c)(5)), and to subpoena when necessary (Section 1052). One area where there may room for improvement is in Section 1014(c)(1), which creates a specific research unit within the agency. As currently written, the research unit is charged with researching, analyzing, and reporting on the markets for consumer financial products and services, including areas of alternative products with high growth, and on various aspects of consumer awareness and behavior. While this is valuable research, it would be helpful to the CFPA’s functioning if the research unit also conducted research on the supply-side of this market. That is, the research unit could also be charged with investigating advertising and marketing practices by financial service and product suppliers. In addition, the research unit could report on the enforcement and regulatory efforts of others federal agencies and the states in addressing financial services and products. This information can assist the CFPA in determining what company practices currently look like and what regulations are feasible.
29 15 U.S.C. § 2053(c). 30 Id.
10 III. The CFPA as Independent v. Executive Agency
The proposed legislation states in Section 1011 that the CFPA will be “an independent agency.” At the same time, the Act makes institutional design choices that make the CFPA more political than most multi-member independent regulatory agencies (including some independent agencies whose functions the CFPA is taking over). In addition, the language of the Act is susceptible to an interpretation that gives the President greater control over the CFPA than over other independent regulatory agencies.
A. Politically Balanced Membership
There are typically two attributes that characterize a multi-member independent regulatory agency and distinguish it from an executive agency. First, unlike the heads of executive agencies who can be removed at will by the President, the members of an independent agency serve fixed terms and are removable only for cause. Second, unlike executive agencies, which are most often headed by a single appointee who shares the President’s political goals for that agency, almost all multi-member independent regulatory agencies are balanced in their membership so that the view of no one political party dominates.
The CFPA takes over functions relating to consumer financial protection from several traditional independent agencies that have these characteristics. The Federal Deposit Insurance Corporation (FDIC) is a five-member board, and its authorizing statute provides that no more than three members may be of the same political party.31 The FTC is also governed by a five-member body, and its authorizing statute similarly insists that no more than three of its commissioners can be members of the same political party.32 The National Credit Union Administration (NCUA) follows this same model. Of the three members of its board, only two may be members of the same party.33
Unlike the legislation establishing these independent agencies, the CFPA Act currently lacks any requirement that seeks to balance the politics on the CFPA’s five- member Board. As a result, it is not inconceivable – and perhaps to be expected – that a President would appoint only members of his or her political party. Thus, if a President serves two terms, he or she could create a Board entirely composed of members of his or her political party because each Board member’s term will have expired over a period of five years. While Senate confirmation may act as a check on this, it is no guarantee of ideological balance or moderation.
The legislation establishing most multi-member independent agencies insists on party balance for good reason. As a wealth of empirical research demonstrates, a group comprised solely of ideologically like-minded people tends toward extreme
31 12 U.S.C. § 1812(a)(2). 32 15 U.S.C § 41. 33 12 U.S.C. § 1752a(b)(1).
11 decisionmaking.34 Liberals and conservatives alike become more liberal and conservative, respectively, when they deliberate only with like-minded people. Thus, as Cass Sunstein has observed, “[a]n independent agency that is all Democratic, or all Republican, might polarize toward an extreme position, likely more extreme than that of the median Democrat or Republican, and possibly more extreme than that of any member standing alone.”35 This kind of polarization is unwise for an agency regulating an area as complicated as consumer financial products and services because it could mean wide fluctuations in policy as presidential administrations change. Indeed, dramatic shifts in positions based on political winds were precisely the evil that independent agencies were designed to combat. When the FTC was created, for instance, the Senate Committee Report emphasized the need “for an administrative board . . . which would have precedent and traditions and a continuous policy and would be free from the effect of such changing incumbency.”36
A multi-member commission that is politically balanced is beneficial for another reason. As noted above, one of the concerns with agencies that regulate powerful, wealthy industries is that those industries tend to dominate the agency’s agenda because they have greater resources to monitor what the agency is doing. But when an agency is composed of members of different parties, it has a built-in monitoring system for interests on both sides because that type of body is more likely to produce a dissent if the agency goes too far in one direction.37 That dissent, in turn, alerts Congress and the public at large that the agency’s decision might merit closer scrutiny.
It is possible that the proposed legislation does not follow this template for multi- member independent regulatory agencies because the CFPA is not just taking over functions from traditional multi-member independent agencies. It is also assuming consumer protection functions from two executive agencies – the Comptroller of the Currency and the Office of Thrift Supervision (OTS) – and the Board of Governors. The Board of Governors is unique among most multi-member independent agencies because it does not have a requirement that its membership be politically balanced.38 But the
34 See, e.g., David Schkade, Cass R. Sunstein & Reid Hastie, What Happened on Deliberation Day?, 95 CAL. L. REV. 915 (2007) (discussing the results of an experiment that shows that liberals and conservatives become more liberal and conservative, respectively, as a result of deliberation amongst like-minded people); Cass R. Sunstein, David Schkade & Lisa Michelle Ellman, Ideological Voting on Federal Courts of Appeals: A Preliminary Investigation, 90 VA. L. REV. 301 (2004) (discussing data that shows that unified groups of three Democrat-appointed or Republican-appointed judges are far more likely to vote in a “liberal” or “conservative” manner, respectively, than Democrat-appointed or Republican-appointed judges who are part of a divided bench); Cass R. Sunstein, Deliberative Trouble? Why Groups Go to Extremes, 110 YALE L.J. 71, 74 (2000) (“In brief, group polarization means that members of a deliberating group predictably move toward a more extreme point in the direction indicated by the members’ predeliberation tendencies.”). 35 Sunstein, supra note 34, at 103. 36 51 Cong. Rec. 10376 (1914). 37 A recent empirical study of the Federal Communications Commission (FCC), for example, found that partisanship accounts for roughly 75 percent of the FCC’s non-unanimous decisions. Daniel E. Ho, Congressional Agency Control: The Impact of Statutory Partisan Requirements on Regulation 35 (Feb. 12, 2007), available at http://dho.stanford.edu/research/partisan.pdf. 38 The legislation creating the Board of Governors does state, however, that, in “selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve district, the
12 Board of Governors is unique in other respects as well. Its members serve long terms of 14 years, and they have perhaps the most powerful agency positions in the country because of their authority to set monetary policy. Monetary policy cannot, of course, fluctuate in an extreme manner as administrations change because of the deleterious effect it would have on the economy. It is therefore unsurprising that even without a requirement that the Board be politically balanced, it is one of the most stable agencies in government and the most independent. As for the Comptroller of the Currency and OTS, those two agencies in Treasury are not multi-member bodies, so their design does not speak to political balance. More fundamentally, as with the Board of Governors, there is no reason to believe that these agencies were designed with their consumer protection functions, as opposed to their more central regulatory functions, in mind.
The CFPA, in contrast, has as its sole mission the protection of consumers in the market for financial products and services. It therefore most closely resembles agencies such as the FTC, the SEC, and the CPSC in its goals – and the legislation for all of those multi-member agencies insists on political balance to help achieve more stable policy outcomes over time. For the same reasons that Congress opted for political balance on those agencies, it should do so with respect to the CFPA as well.
B. Executive Oversight
It is unclear from the proposed legislation what the intended relationship is between the CFPA and the President. Although the legislation states in Section 1011 that the agency is to be “independent,” it immediately adds that the agency will be “in the executive branch.” Coupled with the lack of a provision that seeks party balance, the legislation is at least susceptible to an interpretation that it is creating an agency that, while independent in some respects (specifically, giving Board members some protection from removal from office), it is otherwise a traditional executive agency subject to presidential oversight and direction.
That presidential oversight could include subjecting the CFPA to various executive orders that require executive agencies to conduct cost-benefit analysis of proposed regulations and guidance documents, to explain what market failure a proposed regulation addresses, and to submit that analysis to the President’s Office of Information and Regulatory Affairs for review.39 These orders also require agencies to designate a regulatory policy officer (RPO) to oversee compliance with the requirements of the executive orders, and a recent order insists that the RPO be a presidential appointee. As a recent Government Accountability Office (GAO) report documents, the OIRA regime expands the President’s influence over an agency’s substantive policies, frequently leading to significant and material modifications in the agency’s regulations.40
President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.” 12 U.S.C. § 241. 39 Executive Order 12866; Executive Order 13422. 40 GAO Report, supra note 20, at 30 (reviewing 12 rules submitted to OIRA and finding that OIRA review led to significant or material changes for eight of them).
13 The Executive orders currently exempt independent agencies from their purview, but an independent agency for purposes of the orders is defined by the Paperwork Reduction Act.41 The current CFPA Act does not propose an amendment to the Paperwork Reduction Act to include the CFPA among the list of independent agencies, so it is certainly possible, perhaps likely, that OIRA could conclude that the CFPA is not an independent agency for purposes of its review process, particularly given that the Act specifies that the CFPA is “in the executive branch.”
In this regard, it is noteworthy that the statutes creating the independent regulatory agencies listed in the Paperwork Reduction Act do not use the same “independent agency in the executive branch” language that the CFPA Act does. In contrast, that language has been used to describe executive agencies that are subject to presidential oversight. For example, the Act creating the Social Security Administration (SSA) states that it shall be “an independent agency in the executive branch.”42 The SSA, in turn, has complied with executive orders on regulatory review, including the appointment of a regulatory policy officer.43 Similarly, the Federal Emergency Management Agency has also been characterized as an “independent agency in the Executive Branch,”44 though it, too, is subject to presidential oversight.45
There is, then, a significant possibility that the CFPA Act will subject the CFPA to oversight by the President, including the extensive review of regulations conducted by OIRA.46 Congress should therefore determine whether it wants the CFPA to be subject to this kind of presidential oversight.
OIRA review has benefits. It helps the President coordinate policies across the Executive branch, and requiring an agency to submit a cost-benefit analysis of a proposed regulation to OIRA can have potentially positive disciplining effects because OIRA brings a fresh set of eyes to the issue. And, in recent years, OIRA review has been
41 Executive Order 12866 §3 (including all agencies within its ambit except those “considered to be independent regulatory agencies, as defined in 44 U.S.C. § 3502(10)”). 44 U.S.C. § 3502 has since been amended so that independent regulatory agencies are now defined in § 3502(5). 42 42 U.S.C. § 901. 43 Agency Regulatory Policy Officers (as of June 19, 2008), available at http://georgewbush- whitehouse.archives.gov/omb/inforeg/regpol/agency_reg_policy_officers.pdf. 44 See notes following 15 U.S.C. § 2202 (transfer of functions). 45 See, e.g., Interim Final Rule, 66 Fed. Reg. 15968 (noting that a FEMA rule has been reviewed by OMB for compliance with 12866). 46 There is a constitutional question whether OIRA can exercise oversight over an independent agency. See Richard L. Revesz & Michael Livermore, Institute for Policy Integrity, New York University School of Law, Memorandum 5 (Feb. 13, 2009) filed in response to Memorandum from the President of January 30, 2009 concerning Regulatory Review, published at 74 Fed. Reg. 5977 (Feb. 3, 2009), available at http://www.reginfo.gov/public/jsp/EO/fedRegReview/Revesz_Livermore.pdf; Robert W. Hahn & Cass R. Sunstein, A New Executive Order for Improving Federal Regulation? Deeper and Wider Cost-Benefit Analysis, 150 U. PA. L. REV. 1489, 1534-1537 (2002). To the extent the CFPA Act has language distinguishing it from more traditional independent regulatory agencies, however, that constitutional question may be avoided because a court could conclude that this language signifies Congress’s intent that presidential oversight, including OIRA oversight, is acceptable.
14 relatively expeditious, taking less than a month of additional time.47 Moreover, because the CFPA members are not removable by the President except for cause, OIRA review would give the President some degree of influence over the CFPA’s agenda. Thus, to the extent the President represents a national constituency, that view will be represented before the agency.
But there are costs to OIRA oversight as well. The more susceptible an agency is to presidential oversight, the more likely the agency’s policies will shift as new administrations take power. Dramatic shifts hinder business planning and create legal uncertainty, which can be damaging to any market, including the one for financial products and services. In addition, OIRA has traditionally had a deregulatory bias. Although many urge OIRA to take a more aggressive role in policing agency inaction as well,48 OIRA’s history is to the contrary. There remains the risk, then, that OIRA review could put pressure on the CFPA to be less ambitious in its regulatory positions. The potential for OIRA to delay the implementation of regulations in the future is also a possibility.
Congress therefore faces the question of whether it would like presidential oversight in the form of OIRA review for the CFPA or whether it would prefer to insulate the CFPA from this type of supervision. If Congress wishes to make clear that the CFPA is not subject to OIRA review and other presidential directives, it should amend 44 U.S.C § 3502(5) to include the CFPA or otherwise provide in the CFPA Act that the CFPA is to be treated as an independent agency for purposes of presidential executive orders governing agency oversight. If Congress wishes to make clear that the CFPA is subject to presidential oversight, it should amend the CFPA to state this more clearly. I take no position on which path Congress should pursue, but simply flag that, as the Act now stands, it is unclear what the relationship between the President and CFPA will be.
IV. Conclusion
Thank you for allowing me to testify and share my thoughts on this critical piece of legislation. I would be happy to answer any questions that you might have.
47 See OMB Watch, OIRA’s Role in the Obama Administration Examined, available at http://www.ombwatch.org/node/10115. 48 See Revesz & Livermore, supra note 46, at 1-3; Hahn & Sunstein, supra note 46, at 1521-1524.
15
Project On Government Oversight
Revolving Regulators: SEC Faces Ethics Challenges with Revolving Door
May 13, 2011
1100 G Street, NW, Suite 900 • Washington, DC 20005 • (202) 347-1122 Fax: (202) 347-1116 • Email: [email protected] • www.pogo.org POGO is a 501(c)3 organization TABLE OF CONTENTS
Executive Summary...... 2
Introduction...... 4
Post-Employment Restrictions for SEC Employees...... 5
Post-Employment Statements Document Trips through the Revolving Door...... 6
POGO’s FOIA Request and Online Database ...... 7
Highlights from Post-Employment Statements ...... 9
Most Active Former Employees ...... 10
Fastest Revolvers ...... 10
Top Recruiters of Former Employees...... 12
Where Former Employees Used to Work...... 13
Yearly Breakdown ...... 14
Former Employees Retained to Work on a Wide Range of Issues...... 14
SEC’s Oversight of Post-Employment Requirements ...... 17
Potential Conflicts of Interest ...... 18
Possible Missing Statements...... 20
Does the Revolving Door Undermine SEC Enforcement and Regulatory Actions?...... 22
Pending Studies Could Provide Additional Insights on SEC Revolving Door Issues...... 27
Recommendations...... 28
1 EXECUTIVE SUMMARY
The financial meltdown of 2008 brought renewed focus to the integrity and aggressiveness of federal government oversight of the financial system. One of the most important agencies overseeing financial markets and investor protection is the Securities and Exchange Commission (SEC or Commission).
Several critics, including Members of Congress, have said the SEC’s integrity has been undermined by the “revolving door”—where former SEC employees go to work for entities overseen by the Commission. The revolving door also operates in the opposite direction, where individuals come from entities regulated by the SEC to work for the Commission. The general concern is that a conflict of interest could bias SEC oversight and undermine public confidence in the SEC’s work, as acknowledged by the current SEC Chairman.
The SEC requires that its former employees file post-government employment statements if they plan to represent a client before the Commission within two years of leaving the SEC. The Project On Government Oversight (POGO) filed a Freedom of Information Act (FOIA) request for all post- employment statements filed by former SEC employees between 2006 and 2010 and analyzed these statements and other documents. POGO found that:
• Between 2006 and 2010, 219 former SEC employees filed 789 post-employment statements indicating their intent to represent an outside client before the Commission
• Some former SEC employees filed statements within days of leaving the Commission, with one employee filing within 2 days of leaving
• Some former SEC employees filed numerous statements during this time period, with one former employee filing 20 statements
• There are 131 entities providing legal, accounting, consulting, and other services that were identified as new employers in the statements. Some entities recruited numerous SEC employees during the five-year period.
• In the vast majority of statements, former SEC employees affirm that they did not participate personally or substantially in, or have official responsibility for, the matter on which they now expect to appear before the Commission
• POGO identified instances in which former SEC employees may have been required to file statements during the five-year period but did not
• The SEC Office of Inspector General has identified cases in which the revolving door appeared to be a factor in staving off SEC enforcement actions and other types of SEC oversight, including cases involving Bear Stearns and the Stanford Ponzi scheme
• One recent empirical study uncovered several significant and systematic biases in the SEC’s enforcement patterns and found indirect evidence to support the contention that “post-agency
2 employment at higher salaries may operate as a quid pro quo in return for favorable regulatory treatment”1
• Some former SEC employees disclosed that they consulted with ethics officers regarding the work they intended to do on behalf of their clients before the SEC, but in many other statements, it is unclear whether the former employees discussed their post-employment plans with an ethics officer
• Some statements indicate that the former employee did participate in or have responsibility for a related matter while they worked at the SEC, but that they discussed the matter with an ethics officer who advised them they could contact Commission staff on that issue on behalf of their new client
• There were some inconsistencies in the SEC’s handling of FOIA exemptions in the statements requested by POGO—for instance, while the vast majority of statements disclosed the names of the former employees, in several cases this information was withheld
POGO recommends that Congress and the SEC:
• Strengthen and simplify post-employment restrictions
• Make post-employment statements publicly available online
• Verify completeness and accuracy of post-employment statements
• Strengthen restrictions for new employees coming from industry
• Publicly disclose SEC recusal database and ethics waivers
• Strengthen and utilize ethics enforcement authority
• Extend post-employment regulations to other financial regulatory agencies
• Review confidential treatment procedures and FOIA exemptions
1 Stavros Gadinis, The SEC and the Financial Industry: Evidence from Enforcement Against Broker-Dealers, August 11, 2009, p. 49. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1333717 (Downloaded May 8, 2011) 3
INTRODUCTION
The Securities and Exchange Commission (SEC or Commission) is charged with a critical mission that includes protecting the investments of everyday Americans who “turn to the markets to help secure their futures, pay for homes, and send children to college.”2 As the country continues to recover from a severe financial crisis fueled in large part by the reckless practices of companies overseen by the SEC,3 the SEC’s duty to protect investors and ensure the integrity of our financial markets is more important than ever.
At her confirmation hearing in January 2009, SEC Chairman Mary Schapiro stated that “there can be no sacred cows” with respect to the SEC’s treatment of regulated entities, and spoke of the need to “go with full force and fervor against anyone who violates investors’ trust, large or small, regardless of their standing in the investment community.” When asked about former SEC employees who go to work for the SEC’s regulated entities after leaving government, Schapiro remarked that the SEC must seek to avoid the conflicts created by these employees “walking out the door and going to a firm and leaving everybody to wonder whether they showed some favor to that firm during their time at the SEC.”4
However, the SEC has frequently been criticized by Members of Congress,5 the Commission’s Office of Inspector General (OIG),6 former employees,7 and market participants8 for its deference to the industry it oversees, and in particular to the larger Wall Street firms under the SEC’s purview. Many commentators have focused their criticism on the “revolving door” at the SEC,9 through which former employees are quickly hired or retained by the Commission’s regulated entities and the various firms and individuals that provide these entities with legal, accounting, consulting, and other services.
2 Securities and Exchange Commission, “The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation,” February 28, 2011. http://sec.gov/about/whatwedo.shtml (Downloaded May 7, 2011) 3 National Commission on the Causes of the Financial and Economic Crisis in the United States, The Financial Crisis Inquiry Report, January 2011, pp. 150-154. http://pogoarchives.org/m/fo/fcic-final-report-jan2011.pdf 4 Hearing before the Senate Committee on Banking, Housing, and Urban Affairs, “Nominations of: Mary Schapiro, Christina D. Romer, Austan D. Goolsbee, Cecilia E. Rouse, and Daniel K. Tarullo,” January 15, 2009, pp. 15, 28. http://www.gpo.gov/fdsys/pkg/CHRG-111shrg50221/pdf/CHRG-111shrg50221.pdf (Downloaded May 7, 2011) 5 Senator Charles Grassley, Ranking Member, Senate Committee on Finance, “Grassley: SEC IG Report on Bear Stearns Shows SEC Deference to Wall Street,” October 10, 2008. http://finance.senate.gov/newsroom/ranking/release/?id=53c45ec5-d2c4- 464b-8dfe-cea11d887c30 (Downloaded May 7, 2011) 6 Securities and Exchange Commission, Office of Inspector General, Allegations of Conflict of Interest, Improper Use of Non- Public Information and Failure to Take Sufficient Action Against Fraudulent Company (Case No. OIG-496), January 8, 2010, pp. 34-35, 46-47. http://pogoarchives.org/m/fo/sec-oig-report-20100108.pdf (hereinafter “OIG Allied Report”) 7 Statement of John P. Freeman, Professor of Law, University of South Carolina Law School, Before the Senate Governmental Affairs Subcommittee on Financial Management, the Budget, and International Security, January 27, 2004, pp. 3-5. http://hsgac.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=77fd5d57-f00d-46c8-8803-acbae1abeafb (Downloaded May 7, 2011) 8 Michael Lewis and David Einhorn, “The End of the Financial World as We Know It,” The New York Times, January 3, 2009. http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?adxnnl=1&pagewanted=3&adxnnlx=1304950130- zQ/UjQVMc7pJb3pzzmN7xg. (Downloaded May 7, 2011) David Einhorn and employees of Greenlight Capital are major contributors to POGO. 9 Letter from H. David Kotz, Inspector General, Securities and Exchange Commission, to Senator Charles Grassley, Ranking Member, Senate Committee on Finance, regarding problems associated with SEC employees who represent individuals or entities in matters before the SEC after leaving government work, June 15, 2010. http://finance.senate.gov/newsroom/ranking/download/?id=5f610cdf-376f-48ce-81ea-3308307ea039 (Downloaded May 7, 2011) (hereinafter “Kotz Letter”) 4
As part of an effort to shed light on the revolving door at the SEC, and to examine whether the SEC has adequate policies and procedures in place to detect and mitigate conflicts of interest involving former SEC employees, the Project On Government Oversight (POGO) has obtained five years’ worth of statements filed by former employees who appeared before the Commission seeking to represent outside clients within two years of leaving the SEC. POGO has also made these post-employment statements publicly available in a searchable online database.10 This report provides an overview of the information disclosed in these statements, and examines the SEC’s oversight of former employees who go through the revolving door.
POST-EMPLOYMENT RESTRICTIONS FOR SEC EMPLOYEES
SEC employees are required to follow government-wide ethics laws and regulations for executive branch employees,11 including the “Ethics Commitments” for political appointees established under the Obama administration.12 In addition, SEC regulations require employees to maintain “unusually high standards of honesty, integrity, impartiality and conduct.”13 The SEC’s regulations are “aimed at eliminating the appearance of impropriety as well as any actual wrongdoing.”14
In order to meet the requirements mandated by both government-wide restrictions and the Commission’s specific standards, SEC employees are generally limited in the type of work they can perform for companies overseen by the Commission after leaving their position at the SEC. These post-employment restrictions, found in the SEC’s “Regulation Concerning Conduct of Members and Employees and Former Members and Employees of the Commission,”15 are:
10 Project On Government Oversight, “SEC Revolving Door Database.” http://www.pogo.org/tools-and-data/sec-revolving-door-database. (hereinafter “SEC Revolving Door Database”) POGO’s database provides the largest publicly available listing of statements filed by former SEC employees who appear before the Commission on behalf of outside clients. The Center for Responsive Politics also has a revolving door database that includes many former SEC employees. Center for Responsive Politics, “Revolving Door, Agency Search: Securities & Exchange Commission.” http://www.opensecrets.org/revolving/search_result.php?agency=Securities+%26+Exchange+Commission&id=EISEC (Downloaded May 7, 2011) However, the Center’s database is largely based on a comprehensive online directory of lobbyists published by Columbia Books, Inc., at www.lobbyists.info, whereas POGO’s database is derived from SEC post-employment statements obtained through a FOIA request. 11 Office of Government Ethics, Compilation of Federal Ethics Laws. http://www.usoge.gov/laws_regs/pdf/comp_fed_ethics_laws.pdf; and Office of Government Ethics, “Regulations Issued by or Affecting OGE and Its Mission.” http://www.usoge.gov/laws_regs/regulations/5cfr2635.aspx (All Downloaded May 7, 2011) SEC employees are also required to follow the “Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission,” 5 C.F.R. § 4401. http://www.gpo.gov/fdsys/pkg/CFR-2011-title5-vol3/pdf/CFR-2011- title5-vol3-part4401.pdf (Downloaded May 9, 2011) 12 The White House, “Ethics Commitments by Executive Branch Personnel,” Executive Order 13490, January 21, 2009, Federal Register, Vol. 74, No. 15, January 26, 2009. http://www.gpo.gov/fdsys/pkg/FR-2009-01-26/pdf/E9-1719.pdf (Downloaded May 7, 2011) (hereinafter “Ethics Commitments”) 13 “Regulation Concerning Conduct of Members and Employees and Former Members and Employees of the Commission,” 17 C.F.R. § 200.735-2(a). http://www.gpo.gov/fdsys/pkg/CFR-2010-title17-vol2/pdf/CFR-2010-title17-vol2-part200-subpartM.pdf (Downloaded May 7, 2011) (hereinafter “SEC Post-Employment Regulation”) 14 “SEC Post-Employment Regulation,” 17 C.F.R. § 200.735-3(a)(1). SEC regulations require employees to maintain high ethical standards in light of the Commission’s oversight of a “highly significant area of our national economy” and the “effect which Commission action frequently has on the general public....[SEC employees] must be constantly aware of the need to avoid situations which might result either in actual or apparent misconduct or conflicts of interest.” “SEC Post-Employment Regulation,” 17 C.F.R. § 200.735-2(a) 15 “SEC Post-Employment Regulation,” 17 C.F.R. § 200.735-8(a) 5
1) Former SEC employees can never appear in a representative capacity before the Commission on a particular matter (defined as a “discrete and isolatable transaction or set of transactions between identifiable parties”) if they participated personally and substantially in the matter while working at the Commission.16 2) For two years after their employment ends, former employees cannot assist a person appearing before the Commission in a representative capacity on any matter in which the former employees participated personally and substantially while working at the Commission. 3) For two years after their employment ends, former employees cannot appear before the Commission in a representative capacity on any matter that was under their official responsibility at any time within one year prior to the termination of such responsibility.17 4) Certain senior former employees cannot appear in a representative capacity before the SEC with the intent to influence the Commission for one year after their employment has ceased.18
Furthermore, the SEC requires former employees to file statements when they expect to appear before the agency within two years on behalf of outside parties.19
Despite these seemingly strict limitations, most former SEC employees can begin representing clients within days after leaving the Commission if they file the required statement. As detailed below, many former SEC employees whose statements POGO examined wasted little time returning to the Commission to appear on behalf of outside parties.
POST-EMPLOYMENT STATEMENTS DOCUMENT TRIPS THROUGH REVOLVING DOOR
As mentioned above, former employees are required to file post-employment statements with the SEC under certain circumstances prescribed by Commission regulations. Specifically, SEC regulations require former employees to file statements with the SEC’s Office of the Secretary within two years of leaving the Commission if they are:
[e]mployed or retained as the representative of any person outside the Government in any matter in which it is contemplated that he or she will appear before the Commission, or communicate with the Commission or its employees.20
The statement must be filed within ten days of the former employee being hired or retained to appear before the SEC on behalf of an outside party,21 and it must include:
16 This restriction can also be found in the government-wide post-employment restrictions, “Restrictions on former officers, employees, and elected officials of the executive and legislative branches,” 18 U.S.C. 207(a)(1). http://www.gpo.gov/fdsys/pkg/USCODE-2009-title18/pdf/USCODE-2009-title18-partI-chap11-sec207.pdf (Downloaded May 9, 2011) (hereinafter “Government-Wide Post-Employment Restrictions”) 17 This restriction can also be found in the “Government-Wide Post-Employment Restrictions,” 18 U.S.C. 207(a)(2). 18 This restriction can also be found in the “Government-Wide Post-Employment Restrictions,” 18 U.S.C. 207(c). This restriction typically applies to individuals employed at special rates or in special capacities stipulated by U.S. Code, which in the case of the SEC would include Commissioners. http://www.gpo.gov/fdsys/pkg/USCODE-2010-title5/pdf/USCODE-2010-title5-partIII- subpartD-chap53-subchapII.pdf. According to SEC regulations, the Office of Government Ethics (OGE) can also designate certain individuals to be covered under this restriction. “SEC Post-Employment Regulation,” 17 C.F.R. § 200.735-8(a)(4). In addition, OGE has the authority to waive this requirement for certain senior SEC officials. “Subpart C—Exceptions, Waivers and Separate Components,” 5 C.F.R. § 2641.301(j). http://www.gpo.gov/fdsys/pkg/CFR-2010-title5-vol3/pdf/CFR-2010-title5-vol3- sec2641-301.pdf (All Downloaded May 11, 2011) 19 “SEC Post-Employment Regulation,” 17 C.F.R. § 200.735-8(b) 20 “SEC Post-Employment Regulation,” 17 C.F.R. § 200.735-8(b)(1) 6
• “a description of the contemplated representation”;
• a statement affirming that the former employee did not participate personally and substantially in or have official responsibility for the matter in which they now expect to appear before the Commission;
• the name of the employee’s former Division or Office at the SEC.22
A single former employee must often file multiple statements to cover all the different issues on which they expect to appear before the Commission representing outside parties. As documented below, in the two years after an employee leaves the SEC, he or she may file a dozen or more statements with the Commission. One former SEC employee in POGO’s database filed 20 statements in the two years after he left the Commission.
If a former SEC employee is prohibited from appearing before the Commission on a particular matter in which they participated personally and substantially, the former employee’s new partners and associates would also be disqualified. However, SEC regulations permit the partners or associates to request that the SEC’s General Counsel grant a waiver permitting them to work on the matter, as long as they take measures to isolate the former SEC employee from participating in the matter and from sharing any related fees.23
POGO’S FOIA REQUEST AND ONLINE DATABASE
POGO filed a Freedom of Information Act (FOIA) request for all post-employment statements filed with the Commission between 2006 and 2010.24 In response, the SEC provided POGO with nearly 800 statements from 219 former employees who went to work for 131 new employers over that five-year period.25
The SEC generally disclosed the following information from the post-employment statements: the former employee’s name; the name of the SEC Division or Office where they worked; their former title; their date of resignation from the Commission; their new employer; the Division or Office they planned to contact on behalf of an outside client; and, in cases where a former employee consulted with an ethics officer, the date the ethics officer issued an advisory opinion, which usually stated that the former employee could appear before SEC staff without violating the post-employment restrictions.26 There
21 “SEC Post-Employment Regulation,” 17 C.F.R. § 200.735-8(b)(1) 22 “SEC Post-Employment Regulation,” 17 C.F.R. § 200.735-8(b)(1) 23 “SEC Post-Employment Regulation,” 17 C.F.R. § 200.735-8(d) 24 Other FOIA requesters have also obtained and highlighted the information contained in SEC post-employment statements. In April 2010, The Wall Street Journal reported on post-employment statements filed over a 21-month period based on documents obtained through a public records request similar to POGO’s. The Journal found that there were “66 former SEC employees who filed 168 letters with the SEC secretary in 2008 and the first nine months of 2009.” Tom McGinty, “SEC Lawyer One Day, Opponent the Next,” The Wall Street Journal, April 5, 2010. http://online.wsj.com/article/SB10001424052702303450704575160043010579272.html (Downloaded May 7, 2011) (hereinafter “WSJ Investigation”) 25 The SEC’s response included a few statements that were filed in 2011, beyond the time frame of POGO’s initial FOIA request. These records have also been included in the database. POGO will regularly update the database as additional records become available. 26 There were a few cases in which it appears the ethics officer advised the former employee to modify his or her post- employment plans in order to avoid violating the restrictions. For instance, Walter G. Ricciardi, a former Deputy Director of the 7 were also a few statements in which the SEC disclosed the names of the entities that had retained the former SEC employees, and released partial or full descriptions of issues on which the former employees expected to appear before the Commission.
POGO entered the information included in the statements into an online database.27 As of this writing, POGO’s database includes the following information: employee name, former Division or Office, former Regional Office, former title, new employer, represented entity, issue, date of resignation, and date of statement.
POGO has created the database as a public service. We believe it is the most comprehensive public database documenting the revolving door between the SEC and the entities it regulates. POGO obtained and made the underlying data public in order to improve the public’s understanding of the Commission’s operations and its ongoing relationships with the entities it regulates.
Inclusion in POGO’s report and database is not meant to suggest illegality or misdeeds. Instead, this report and the underlying data are intended to illustrate the extent to which former SEC employees have appeared before the Commission or communicated with SEC staff on behalf of outside clients in recent years, and to shed light on the SEC’s oversight of former employees who go through the revolving door.
There are several important caveats that should be kept in mind when reviewing the information in POGO’s database.
The database does not include every employee who left the SEC or went through the revolving door during the relevant time period. Some former employees who went to work for an entity regulated by the SEC did not represent the entity before the SEC. Some waited until after two years had passed to begin representing an outside client before the SEC. And some employees left the SEC to take jobs elsewhere in the public sector. These cases are beyond the scope of POGO’s FOIA request, and are not included in POGO’s database. POGO has also documented a handful of instances in which it appears that former SEC employees should have filed statements with the Commission but did not, as described below.
In addition, most of the statements provided to POGO by the SEC were heavily redacted. The SEC typically redacted the name of the entity that had retained the former employee’s new employer, and the issue on which the employee was expected to appear before the Commission. The SEC’s FOIA response letter states that this information was withheld under: FOIA Exemption 4, “since the release would cause substantial competitive harm to the submitter”; Exemption 7(A), to “[protect] from disclosure records compiled for law enforcement purposes, the release of which could reasonably be expected to interfere with enforcement activities”; and Exemption 7(C), since “[r]elease of this information could subject [SEC] employees to harassment from the public in the performance of their official duties.” The SEC also usually redacted the names of current Commission staff under FOIA Exemptions 6 and7(C), “since release could reasonably be expected to constitute an unwarranted invasion of personal privacy.”28
SEC’s Enforcement Division, disclosed in one of his statements that a certain “investigation may have been initiated under my official responsibility,” an understanding he reached based on a conversation with an ethics officer. Accordingly, it appears he agreed not to appear before the Commission on behalf of an outside client with regards to this investigation for two years after his departure from the SEC. Letter from Walter G. Ricciardi, Paul, Weiss, Rifkind, Wharton & Garrison LLP, to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), June 15, 2010. http://pogoarchives.org/tools-and-data/fo/sec/ricciardi-20100615-130-131.pdf 27 “SEC Revolving Door Database.” http://www.pogo.org/tools-and-data/sec-revolving-door-database 28 Letter from Dave Henshall, FOIA Branch Chief, Securities and Exchange Commission, to Michael Smallberg, Project On Government Oversight, February 10, 2011. http://pogoarchives.org/m/fo/sec-foia-response-20110210.pdf 8
In a few statements filed by employees who had gone to work for Wilmer Cutler Pickering Hale and Dorr LLP, the SEC also redacted the names and titles of the former employees under Exemption 6.29 When asked why the Commission chose to redact this information in only a few statements, an SEC spokesperson told POGO that “[s]ome former SEC employees requested confidentiality pursuant to agency procedures. We redacted to protect their names, titles, work telephone numbers and work email addresses. Where all that information was released, confidentiality was not requested. The procedures are laid out in 17 CFR 200.83,”30 an SEC regulation that provides a “procedure by which persons submitting information in any form to the Commission can request that the information not be disclosed pursuant to a request under the Freedom of Information Act.”31
This regulation states that when the SEC determines that confidential treatment is warranted, the person requesting the related information under FOIA will be notified of the determination and informed of their right to appeal.32 However, POGO did not receive any notification after filing its FOIA request conveying the SEC’s position that confidential treatment was warranted with respect to the post- employment statements. Furthermore, POGO is concerned that this regulation may give the SEC excessive authority to withhold information from the public.
Finally, there were a few minor inconsistencies in the statements that POGO standardized to the best of its ability in order to create a searchable database.33
HIGHLIGHTS FROM POST-EMPLOYMENT STATEMENTS
This section presents some of the key highlights from the SEC post-employment statements based on POGO’s review of nearly 800 statements filed between 2006 and 2010.
29 For example, see Letter from Former Employee to Elizabeth Murphy, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), March 26, 2010. http://pogoarchives.org/tools- and-data/fo/sec/20100326-171-173.pdf. It is worth noting that Wilmer Cutler Pickering Hale and Dorr LLP discloses and advertises the names and titles of former SEC employees who work for the firm. Wilmer Cutler Pickering Hale and Dorr LLP, “Government Service of Our Professionals,” p. 5. http://www.wilmerhale.com/files/upload/GovernmentService.pdf (Downloaded May 7, 2011) 30 Email from John Nester, Securities and Exchange Commission, to Michael Smallberg, Project On Government Oversight, May 3, 2011 (hereinafter “May 3 Nester Email”) 31 “Confidential treatment procedures under the Freedom of Information Act,” 17 C.F.R. § 200.83. http://www.gpo.gov/fdsys/pkg/CFR-2010-title17-vol2/pdf/CFR-2010-title17-vol2-sec200-83.pdf (Downloaded May 11, 2011) (hereinafter “Confidential Treatment Procedures”) It is worth noting many other statements also included a request for confidential treatment, yet in nearly every case the SEC still released the names and former titles of the employees. 32 “Confidential Treatment Procedures,” 17 C.F.R. § 200.83 33 In cases where employees had worked in several Divisions or Offices at the SEC, POGO tried to select the Division or Office where they were most recently employed. In cases where employees provided a month but not a date of resignation, POGO chose the first day of the month. In one case where a former employee listed multiple resignation dates, POGO chose the earliest date provided. In one case where a former employee listed different former titles, POGO chose the title most commonly provided in the employee’s statements. In cases where information was redacted, the specific FOIA exemption is indicated in the database. In cases where no information was provided, these records are marked with “N/A.” In cases where there were non-official markings that obscured the information, POGO either determined what was behind the markings by reviewing similar records, or marked the information as “Illegible” in the database. Finally, POGO standardized the spelling and names of employees, firms, titles, and SEC Offices and Divisions wherever possible in order to facilitate data sorting. For instance, POGO received statements filed by both “Norman Reed” and “Norman M. Reed” with the same former title, former Division/Office, and new employer listed on both statements. This former employee is listed only as “Norman M. Reed” in POGO’s database. Similarly, some former employees identified their former position as “attorney-adviser,” while others spelled it “attorney-advisor.” This former position is consistently spelled “attorney-advisor” in POGO’s database. 9
Most Active Former Employees One simple way to measure how active former SEC employees have been in representing outside clients before the Commission is to count the number of statements filed by each employee during this five year period. Table 1: Top 10 Most Active Former Employees Ranked by Number of Statements Filed, 2006 – 2010 Former Statements Name Division/Office Former Title New Employer Filed Walter G. Ricciardi Enforcement Deputy Director Paul, Weiss, Rifkind, Wharton & 20 Garrison LLP Daniel A. Goldfried Enforcement Senior Counsel Merrill Lynch 17 Nicolas Morgan Enforcement Senior Trial DLA Piper 17 Counsel Alison M. Fuller Investment Assistant Chief Stradley Ronon Stevens & Young 15 Management Counsel LLP Joshua E. Levine Enforcement Senior Attorney Citigroup Global Markets, Inc. 14 Amy J. Greer Philadelphia Regional Trial Reed Smith, LLP 13 Regional Office Counsel Peter H. Bresnan Enforcement Deputy Director Simpson Thacher & Bartlett LLP 12 Robert L.D. Colby Trading and Markets Deputy Director Davis Polk & Wardwell LLP 12 Alan Reifenberg Enforcement Branch Chief Credit Suisse 12 Kevin M. Loftus Enforcement Branch Chief Paul, Weiss, Rifkind, Wharton & 11 Garrison LLP
These ten employees stated that they expected to appear before the SEC on issues such as:
• The SEC’s enforcement action against a Kuwaiti resident and three foreign firms that were charged with making millions of dollars in profits from “trading around hoax offers to acquire U.S. companies.”34 • “[I]ssues arising under Section 18 of the Investment Company Act of 1940 and its application to [a client’s] use of derivatives and other instruments that may create leverage.”35 • An SEC complaint filed against an “Atlanta-based promoter and investment advisors controlled by him” for raising as much as $185 million from up to 500 investors through a fraudulent investment scheme.36
34 Letter from Walter G. Ricciardi, Paul, Weiss, Rifkind, Wharton & Garrison LLP, to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), September 3, 2009. http://pogoarchives.org/tools-and-data/fo/sec/ricciardi-20090903-1-2.pdf; and Securities and Exchange Commission, “SEC Obtains Temporary Restraining Order and Freeze of Over Five Millions [sic] Dollars Against Foreign Trader and Entities for Scheme Involving Trading Around Hoax Bids for U.S. Companies,” Securities and Exchange Commission v. Hazem Khalid Al-Braikan, Civil Action No. 09 civ 6533 (JGK) (S.D.N.Y.), Litigation Release No. 21152, July 23, 2009. http://www.sec.gov/litigation/litreleases/2009/lr21152.htm (Downloaded May 8, 2011) 35 Letter from Alison M. Fuller, Stradley Ronon Stevens & Young LLP, to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), June 1, 2007. http://pogoarchives.org/tools-and-data/fo/sec/fuller-20070601-66-67.pdf 36 Letter from Alan Reifenberg, Credit Suisse, to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), July 5, 2006. http://pogoarchives.org/tools-and- data/fo/sec/reifenberg-20060705-337.pdf; and Securities and Exchange Commission, SEC v. Kirk S. Wright, International Management Associates, LLC; International Management Associates Advisory Group, LLC; International Management Associates Platinum Group, LLC; International Management Associates Emerald Fund, LLC; International Management Associates Taurus Fund, LLC; International Management Associates Growth & Income Fund, LLC; International Management Associates Sunset Fund, LLC; Platinum II Fund, LP; and Emerald II Fund, LP, Civil Action No. 1:06-CV-0438, Litigation Release No. 19581, February 28, 2006. http://www.sec.gov/litigation/litreleases/lr19581.htm (Downloaded May 12, 2011) 10
Fastest Revolvers Some former SEC employees hit the ground running as soon as they officially left the SEC, filing post- employment statements with the Commission within days or weeks of leaving. Table 2: Top 10 Former Employees with Shortest Time Between Date of Resignation and Earliest Statement Filed, 2006 – 2010 Former Days After Resignation Name Division/Office Former Title New Employer Statement was Filed Matthew A. Los Angeles Examiner GPS Partners, LLC 2 Beller37 Regional Office John C. Ivascu38 Enforcement Staff Attorney Vinson & Elkins L.L.P. 3 Christopher T. Enforcement Staff Attorney Dell Inc. 4 Stidvent39 Daniel A. Enforcement Senior Counsel Merrill Lynch 5 Goldfried40 Steven E. Enforcement Assistant Chief FTI Consulting, Inc. 5 Richards41 Accountant Alan Reifenberg42 Enforcement Branch Chief Credit Suisse 6 Norman M. Reed43 Market Regulation Staff Attorney Omgeo LCC and Depository 9 Trust and Clearing Corporation Michael K. Enforcement Assistant Chief Jenner & Block LLP 10 Lowman44 Litigation Counsel William F. Office of the Chief Management Public Company Accounting 10 Wiggins45 Executive Director Analyst Oversight Board Andrew J. Enforcement Staff Attorney Sidley Austin LLP 11 Dunbar46
37 Letter from Matthew A. Beller, GPS Partners LLC, to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding statement of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), March 3, 2008. http://pogoarchives.org/tools-and-data/fo/sec/beller-20080303-153-154.pdf (hereinafter “Beller Letter”) 38 Letter from John C. Ivascu, Vinson & Elkins L.L.P., to Nancy Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), January 5, 2006. http://pogoarchives.org/tools- and-data/fo/sec/ivascu-20060105-108-109.pdf 39 Letter from Christopher T. Stidvent, Dell Inc., to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), September 5, 2006. http://pogoarchives.org/tools-and-data/fo/sec/stidvent-20060905-312.pdf 40 Letter from Daniel A. Goldfried, Merrill Lynch, to Nancy Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), March 7, 2007. http://pogoarchives.org/tools-and- data/fo/sec/goldfried-20070307-82-83.pdf 41 Letter from Steven E. Richards, FTI Consulting, Inc., to Florence Harmon, Acting Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), July 16, 2008. http://pogoarchives.org/tools-and-data/fo/sec/richards-20080716-71.pdf 42 There were two statements filed by Reifenberg six days after he left the SEC. Letters from Alan Reifenberg, Credit Suisse, to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding notices of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), June 15, 2006. http://pogoarchives.org/tools-and-data/fo/sec/reifenberg-20060615-325.pdf and http://pogoarchives.org/tools-and-data/fo/sec/reifenberg-20060615-326.pdf 43 Letter from Norman M. Reed to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), March 8, 2007. http://pogoarchives.org/tools-and-data/fo/sec/reed- 20070308-289-290.pdf 44 Letter from Michael K. Lowman, Jenner & Block LLP, to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), August 21, 2006. http://pogoarchives.org/tools- and-data/fo/sec/lowman-20060821-280-281.pdf 45 Letter from William F. Wiggins, Budget Officer, Public Company Accounting Oversight Board, to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735- 8(b), May 22, 2006. http://pogoarchives.org/tools-and-data/fo/sec/wiggins-20060522-207.pdf 11
There are no laws or regulations that would generally prevent a former SEC employee from going to work for a regulated entity immediately after leaving the Commission. However, when a former employee appears before the SEC on behalf of an outside client just days after leaving the Commission, it raises questions about whether they might have shown favorable treatment to their new employer during their time at the SEC.
Top Recruiters of Former Employees There are 131 new employers listed on the statements filed by former SEC employees between 2006 and 2010. It appears that some firms were particularly effective at recruiting former employees to appear before the Commission.
Table 3: Top 11 New Employers Ranked by Number of Former SEC Employees Recruited, 2006 – 2010
Firm Former SEC Employees Listing Firm as New Employer ACA Compliance Group47 10 Deloitte & Touche LLP48 9 Ernst & Young 8 O’Melveny & Myers LLP 6 Wilmer Cutler Pickering Hale and Dorr LLP49 6 DLA Piper50 5 KPMG LLP 5 Morrison & Foerster LLP 5 FTI Consulting, Inc. 4 Kirkpatrick & Lockhart Preston Gates Ellis LLP51 4 Sidley Austin LLP 4
46 Letter from Andrew J. Dunbar, Sidley Austin LLP, to Florence E. Harmon, Acting Secretary, Securities and Exchange Commission, regarding statement of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), August 26, 2008. http://pogoarchives.org/tools-and-data/fo/sec/dunbar-20080826-145-146.pdf 47 Includes Adviser Compliance Associates, LLP (ACA) 48 Includes Deloitte Financial Advisory Services 49 There were nine statements filed in this five-year period identifying Wilmer Cutler Pickering Hale and Dorr LLP as the new employer in which the SEC redacted the names and titles of the former employees. Based on other information that was disclosed in these statements, such as the date of resignation and the employee’s former Division or Office, POGO believes there are two unique employees covered by these statements. POGO included these two employees when counting the number of former employees who went to work for Wilmer Cutler Pickering Hale and Dorr LLP. 50 Includes DLA Piper Rudnick Gray Cary US LLP 51 Includes Kirkpatrick & Lockhart Nicholson Graham LLP and Preston, Gate & Ellis LLP, which merged to become Kirkpatrick & Lockhart Preston Gates Ellis LLP 12
Table 4: Top 11 New Employers Ranked by Number of Mentions in Post-Employment Statements, 2006 – 2010
Firm Statements Listing Firm as New Employer DLA Piper52 40 Deloitte & Touche LLP 34 Paul, Weiss, Rifkind, Wharton & Garrison LLP 32 O’Melveny & Myers LLP 30 Merrill Lynch 28 Wilmer Cutler Pickering Hale and Dorr LLP 28 Ernst & Young 27 Davis Polk & Wardwell LLP 21 Reed Smith, LLP 19 Sidley Austin LLP 19 Stradley Ronon Stevens & Young LLP 19
In many cases, a single employee had to file multiple statements in order to disclose new clients and/or new issues on which they expected to appear before the Commission. For instance, only five former SEC employees account for the 40 statements mentioning DLA Piper as a new employer.
Where Former Employees Used to Work POGO’s database includes post-employment statements filed by former employees who worked at a wide range of Divisions and Offices throughout the SEC.
Table 5: All Divisions and Offices of Former Employees Who Filed Statements, 2006 – 2010 Former Division/Office Statements Filed Enforcement 403 Corporation Finance 91 Chief Accountant 89 Regional Official53 81 Investment Management 49 Trading and Markets 19 Compliance Inspections and Examinations 14 General Counsel 13 Market Regulation 12 Office of Chairman Christopher Cox 9 Office of Commissioner Roel C. Campos 5 Economic Analysis 2 Executive Director 2 Total 789
52 Includes DLA Piper Rudnick Gray Cary US LLP 53 Employees at SEC regional offices typically report to either the Division of Enforcement or the Office of Compliance Inspections and Examinations. Securities and Exchange Commission, “Organizational Chart.” http://sec.gov/about/orgtext.htm (Downloaded May 8, 2011) If there was no indication as to whether they were affiliated with either Division or Office, their former Division/Office is listed as “Regional Office” in the database. 13
In over half of the statements filed, the former employee indicated that he or she previously worked in the Commission’s Division of Enforcement.54
Yearly Breakdown The number of former employees who filed statements and the number of statements filed each year have generally declined between 2006 and 2010.55
Table 6: Yearly Breakdown of Statements Filed by Former SEC Employees, 2006 – 2010
Year 2006 2007 2008 2009 2010 Total Former 96 76 55 36 34 21956 Employees Statements 254 197 108 100 130 789 Filed
However, it is difficult to draw conclusions from these figures alone. While it may appear that the revolving door has slowed over the past five years, more information would be required to support such a conclusion. These top-level figures simply represent the number of former employees who filed statements and the number of statements filed over a five-year period. It is unknown, for instance, whether former SEC employees have increasingly found ways to avoid filing these statements in the two years after they leave the Commission.
FORMER EMPLOYEES RETAINED TO WORK ON A WIDE RANGE OF ISSUES
Although the SEC usually redacted some or all of the descriptions of the matters on which former employees sought to appear before the Commission, the information that was released suggests that the SEC’s regulated entities relied on former employees to appear before the Commission on a sweeping range of issues.
Not surprisingly, many companies turned to former SEC employees for assistance in SEC litigation. For instance, Jill Slansky, a former senior attorney in the SEC’s New York Regional Office, resigned in December 2009. In June 2010, she filed a statement advising the Commission that she had been “retained to represent [Redacted (b)(7)(C)] in Securities and Exchange Commission v. Galleon
54 The Enforcement Division is the largest Division or Office at the SEC. In FY 2010, there were 1,173 full-time equivalents (FTEs) working in the Enforcement Division, compared with 854 FTEs in the Office of Compliance Inspections and Examinations, 470 FTEs in the Division of Corporation Finance, 191 FTEs in the Division of Trading and Markets, 157 FTEs in the Division of Investment Management, 139 FTEs in the Office of General Counsel, and 47 FTEs in the Office of Risk, Strategy and Financial Innovation. Securities and Exchange Commission, In Brief: FY 2012 Congressional Justification, February 2011, p. 9. http://sec.gov/about/secfy12congbudgjust.pdf (Downloaded May 12, 2011) 55 Since former employees are required to file these statements for two years after leaving the SEC, POGO received some statements from employees who had resigned as early as January 2004—two years before the time frame indicated in POGO’s FOIA request. However, since POGO’s database is built around data derived from forms filed between 2006 and 2010, we confined our analysis to this time period. Any attempt to analyze the number of employees who left in 2004 or 2005 would be largely incomplete without additional statements filed in those years. 56 This figure represents the total number of unique former employees who filed statements over the entire five year period. The total sum of former employees who filed statements each year is greater than the total listed above because some employees filed statements across multiple years. For instance, an employee who left the Commission in 2006 may have filed statements in both 2007 and 2008, but POGO only counted that person once towards the total figure. 14
Management LP, et al., 09-CV-8811(S.D.N.Y.) (JSR),”57 a high-profile SEC complaint that charged billionaire Raj Rajaratnam and his hedge fund advisory firm Galleon Management LP along with many others in a “massive insider trading scheme.”58
Peter H. Bresnan, a former Deputy Director in the SEC’s Division of Enforcement, resigned in December 2007 and joined Simpson Thacher & Bartlett LLP.59 In November 2009, he filed a statement advising the SEC that he had been “retained to represent [Redacted (b)(7)(C)] in connection with SEC v. Bank of America Corp. (09-Civ-6892 (JSR)) (S.D.N.Y.),”60 which charged Bank of America with “misleading investors about billions of dollars in bonuses that were being paid to Merrill Lynch & Co. executives at the time of its $50 billion acquisition of the firm.”61 Two months earlier, the case made headlines62 when a federal district judge refused to approve the SEC’s proposed $33 million settlement with Bank of America, finding that the settlement “does not comport with the most elementary notions of justice and morality,” and remarking that he had been left with the “distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry—all at the expense of the sole alleged victims, the shareholders.”63
In some cases, former employees helped firms to prepare the documents that all publicly-held companies are required to file with the SEC, including registration statements for new securities, annual and quarterly filings, and proxy materials sent to shareholders.64 Donald A. Walker, Jr., who formerly served as a Senior Assistant Chief Accountant in the SEC’s Division of Corporation Finance, left the Commission in May 2008 and went to work for FTI Consulting, Inc. In October 2008, he filed a statement with the SEC indicating he would be representing a client regarding “Division of Corporation Finance and Office of the Chief Accountant pre-filing matters regarding Form 10-Q for the quarter [ending] September 30, 2008.”65
57 Letter from Jill Slansky to Elizabeth Murphy, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), June 23, 2010. http://pogoarchives.org/tools-and- data/fo/sec/slansky-20100623-143.pdf 58 Securities and Exchange Commission, “SEC Charges Billionaire Hedge Fund Manager Raj Rajaratnam with Insider Trading,” SEC v. Galleon Management, LP, Raj Rajaratnam, Rajiv Goel, Anil Kumar, Danielle Chiesi, Mark Kurland, Robert Moffat and New Castle LLC Civil Action No. 09-CV-8811 (SDNY) (JSR), Litigation Release No. 21255, October 16, 2009. http://www.sec.gov/litigation/litreleases/2009/lr21255.htm (Downloaded May 8, 2011) 59 The firm’s brochure for its Washington, DC, office advertises that “[w]ith the addition of Peter H. Bresnan, former Deputy Director of the SEC’s Division of Enforcement, the Washington, DC, office is well-positioned to handle securities-related government investigations for financial institutions, corporations, directors, and officers and high-ranking executives.” Simpson Thacher & Bartlett LLP, “Washington, D.C. Office.” http://www.stblaw.com/pdf/washingtondc.pdf (Downloaded May 8, 2011) 60 Letter from Peter H. Bresnan, Simpson Thacher & Bartlett LLP, to Elizabeth Murphy, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), November 16, 2009. http://pogoarchives.org/tools-and-data/fo/sec/bresnan-20091116-180-181.pdf 61 Securities and Exchange Commission, “SEC Charges Bank of America for Failing to Disclose Merrill Lynch Bonus Payments,” SEC v. Bank of America Corp., Case No. 09 civ 6829 (S.D.N.Y.), August 3, 2009. http://www.sec.gov/litigation/litreleases/2009/lr21164.htm (Downloaded May 8, 2011) 62 Zachery Kouwe, “Judge Rejects Settlement Over Merrill Bonuses,” The New York Times, September 14, 2009. http://www.nytimes.com/2009/09/15/business/15bank.html (Downloaded May 8, 2011) 63 Judge Jed S. Rakoff, United States District Court, Southern District of New York, “Memorandum Order,” SEC v. Bank of America Corp., Case No. 09 civ 6829 (S.D.N.Y.), September 14, 2009, pp 4, 8. http://www.archive.org/download/gov.uscourts.nysd.350160/gov.uscourts.nysd.350160.22.0.pdf (Downloaded May 8, 2011) 64 Securities and Exchange Commission, “Division of Corporation Finance,” February 17, 2010. http://sec.gov/about/whatwedo.shtml#corpfin (Downloaded May 8, 2011) 65 Letter from Donald A. Walker, Jr., FTI Consulting, Inc., to Florence E. Harmon, Acting Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), October 31, 2008. http://pogoarchives.org/tools-and-data/fo/sec/walker-20081031-3.pdf 15
In other cases, former employees sought to contact the Commission on behalf of outside clients regarding proposed SEC rules. Giovanni Prezioso, a former SEC General Counsel, left the commission in February 2006 and went to work for Cleary Gottlieb Steen & Hamilton LLP. In May 2007, he filed a statement with the SEC seeking to represent a “trade association” on “[i]ssues relating to proposed rules relating to pooled investment vehicles and investors in those vehicles (Commission File No. S7-25- 06).”66
Many former employees assisted outside clients in requesting no-action letters, which are submitted by “[a]n individual or entity who is not certain whether a particular product, service, or action would constitute a violation of the federal securities law.”67 If the Commission grants the request, the no-action letter will indicate that “SEC staff would not recommend that the Commission take enforcement action against the requester based on the facts and representations described in the individual’s or entity’s original letter.”68 Eric S. Purple, a former Senior Counsel in the SEC’s Division of Investment Management, left the Commission in July 2007 and went to work for Bell, Boyd & Lloyd LLP. Two months later, he filed a statement with the SEC regarding his:
[e]fforts to seek no-action assurances from the staff of the Division of Investment Management; specifically, [Redacted (b)(4)] wishes to obtain the staff’s views regarding the potential integration issues raised by a hedge fund structure in which an existing domestic 3(c)(1) excepted investment pool will convert into a “feeder fund” of a yet-to-be formed offshore “master” investment company, and which will be operated side-by-side with two yet-to-be formed 3(c)(7) feeder funds, one domestic and one off-shore, each of which will also invest in the master.69
Many companies turned to former SEC employees to represent them before Commission staff during inspections, examinations, and investigations. For instance, Matthew A. Beller, a former examiner in the SEC’s Los Angeles Regional Office, left the SEC in March 2008 and went to work for GPS Partners, LLC, an “employee owned hedge fund sponsor.”70 Just two days after he left the Commission, Beller filed a statement advising the SEC that he had been “asked by GPS to assist in an existing examination of GPS by the staff of the Los Angeles Regional Office.”71
Finally, some former employees listed a wide range of issues within a single post-employment statement. For instance, Margaret E. (“Mitzi”) Moore, a former Senior Counsel in the SEC’s Office of Compliance Inspections and Examinations, left the Commission in January 2006 and joined the Financial Services Roundtable, which “represents 100 of the largest integrated financial services companies providing banking, insurance, and investment products and services to the American
66 Letter from Giovanni Prezioso, Cleary Gottlieb Steen & Hamilton LLP, to Nancy Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), May 3, 2007. http://pogoarchives.org/tools-and-data/fo/sec/prezioso-20070503-263-264.pdf 67 Securities and Exchange Commission, “No Action Letters,” March 5, 2005. http://www.sec.gov/answers/noaction.htm (Downloaded May 8, 2011) (hereinafter “No Action Letters”) 68 “No Action Letters” 69 Letter from Eric S. Purple, Bell, Boyd & Lloyd LLP, to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), September 27, 2007. http://pogoarchives.org/tools-and-data/fo/sec/purple-20070927-106-107.pdf 70 “GPS Partners LLC,” Bloomberg/BusinessWeek. http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=29780953 (Downloaded May 8, 2011) 71 “Beller Letter” 16 consumer.”72 Two months after she left the SEC, she filed a statement advising the Commission that she and other Roundtable staff members were scheduled to meet with then-Chairman Christopher Cox and expected to discuss a wide range of issues including:
1. Good Start/Positive Mood Change at SEC • New Penalty Guidelines are helpful • Good staff appointments o [Redacted (b)(6)] o [Redacted (b)(6)] • Staff to clear subpoenas to press with Commissioners • Market above 11,000 for first time since 9/11
2. SEC Compliance and Reform Act • OCIE back into Market Regulation and Investment Management o Sweep exams to require pre-approval from Commission o Cannot require production of information not required by rules or regulations • Enforcement o Provide notice of ongoing inquiry or investigation o Notice of closure of inquiry or investigation • Ombudsman o Allow registered entities to present questions or statements Maintain confidentiality Permit self-reporting with due credit
3. Executive Compensation • Great proposed rule, support increased disclosure • PROBLEM: requirement to list salaries of “three ‘other’” highly compensated employees is anti-competitive, etc.73 (Emphasis in original)
In many cases, it is difficult to assess the influence that former employees had on the SEC based solely on their description of the issues on which they expected to appear before the Commission. Nonetheless, the information that is available suggests that current SEC employees need to remain vigilant in order to avoid real or apparent conflicts of interest stemming from their interactions with former employees.
SEC’S OVERSIGHT OF POST-EMPLOYMENT REQUIREMENTS
When asked about the rationale for collecting post-employment statements, an SEC spokesperson told POGO that the “goal is to assist former employees in complying with the post-employment restrictions under 18 USC 207,”74 the government-wide post-employment conflict-of-interest statute. The SEC even
72 Letter from Margaret E. (“Mitzi”) Moore, Research Director and Senior Regulatory Counsel, the Financial Services Roundtable, to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), March 13, 2006. http://pogoarchives.org/tools-and-data/fo/sec/moore-20060313-236-238.pdf (hereinafter “Moore Letter”) 73 “Moore Letter” 74 “May 3 Nester Email” 17 provides a sample template for former employees and their new associates to follow in drafting the post- employment and waiver request letters.75
However, it is difficult to tell from the statements alone whether the SEC is doing a consistent or adequate job of examining all potential conflicts of interest involving former employees. In addition, POGO is concerned that the SEC may not be doing enough to verify that all employees who are required to file statements actually do so.
Potential Conflicts of Interest In the vast majority of statements, former SEC employees affirm that they did not participate personally or substantially in, or have official responsibility for, the matter on which they now expect to appear before the Commission, in keeping with the requirements of 18 U.S.C. 207 and SEC regulations.
Occasionally, however, former employees disclosed in their statements that they had some involvement with a related matter during their time at the Commission. In some cases, the former employee discussed the matter with an ethics officer and received an advisory opinion indicating they could contact Commission staff without violating the post-employment restrictions.
For instance, Andrew D. Bailey, Jr., a former Deputy Chief Accountant in the Office of the Chief Accountant, resigned in December 2005 and became a Senior Policy Advisor at Grant Thornton LLP. He was seeking to communicate with SEC staff regarding financial interest independence issues related to Grant Thornton audits of hedge funds. His statement describes his prior work on a related issue when he worked at the SEC:
While an employee of the Commission, I was responsible for independence issues and their resolution. To the best of my recollection, the specific issue of Hedge Funds was not a matter that I dealt with directly during my employment at the Commission. However, I was involved with policy discussions on related issues involving Private Equity Investment and Mutual funds. These discussions were of a policy nature and did not relate to any particular fund or their auditor.
The statement indicates that Bailey spoke about the matter with an ethics officer who “believes that I can meet the Commission staff on this matter within the meaning of the Commissions [sic] Conduct Regulation.”76
In another example, Peter Simonyi, a former Economist in the Office of Economic Analysis, resigned in April 2005 to accept employment with Goldman Sachs and Co. His post-employment statement shows that he expected to appear before the Commission regarding a “[National Association of Securities Dealers] Mark-Up Policy Proposal (SR NASD-2003-141), and describes his prior work on a related matter in which he was only “marginally” involved:
75 Securities and Exchange Commission, “Sample 8(b) Letter and Sample 8(d) Letter.” http://www.sec.gov/about/offices/ethics/post-emp-sample-ltrs.pdf (Downloaded May 7, 2011) 76 Letter from Andrew D. Bailey, Jr., Senior Policy Advisor, Grant Thornton LLP, to Nancy Morris, Secretary, Securities and Exchange Commission, regarding statement by a former employee pursuant to Rule 8(b) of the Commission’s Conduct Regulation, March 6, 2007. http://pogoarchives.org/tools-and-data/fo/sec/bailey-20070306-155-156.pdf (Downloaded May 8, 2011) 18
While an employee of the Commission, I was marginally involved with the NASD Mark-UP Policy Proposal (SR NASD-2003-141). Specifically, I provided website links with sample language that the Office of Market Regulation may have relied on while assisting the NASD draft certain economic aspects of the Mark-Up Policy.
According to the statement, the SEC’s Ethics Office advised him in October 2005 that he could communicate with SEC staff without violating the post-employment restrictions.77
In other cases, former employees disclosed their involvement with a related matter during their time at the Commission, but there is no indication as to whether they discussed the issue with an ethics officer.
For instance, Arthur S. Gabinet, a former District Administrator of the SEC’s Philadelphia District Office,78 left the SEC in October 2005. About a year later, he advised the Commission of his intent to appear before the SEC on behalf of Vanguard Group with respect to a:
broad spectrum of regulatory matters of concern to Vanguard, including, but not limited to, pending and future applications for exemptive relief, if any; pending and future requests for no- action relief, if any; pending and prospective rulemaking or interpretive guidance; and enforcement and inspection matters affecting Vanguard, if any should arise.
He also disclosed that there were several matters involving Vanguard under his official responsibility during his time at the SEC, but assured the Commission that none of the matters were under his responsibility in the one year prior to his departure:
To the best of my knowledge there were only two matters involving Vanguard which were under my official responsibility during my tenure at the Commission (neither of which is ongoing), and none during the one year prior to my separation. None of the matters with respect to which I intend to represent Vanguard before the Commission or its staff is, or will be, a matter in which I participated personally and substantially, or which was under my official responsibility during the one year prior to my separation.79
His assurances notwithstanding, there is no indication as to whether Gabinet discussed these issues with an SEC ethics officer.
In another example, Fran Pollack-Matz, a former attorney-advisor in the SEC’s Division of Investment Management, resigned in February 2009 to accept employment with T. Rowe Price. In August 2009, she filed a statement advising the Commission of her intent to file a comment letter in response to a proposed rule on money market fund reform (File No. S7-11-09). Her statement also indicates that during her time at the SEC, she did some “work on money market related issues, which are the subject
77 Letter from Peter Simonyi, Goldman Sachs & Co., to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), February 16, 2006. http://pogoarchives.org/tools-and-data/fo/sec/simonyi-20060216-223.pdf 78 As a District Administrator, Gabinet was “responsible for managing the enforcement and inspection programs within the Philadelphia office’s jurisdiction.” Securities and Exchange Commission, “Chairman Harvey L. Pitt Announces Selection of Arthur Gabinet to Head the SEC’s Philadelphia District Office,” December 4, 2002. http://www.sec.gov/news/press/2002- 174.htm (Downloaded May 9, 2011) 79 Letter from Arthur S. Gabinet, Vanguard Group, Inc., to Nancy Morris, Secretary, Securities and Exchange Commission, regarding notice of intent to appear pursuant to 17 C.F.R. § 200.735-8, October 19, 2006. http://pogoarchives.org/tools-and- data/fo/sec/gabinet-20061019-157.pdf 19 of the Proposal.”80 Again, there is no indication as to whether she discussed this matter with an SEC ethics officer.
It is difficult to obtain aggregate data on how often former SEC employees received ethics opinions or not due to inconsistencies in the reporting of this information in the post-employment statements. While many statements do indicate that the former employee received or believed they received an advisory opinion from an ethics officer giving them clearance to contact Commission staff, many do not.
When asked if the SEC has policies or procedures in place to verify the former employees’ declarations that they did not have official responsibility for, or participate personally or substantially in, the matter on which they expect to appear before the Commission, an SEC spokesperson told POGO that the “Ethics Office verifies the information through consultations with the appropriate Divisions and Offices.”81 However, the SEC said it could not discuss specific statements and employees, including statements in which it is unclear whether an ethics officer signed off on the former employee’s declaration regarding potential conflicts of interest.82
Possible Missing Statements POGO identified several former employees who left the SEC and began appearing before the Commission or communicating with staff on behalf of outside clients within the time period covered by POGO’s FOIA request, but whose statements were not included in the SEC’s response.83 It is unclear whether these former employees obtained a waiver that exempted them from filing the post-employment statements, or whether they simply did not make a submission. It is also possible that they filed a statement as required, but that the SEC did not provide it in response to POGO’s FOIA request.
1) Spencer Barasch Barasch, a former Assistant Director of Enforcement in the SEC’s Fort Worth Regional Office, left the Commission in April 2005 and joined Andrews Kurth, LLP later that month. According to the OIG, while Barasch was still at the SEC, he played a big part in delaying and limiting the Commission’s investigation of the $8 billion Ponzi scheme orchestrated by R. Allen Stanford.84 After leaving the SEC, Barasch repeatedly attempted to represent Stanford in connection with the Commission’s investigation, even though he was told by the Ethics Office that his previous involvement with the Stanford investigation prohibited him from doing so.85 Nonetheless, the OIG reported that in September 2006—
80 Letter from Fran Pollack-Matz, Vice President, T. Rowe Price, to Elizabeth Murphy, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), August 25, 2009. http://pogoarchives.org/tools-and-data/fo/sec/pollack-matz-20090825-21.pdf 81 “May 3 Nester Email” 82 Email from John Nester, Securities and Exchange Commission, to Michael Smallberg, Project On Government Oversight, May 4, 2011 (hereinafter “May 4 Nester Email”) 83 POGO did not conduct a comprehensive analysis to determine the universe of former SEC employees that may have needed to file these statements. 84 The OIG also found that Harold Degenhardt, then-District Administrator of the Fort Worth Regional Office, declined to support enforcement action against Stanford despite mounting evidence of his Ponzi scheme. Securities and Exchange Commission, Office of Inspector General, Investigation of the SEC’s Response to Concerns Regarding Robert Allen Stanford’s Alleged Ponzi Scheme (Case No. OIG-526), March 31, 2010, pp. 78-79. http://www.sec.gov/news/studies/2010/oig-526.pdf (Downloaded May 8, 2011) (hereinafter “OIG Stanford Report”) POGO’s database includes seven statements filed by Degenhardt after he left the SEC in September 2005 and joined Fulbright & Jaworski L.L.P. 85 Barasch told the OIG that “[e]very lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines.” “OIG Stanford Report,” p. 146 20 well within two years of his departure—Stanford ended up retaining Barasch to “represent it in connection with the SEC’s investigation of Stanford.”86
2) Justin Daly Daly, a former legal and policy advisor to SEC Commissioner Kathleen Casey, left the Commission in February 2010 to join Ogilvy Government Relations.87 According to reports filed under the Lobbying Disclosure Act, it appears that he lobbied the SEC on behalf of CME Group, Inc.,88 Blackstone Group,89 and MBIA Group,90 all within the 2010 filing year. In addition, he met with Commission staff on September 22, 2010, to discuss SEC rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act related to credit rating agencies, and even proposed the meeting agenda, according to SEC records.91
3) Matthew Shimkus As recently as 2008, Shimkus was listed as serving as a legislative affairs specialist in the Office of then-SEC Chairman Christopher Cox.92 After leaving the SEC later that year, he made contact with the Commission on behalf of FINRA, and has made repeated appearances on behalf of FINRA ever since, according to reports filed under the Lobbying Disclosure Act.93
When asked whether the Commission has policies or procedures in place to ensure that all former employees who are required to file statements actually do so, an SEC spokesperson told POGO that:
[f]ormer employees are responsible for their own compliance as they are no longer employees or members of the Commission. We have programs and procedures in place to help them meet their obligations. For example, The SEC Ethics Office briefs all departing employees on their post- employment obligations.94
The SEC declined to comment on the absence of statements for the former employees mentioned above, and said through the spokesperson that the Commission cannot comment on individual statements.95
86 “OIG Stanford Report,” pp. 1, 79-80, 137 87 Ogilvy Government Relations, “John O’Neill & Justin Daly Join Ogilvy Government Relations,” February 1, 2010. http://www.ogilvy.com/News/Press-Releases/February-2010-Two-New-Hires-at-Ogilvy-Government-Relations.aspx; and Eric Lichtblau, “Ex-Regulators Get Set to Lobby on New Financial Rules,” The New York Times, July 27, 2010. http://www.nytimes.com/2010/07/28/business/28lobby.html (Downloaded May 8, 2011) 88 Lobbying Report, Justin Daly, Ogilvy Government Relations, retained by CME Group, Inc., Third Quarter 2010. http://pogoarchives.org/m/fo/daly-cme-2010q3.pdf 89 Lobbying Report, Justin Daly, Ogilvy Government Relations, retained by The Blackstone Group, Third Quarter 2010. http://pogoarchives.org/m/fo/daly-blackstone-2010q3.pdf 90 Lobbying Report, Justin Daly, Ogilvy Government Relations, retained by MBIA Inc., Fourth Quarter 2010. http://pogoarchives.org/m/fo/daly-mbia-2010q4.pdf 91 Memorandum from Tim Fox, Securities and Exchange Commission, regarding status and direction of NRSRO rulemaking, September 22, 2010. http://www.sec.gov/comments/df-title-ix/credit-rating-agencies/creditratingagencies-9.pdf (Downloaded May 8, 2011) 92 Senate Committee on Homeland Security and Governmental Affairs, Policy and Supporting Positions, November 12, 2008, p. 180. www.gpoaccess.gov/plumbook/2008/2008_plum_book.pdf (Downloaded May 8, 2011) 93 Lobbying Report, Matthew Shimkus, Financial Industry Regulatory Authority, Third Quarter 2008. http://pogoarchives.org/m/fo/shimkus-finra-2008q3.pdf 94 “May 3 Nester Email” 95 “May 4 Nester Email” 21
The SEC spokesperson also told POGO that the Commission can refer potential violations of the government-wide post-employment restrictions in 18 U.S.C. 207 to criminal authorities.96 Civil and criminal violations of this statute are punishable under penalties and injunctions outlined in 18 U.S.C. 216.97 According to POGO’s review of Department of Justice (DOJ) data made available by the Transactional Records Access Clearinghouse (TRAC), the SEC only made one referral in which 18 U.S.C. 207 was the lead charge code between fiscal years 1986 and 2010. This referral was made in October 2000, and was immediately declined for prosecution by an Assistant U.S. Attorney.98 The SEC spokesperson declined to comment on this referral, and could not comment on whether there were other referrals made during this time period.99
In the case of the October 2000 referral from the SEC, an Assistant U.S. Attorney declined to prosecute because there were “civil, admin or other disciplinary alternatives,” according to the Executive Office of U.S. Attorneys data maintained by TRAC. However, the SEC declined to comment on whether it ever takes civil or administrative actions to enforce post-employment requirements, including the regulations governing the post-employment statements.100
There may have been other cases in which former SEC employees were prosecuted for an 18 U.S.C. 207 referral made by an agency other than the SEC, or in which the 18 U.S.C. 207 violation was not designated as the lead charge, but it would be difficult to locate these cases given the structure of the available data. Additional searches by POGO uncovered only one case in which a former SEC employee was prosecuted for an 18 U.S.C. 207 violation. In that case, charges were filed against a former attorney in the SEC’s Denver Regional Office who was “responsible for investigating stock promoters regarding their promotion of Integrated Resources Technologies, Inc. later known as Comprehensive Environmental Systems, Inc. (CESI/IRTI),” after it was revealed that he left the SEC and was subsequently “hired by the stock promoters to perform legal work for companies owned by them, including CESI/IRTI.”101 That former SEC employee, James W. Nearen, pled guilty in 1997 to the 18 U.S.C. 207 conflict of interest violation, as well as money laundering and securities fraud. He was sentenced in 1998 to 18 months in jail.102
DOES THE REVOLVING DOOR UNDERMINE SEC ENFORCEMENT AND REGULATORY ACTIONS?
Former SEC employees can be immensely valuable for companies that have business before the Commission. For instance, Diane L. Dallianis, a former attorney-advisor in the SEC’s Midwest Regional Office, filed a statement in April 2007 indicating she would be assisting a firm during an SEC
96 “May 3 Nester Email” 97 “Penalties and injunctions,” 18 U.S.C. 216. http://www.gpo.gov/fdsys/pkg/USCODE-2009-title18/pdf/USCODE-2009-title18- partI-chap11-sec216.pdf (Downloaded May 9, 2011) 98 Transactional Records Access Clearinghouse, “Criminal Enforcement.” http://tracfed.syr.edu/index/index.php?layer=cri (Downloaded May 8, 2011) 99 “May 4 Nester Email” 100 “May 4 Nester Email” 101 Department of Defense, Standards of Conduct Office, “Summary of Selected Prosecutions and Administrative Actions Involving Standards of Conduct,” May 1, 1999. http://www.dod.gov/dodgc/defense_ethics/resource_library/ethicsdec.htm; and Floyd Norris, “Six Charged With Fraud in 2 Stocks,” The New York Times, October 5, 1996. http://www.nytimes.com/1996/10/05/business/six-charged-with-fraud-in-2-stocks.html?pagewanted=all&src=pm (All Downloaded May 8, 2011) 102 “Former S.E.C. Lawyer Gets Jail Term,” The New York Times, January 27, 1998. http://www.nytimes.com/1998/01/27/business/former-sec-lawyer-gets-jail-term.html (Downloaded May 11, 2011) 22 examination “as they have never been examined before and want to ensure a smooth process with SEC staff.”103 Many firms advertise their roster of attorneys with former SEC experience.104
The high concentration of former SEC employees at certain firms does not necessarily mean that these firms and their clients are exerting undue influence on the Commission.105 However, there have been several recent reports and studies that point to instances in which former SEC employees appear to have exerted undue influence on current Commission staff, or in which the temptations of traveling through the revolving door appear to have weakened SEC regulatory and enforcement actions.
In 2007, the Senate Finance and Judiciary Committees released a report on the SEC’s botched investigation of insider trading at Pequot Capital Management, and the improper termination of former Enforcement attorney Gary Aguirre. The report found that Aguirre faced retaliation after he raised concerns about a warning made by his direct supervisor, then-Enforcement Branch Chief Robert Hanson, suggesting it would be difficult to subpoena Wall Street executive John Mack in connection to Pequot’s insider trading due to his “very powerful political connections.”106
The report also found that, around the same time, the law firm Debevoise & Plimpton LLP had been retained by Morgan Stanley’s board to determine whether Mack, a prospective CEO of the company, had any exposure related to the SEC’s Pequot investigation. The Senate report describes how a former U.S. Attorney who worked for Debevoise & Plimpton LLP contacted several senior Enforcement officials to ask about the Pequot investigation, including Paul Berger, then-Associate Director of the Enforcement Division. Senate investigators also determined that Berger may have begun inquiring into a possible job at Debevoise & Plimpton LLP while the Pequot investigation was still ongoing. The report concluded that Berger “failed to recuse himself from the Pequot investigation in a timely manner.”107 POGO’s database includes five statements filed by Berger after he left the SEC in 2006 and joined Debevoise & Plimpton LLP.
There have also been several SEC OIG reports in recent years that have highlighted the ethical challenges posed by former employees going through the revolving door. As described above, one report
103 Letter from Diane L. Dallianis to Nancy M. Morris, Secretary, Securities and Exchange Commission, regarding notice of representation pursuant to Rule 8(b), 17 C.F.R. 200.735-8(b), April 11, 2007. http://pogoarchives.org/tools-and- data/fo/sec/dallianis-20070411-201.pdf 104 For instance, Wilmer Cutler Pickering Hale and Dorr LLP allows potential clients to search on their website for attorneys with both securities expertise and former government experience. Wilmer Cutler Pickering Hale and Dorr LLP, “Search Criteria: Securities and Government Experience.” http://www.wilmerhale.com/biographies/biographies/whAttorneyList.aspx?Practice=44b6f546-0751-4444-a552- a9cbb43a58bf&GovernmentExperienceYes=on (Downloaded May 8, 2011). Wilmer Cutler Pickering Hale and Dorr LLP also advertises on its website that the attorneys in its securities practice include a “former SEC Director of Enforcement, a former Regional Director of the Pacific Regional Office of the SEC, a former SEC Deputy General Counsel and a former Deputy Director of the Division of Trading and Markets.” Wilmer Cutler Pickering Hale and Dorr LLP, “Securities.” http://www.wilmerhale.com/securities (Downloaded May 8, 2011) 105 Peter J. Henning, “SEC’s Revolving Door Draws More Scrutiny,” DealBook, June 18, 2010. http://dealbook.nytimes.com/2010/06/18/s-e-c-s-revolving-door-draws-more-scrutiny/ (Downloaded May 10, 2011) 106 Minority staff of the Senate Committee on Finance and the Senate Committee on the Judiciary Committee, The Firing of an SEC Attorney and the Investigation of Pequot Capital Management, August 2007, pp. 6, 10, 28, 80. http://pogoarchives.org/m/er/senate-pequot-report-august2007.pdf (Downloaded May 8, 2011) (hereinafter “Senate Pequot Report”) 107 “Senate Pequot Report,” pp. 5-6, 82-87 23 found that a former SEC official who had delayed and limited the Fort Worth Regional Office’s Stanford investigation tried to represent Stanford on several occasions after leaving the Commission.108
In another report, the OIG investigated the SEC’s handling of a feud between Greenlight Capital President David Einhorn and Allied Capital, which began in 2002 when Einhorn alleged that Allied was overvaluing its assets.109 Two former employees in the SEC’s Enforcement Division—whose names were redacted in the OIG report but were later identified by The Wall Street Journal as Joan Sweeney and William McLucas110—were representing Allied in its meetings with the SEC. According to the OIG, an Associate Director in the SEC’s compliance office who knew Sweeney declined to refer the case to Enforcement, stating he would give the benefit of the doubt to any former SEC employees: “If you’ve known somebody or even if they didn’t really know them but you know they worked here…Well, they should hopefully be doing the right thing.”111 The OIG’s investigation also revealed that a former SEC Enforcement attorney who had led an investigation into Einhorn subsequently left the Commission and became a registered lobbyist for Allied. He was later caught in an illegal act of identity theft attempting to access Einhorn’s phone records.112
A third OIG report looked into allegations that then-Enforcement Director Linda Thomsen gave information to Stephen Cutler—the Executive Vice President and General Counsel of JPMorgan Chase & Co. and also a former SEC Enforcement Director—regarding the SEC’s investigation into Bear Stearns during the weekend before JPMorgan acquired the firm. The OIG found that Thomsen provided Cutler with some assurances regarding ongoing and potential investigations, without consulting any other Enforcement staff. The OIG also uncovered a “perception within the SEC that certain members of the legal defense bar have influence within Enforcement and, specifically, a belief that the special relationship between Ms. Thomsen and Mr. Cutler facilitated what occurred over the weekend in question.”113 POGO’s database includes a total of 13 post-employment statements filed by Cutler and Thomsen between 2006 and 2010.
And in yet another report, the OIG examined an Enforcement investigation conducted by the SEC’s Miami Regional Office into Bear Stearns and a related entity, W. Holding Company, Inc., regarding allegedly false and misleading securities forms and fraud committed by senior Bear Stearns executives. The OIG found that a former SEC Enforcement attorney, with whom the Regional Director of the Miami office, David Nelson, had an ongoing personal relationship, represented Bear Stearns in settlement discussions with the Commission. Nelson abruptly closed the case just as the Commission staff was making final settlement arrangements. He then contacted the former Enforcement attorney who represented Bear Stearns and told him, “Christmas is coming early this year” and that Bear Stearns “can keep their money.”114 POGO’s database includes seven post-employment statements filed by Nelson after he left the SEC.
108 “OIG Stanford Investigation” 109 David Einhorn and employees of Greenlight Capital are major contributors to POGO. 110 “WSJ Investigation” 111 “OIG Allied Report, p. 47 112 “OIG Allied Report,” p. 36; and Gretchen Morgenson, “Following Clues the S.E.C. Didn’t,” The New York Times, January 31, 2009. http://www.nytimes.com/2009/02/01/business/01gret.html (Downloaded May 9, 2011) 113 “Kotz Letter”; and Securities and Exchange Commission, Office of Inspector General, Allegations of Improper Disclosures and Assurances Given (Case No. OIG-502), September 30, 2009. http://www.sec.gov/news/studies/2009/oig-502.pdf (Downloaded May 8, 2011) 114 “Kotz Letter”; and Securities and Exchange Commission, Office of Inspector General, Failure to Vigorously Enforce Action Against W. Holding and Bear Stearns at the Miami Regional Office (Case No. OIG-483), September 30, 2008, pp. 25-29. http://pogoarchives.org/m/fo/sec-oig-report-20080930-2.pdf (Downloaded May 8, 2011) 24
Members of Congress have also weighed in on the SEC’s revolving door. In June 2010, Senator Charles Grassley (R-IA) wrote a letter to SEC Inspector General David Kotz raising concerns about the revolving door at the Commission.115 For instance, Senator Grassley pointed out that Elizabeth King, former Associate Director of the SEC’s Trading and Markets Division, had recently left the Commission to go work for Getco, LLC, a high-frequency trading firm. He raised questions about her involvement with the Commission’s “flash crash” investigation in light of her move through revolving door.116
In a letter responding to Senator Grassley, Inspector General David Kotz announced that his office had opened another investigation into different “allegations very recently brought to our attention that a prominent law firm’s significant ties with the SEC, specifically, the prevalence of SEC attorneys leaving the agency to join this particular firm, led to the SEC’s failure to take appropriate actions in a matter involving the law firm.”117
These investigations by the OIG and congressional offices have provided numerous examples of enforcement and regulatory actions that may have been undermined by former employees’ trips through the revolving door and the ongoing relationships between current Commission staff and SEC alumni working on behalf of outside clients. Much of this revolving door activity is documented in the SEC post-employment statements.
In recent years, various other studies have also attempted to analyze the effects of the revolving door on SEC enforcement. A 2004 article in the Villanova Law Review found that “typical SEC enforcement staffers are young attorneys who spend only a few years at the SEC before pursuing more lucrative careers in private practice, often at large prestigious law firms….[A]ttorneys may, quite frankly, be leery of bringing disciplinary proceedings against lawyers from the kind of firms that they hope to join in the future.” On the other hand, these young attorneys may wish to pursue aggressive disciplinary proceedings in order to impress their potential future employers, but the article notes that “when a lawyer’s own future earnings potential is on the line, the attorney may be risk averse.”118
In another study released a few years ago, University of California-Berkeley Law School Professor Stavros Gadinis conducted an empirical analysis of SEC enforcement actions against investment banks and broker-dealers in 1998, 2005, 2006, and the first four months of 2007. He uncovered several significant and systematic biases in the SEC’s enforcement patterns. For instance, in 40 percent of SEC actions against big broker-dealers, the Commission only brought charges against the firm, not against any of its executives or employees. In comparison, the SEC only brought a few firm-only charges against small broker-dealers during this same time period. Big firms were also less likely to face charges
115 Letter from Senator Charles Grassley, Ranking Member, Senate Finance Committee, to David Kotz, Inspector General, Securities and Exchange Commission, regarding recent reports that have highlighted problems associated with the revolving door between working at the SEC and working in the securities industry, June 14, 2010. http://finance.senate.gov/newsroom/ranking/download/?id=e037124f-b089-40a1-9a77-3dc773c3cbe2 (Downloaded May 8, 2011) (hereinafter “Grassley Letter”) 116 “Grassley Letter” 117 “Kotz Letter,” pp. 2-3; and Ben Hallman, “SEC watchdog investigates ‘revolving door’ policy,” Center for Public Integrity, June 18, 2010. http://www.iwatchnews.org/2010/06/18/2642/sec-watchdog-investigates-%E2%80%9Crevolving- door%E2%80%9D-policy (Downloaded May 8, 2011) 118 Michael A. Perino, “SEC Enforcement of Attorney Up-the-Ladder Reporting Rules: An Analysis of Institutional Constraints, Norms and Biases,” Villanova Law Review, 2004, 49 Vill. L. Rev. 851. https://litigation- essentials.lexisnexis.com/webcd/app?action=DocumentDisplay&crawlid=1&doctype=cite&docid=49+Vill.+L.+Rev.+851&srcty pe=smi&srcid=3B15&key=cff904707d3e2c2bd8f823d477db1033 (Downloaded May 12, 2011) 25 in civil court where they might face the consequences of a harsh court-issued injunction; instead, these cases were often brought in SEC administrative proceedings. Among the defendants assigned to administrative proceedings, large firms were less likely than small firms to receive an industry ban.119
In attempting to explain these enforcement biases, Gadinis took a look at the career incentives of SEC officials, and found that “[c]oncerns that ‘revolving doors’ between industry and government may hurt regulators’ independence have strong theoretical foundations.” According to one model described by Gadinis, “post-agency employment at higher salaries may operate as a quid pro quo in return for favorable regulatory treatment.” Even officials who have no interest in industry employment “will prefer a conciliatory outcome in investigations where the persons representing the defendants may soon occupy a position within the agency, either as their colleagues or, more likely, as their superiors.” Another model mentioned in his study predicts that the revolving will door will affect regulatory performance because regulators with an industry background have become “‘socialized’ into that industry’s concerns and aspirations.”120
Gadinis applied an indirect test which found “lower [SEC] sanctions for big firms headquartered in financial centers compared to big firms headquartered elsewhere,” possibly suggesting a bias toward big firms in cities with high levels of financial activity where SEC employees may hope to be employed one day.121
In 2004, POGO issued a report that examined the revolving door between the federal government and large private contractors. POGO identified six critical problems created by the revolving door:
1) It provides a vehicle for public servants to use their office for personal or private gain at the expense of the American taxpayer;
2) It creates an opportunity for government officials to be lenient toward or to favor prospective future employers;
3) It creates an opportunity for government officials to be lenient toward or to favor former private sector employers, which the government official now regulates or oversees;
4) It sometimes provides the contractor with an unfair advantage over its competitors due to insider knowledge that can be used to the benefit of the contractor but to the detriment of the public;
5) It has resulted in a highly complex framework of ethics and conflict of interest regulations. Enforcing these regulations has become a virtual industry within the government, costing significant resources, but rarely resulting in sanctions or convictions of those accused of violating the rules;
6) The appearance of impropriety has two significant negative implications. First, it exacerbates public distrust in government, ultimately resulting in a decline in civic participation. Second, the
119 Stavros Gadinis, The SEC and the Financial Industry: Evidence from Enforcement Against Broker-Dealers, August 11, 2009, pp. 6, 7, 26, 38. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1333717 (Downloaded May 8, 2011) (hereinafter “Gadinis Study”) 120 “Gadinis Study,” pp. 49-50 121 “Gadinis Study,” pp. 6, 38-39, 51-52, 64-65 26
vast majority of career civil servants do not use their government jobs as stepping stones to high paying jobs with government contractors, and it demoralizes them to see their supervisors and co-workers do so.122
Although the 2004 report was about the government’s oversight of federal contractors, POGO’s concerns about the revolving door remain the same. For instance, POGO has concerns about employees who come directly to the SEC from entities overseen by the Commission. One such employee is Eileen Rominger, the new head of the SEC’s Division of Investment Management, who came to the Commission after an 11-year stint at Goldman Sachs123 not long after the SEC entered into a major settlement with the firm in connection with charges that it misled investors regarding a subprime mortgage product.124
Pending Studies Could Provide Additional Insights on SEC Revolving Door Issues In its most recent semiannual report to Congress, the SEC OIG announced that it has opened an investigation into “allegations that a former federal employee violated federal post-employment restrictions or SEC ethics rules when the employee left the SEC and began working at an entity regulated by the SEC, as well as broader concerns with respect to the revolving door between the SEC and outside industry.” As part of its review, the OIG reviewed more than two years’ worth of post- employment statements, along with former employees’ personnel folders, comment letters submitted by new employers, and thousands of related emails.125
Meanwhile, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Government Accountability Office (GAO) to conduct its own study of the revolving door at the SEC. The GAO’s study is expected to be released in July 2011.126 An SEC spokesperson told POGO that the Commission is “assisting in that review and [looks] forward to any recommendations the GAO may make.”127
122 The Project On Government Oversight, The Politics of Contracting, June 29, 2004. http://www.pogo.org/pogo- files/reports/government-corruption/the-politics-of-contracting/gc-rd-20040629.html (hereinafter “The Politics of Contracting”) 123 Jessica Toonkel, “New SEC executive’s background could bode well for fund industry,” Investment News, January 23, 2011. http://www.investmentnews.com/article/20110123/REG/301239978 (Downloaded May 11, 2011) 124 Securities and Exchange Commission, “Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO,” July 15, 2010. http://sec.gov/news/press/2010/2010-123.htm (Downloaded May 11, 2011) 125 Securities and Exchange Commission, Office of Inspector General, Semiannual Report to Congress: April 1, 2010 – September 30, 2010, p. 80. http://www.sec-oig.gov/Reports/Semiannual/2010/semifall10.pdf (Downloaded May 8, 2011) 126 As part of this study, the GAO is required to: “1) Review the number of employees who leave the Securities and Exchange Commission to work for financial institutions regulated by such Commission; 2) Determine how many employees who leave the Securities and Exchange Commission worked on cases that involved financial institutions regulated by such Commission; 3) Review the length of time employees work for the Securities and Exchange Commission before leaving to be employed by financial institutions regulated by such Commission; 4) Review existing internal controls and make recommendations on strengthening such controls to ensure that employees of the Securities and Exchange Commission who are later employed by financial institutions did not assist such institutions in violating any rules or regulations of the Commission during the course of their employment with such Commission; 5) Determine if greater post-employment restrictions are necessary to prevent employees of the Securities and Exchange Commission from being employed by financial institutions after employment with such Commission; 6) Determine if the volume of employees of the Securities and Exchange Commission who are later employed by financial institutions has led to inefficiencies in enforcement; 7) Determine if employees of the Securities and Exchange Commission who are later employed by financial institutions assisted such institutions in circumventing Federal rules and regulations while employed by such Commission; 8) Review any information that may address the volume of employees of the Securities and Exchange Commission who are later employed by financial institutions, and make recommendations to Congress; and 9) Review other additional issues as may be raised during the course of the study conducted under this subsection.” “Dodd- Frank Wall Street Reform and Consumer Protection Act,” Pub. L. No. 111-203, § 968. http://www.gpo.gov/fdsys/pkg/PLAW- 111publ203/pdf/PLAW-111publ203.pdf (Downloaded May 8, 2011) 127 “May 3 Nester Email” 27
RECOMMENDATIONS
In anticipation of the upcoming studies by the SEC OIG and the GAO, POGO would like to offer its own recommendations for exposing and slowing the revolving door at the SEC based on its review of five years’ worth of post-employment statements filed with the Commission and other relevant information.
Strengthen and Simplify Post-Employment Restrictions The SEC should impose a two-year cooling-off period for all former Commission employees, during which they would be prohibited from representing any entity on any matter before the SEC. A similar reform was proposed in an amendment to the Dodd-Frank Act introduced last year by Senator Grassley, but was not adopted.128
There should also be a one-year cooling-off period for all former SEC employees, during which they would be prohibited from accepting compensation as an employee, officer, director, or consultant from a financial institution or its holding company if the former employee participated personally and substantially in, or had official responsibility for, any regulation of or enforcement against the financial institution or its holding company within one year prior to their departure from the SEC. A similar reform was proposed in an amendment to the Dodd-Frank Act introduced last year by Senator Carl Levin (D-MI), but was not adopted.129
The revolving door restrictions introduced by President Obama130 should be made permanent in statute and extended to all federal employees, not just political appointees.
Make Post-Employment Statements Publicly Available Online The SEC should make post-employment statements publicly available online in a searchable database, as POGO has done, making any necessary redactions under the standard FOIA exemptions. In addition, former employees should have to file a statement within two years of leaving the SEC whenever they are employed or retained by a client with business before the Commission, regardless of whether they intend to appear before the SEC on the client’s behalf.
As proposed in Senator Grassley’s Dodd-Frank amendment, these statements should include the name of the employee; their previous job title; the name of the individual, corporation, or entity they seek to represent; a comprehensive list of all matters in which the employee participated personally and substantially while during their time at the SEC; and, where applicable, a description of the proposed representation, a comprehensive list of all matters that the representation will include, and a description of any restrictions on the representation of the individual, corporation, or entity.
Along these lines, POGO’s 2004 report on the revolving door recommended that former government officials be required to enter into a binding revolving door exit plan that sets forth the programs and projects on which the former employee is banned from working.131 The SEC should consider requiring former employees to enter into a binding exit plan, which would benefit employees who are unaware or
128 111th Congress, Senate Amendment No. 3966, introduced by Senator Charles Grassley. http://pogoarchives.org/m/fo/sa3966.pdf 129 111th Congress, Senate Amendment No. 3977, introduced by Senator Carl Levin. http://pogoarchives.org/m/fo/sa3977.pdf 130 “Ethics Commitments” 131 “The Politics of Contracting” 28 confused by the post-employment restrictions, ensure that relevant information is more consistently disclosed in the post-employment statements, and enhance the public’s trust in government.
Verify Completeness and Accuracy of Post-Employment Statements POGO’s investigation suggests that not all former SEC employees are consistently filing statements and obtaining ethics opinions when needed. An audit should be conducted to examine the completeness and accuracy of the statements filed with the SEC, and regular checks should be made to ensure full compliance with post-employment regulations. In addition, the SEC should consider providing clearer guidance to former employees on the proper procedures for filing post-employment statements and consulting with ethics officers, and should update its statement template accordingly.
Strengthen Restrictions for New Employees Coming from Industry Since the revolving door swings both ways, SEC employees should be prohibited from participating in matters related to their former private-sector employer and the clients they represented. New employees who previously worked for or were retained by an entity regulated by the SEC should have to disclose all potential conflicts of interest, similar to the recently introduced ethics policy for offshore workers at the Bureau of Ocean Energy Management, Regulation and Enforcement.132
Publicly Disclose SEC Recusal Database and Ethics Waivers According to the Office of Government Ethics (OGE), the SEC’s Ethics Office “maintains a searchable record of recusals by both members of the Commission and certain senior staff, noting the reasons for the recusals, which facilitates future review” of potential conflicts.133 This database and the underlying recusals, in addition to any ethics waivers provided by the SEC or OGE, should be made public.
Strengthen and Utilize Enforcement Authority It is unclear whether the SEC is utilizing its authority to impose penalties on former employees who violate their post-employment restrictions. The SEC should make rules to restrict former employees who violate the post-employment regulations from any further participation in prohibited matters for a period of up to five years, as proposed in Senator Levin’s Dodd-Frank amendment. In general, former SEC employees who violate the post-employment restrictions should expect to face a gradient of criminal, civil, or administrative disciplinary penalties corresponding to their violation.
In addition, Congress should give OGE the authority to compel SEC officials to investigate potential violations of ethics laws and regulations. The OGE also should have the authority to officially refer cases to the SEC OIG or the DOJ.
Extend Regulations to Other Financial Regulatory Agencies Any new legislation or rulemaking that strengthens the SEC’s post-employment restrictions should also be applied to other financial regulatory agencies. In addition, there should be rules in place to restrict the post-employment activities of officials who work for the Financial Industry Regulatory Authority (FINRA) and other self-regulatory organizations (SROs) that have the authority to take disciplinary and enforcement actions against financial institutions regulated by the federal government. In April 2011, FINRA’s Board of Governors authorized the staff to file a proposed rule that would prohibit FINRA
132 Memorandum from Michael R. Bromwich, Director, Bureau of Ocean Energy Management, Regulation and Enforcement, to ALL BOEMRE District Employees, on policy regarding interference with the performance of official duties and potential conflicts of interest, August 2010. http://pogoarchives.org/m/nr/boemre-recusal-memo-20100830.pdf 133 Office of Government Ethics, Ethics Program Review: Securities and Exchange Commission, July 2008, p. 9. http://www.usoge.gov/about/foia/sec_prog_rev2008.pdf (Downloaded May 8, 2011) 29 officers from “making a communication, appearing, or testifying as an expert witness on behalf of any respondent in a FINRA disciplinary proceeding or similar action” for one year after leaving the organization.134 Although this is a step in the right direction, FINRA’s rule needs to be significantly strengthened and expanded in order to match the post-employment restrictions facing government employees.
Any financial regulatory agencies or SROs that do not currently collect post-employment statements should require the filing and online posting of these statements for all former employees as described above.
Review Confidential Treatment Procedures and FOIA Exemptions The SEC OIG should review the Commission’s authority and practices for handling confidential treatment requests made by former employees and others, including the requirements for notifying a FOIA requester when the Commission makes a determination that confidential treatment is warranted. In particular, the OIG should examine whether the SEC’s confidential treatment procedures and practices run afoul of the public’s right to know and the Obama Administration’s FOIA directive calling for a “presumption of disclosure.”135 The OIG should also examine the SEC’s handling of FOIA exemptions in the post-employment statements, and in particular the exemptions used to withhold the names of represented entities and the issues on which former employees expect to appear before the Commission.
134 Financial Industry Regulatory Authority, “Update: FINRA Board of Governors Meeting,” April 18, 2011. http://www.finra.org/Industry/Regulation/Guidance/CommunicationstoFirms/P123516 (Downloaded May 9, 2011) 135 “Memorandum of January 21, 2009 - Freedom of Information Act,” Federal Register, Vol. 74, No. 15, January 26, 2009. http://edocket.access.gpo.gov/2009/pdf/E9-1773.pdf (Downloaded May 11, 2011) 30
United States Government Accountability Office
Report to Congressional Committees GAO
July 2011 SECURITIES AND EXCHANGE COMMISSION Existing Post- Employment Controls Could Be Further Strengthened
GAO-11-654
July 2011 SECURITIES AND EXCHANGE COMMISSION Accountability • Integrity • Reliability Existing Post-Employment Controls Could Be Further Strengthened
Highlights of GAO-11-654, a report to congressional committees
Why GAO Did This Study What GAO Found Many Securities and Exchange Because SEC historically has not collected future employer information from Commission (SEC) employees leave separating employees on an agencywide basis, complete information on the SEC each year, and some of where former SEC officials obtained employment is not currently available. these former employees go to work Based on available SEC attrition data, about 37 percent of the more than for firms regulated by SEC or the law 2,000 employees who separated from SEC between October 2005 and or consulting firms that represent September 2010 were in occupation categories that included examiners, them. This practice raises questions accountants, economists, or attorneys—occupations particularly relevant to about the potential impact on SEC’s SEC examinations and investigations. GAO analyzed notice of appearance ability to effectively carry out its requests—which are required when former SEC employees wish to appear mission, including the potential for before SEC, within 2 years of their separation, for purposes of representing undue influence by former SEC their firm or client—submitted between October 2005 and October 2010. employees on SEC matters or cases. The Dodd-Frank Wall Street Reform Sixteen entities, consisting primarily of law and consulting firms, accounted and Consumer Protection Act for approximately 35 percent of the individuals filing these notices. GAO also required GAO to examine the selected a nongeneralizable sample of 150 former employees from movement of former SEC employees occupation categories relevant to SEC’s examination and investigative efforts to regulated firms and the associated and searched publicly available sources for information about their post-SEC concerns. Among other things, this employment. These individuals frequently obtained positions with financial, report examines (1) the extent to consulting, or law firms that represent firms regulated by SEC. According to which employees leave SEC to work SEC officials, representatives from law and financial firms, and academic for or represent regulated entities researchers with whom GAO spoke, the potential benefits of employees and the potential issues associated moving between SEC and the private sector include bolstering SEC’s ability with such movements and (2) to attract experts to help fulfill its mission and increasing understanding of internal controls SEC has in place to SEC rules and regulations among industry participants. Academic manage potential conflicts of interest researchers and citizen advocacy groups described potential challenges of and how these controls compare such movements, such as the appearance of potential conflicts of interest across other agencies. To address when former SEC staff work for or represent regulated firms. these objectives, GAO analyzed data on former SEC employees, reviewed SEC has a number of controls for managing post-employment and conflict-of- SEC’s and other agencies’ internal interest issues, and many of SEC’s controls are similar to those of other controls, and interviewed current and agencies. For example, the SEC Ethics Office provides information to former SEC officials. employees about ethics rules and regulations as well as agency-specific conflict-of-interest and post-employment restrictions. Also, some SEC What GAO Recommends divisions and offices take steps through staffing and work processes to GAO recommends that SEC manage potential conflicts of interest and have multiple levels of review and establish standards for systems for documenting key decisions, such as closing SEC investigations. documentation of ethics advice on As previously recommended by GAO, SEC also recently began collecting current and post-employment issues future employer information from separating employees. This information can associated with the movement of be used as part of SEC’s mandatory exit interviews to advise departing staff employees between SEC and other about potential conflicts of interest they might encounter in their new employers. SEC generally agreed positions related to their SEC experience. While SEC ethics officials routinely with GAO’s recommendation and advise current and former employees on post-employment and conflict-of- stated that it has begun drafting interest issues, SEC has not consistently documented this advice. The standards. agency’s lack of documentation standards could limit SEC’s and employees’ View GAO-11-654 or key components. ability to demonstrate that appropriate consultation occurred and could For more information, contact A. Nicole Clowers at (202) 512-8678 or contribute to questions about the movement of employees between SEC and [email protected]. the private sector. United States Government Accountability Office
Contents
Letter 1 Background 4 While Employee Movement between SEC and the Private Sector Offers Potential Benefits to Each Side, It Also Raises Questions 7 Although SEC Has Multiple Controls Related to Conflicts of Interest, Documentation of Ethics Issues Varies 12 While Stakeholders Identified Additional Options for Managing Potential Conflicts of Interest, Each Involves Advantages and Disadvantages 21 Conclusions 24 Recommendation for Executive Action 25 Agency Comments 25
Appendix I Scope and Methodology 26
Appendix II Comments from the Securities and Exchange Commission 32
Appendix III GAO Contact and Staff Acknowledgments 33
Table Table 1: SEC Separations by Occupation Category, October 2005 through September 2010 27
Figures Figure 1: Attrition for Select Occupation Categories of SEC Employees, Fiscal Years 2006 through 2010 9 Figure 2: Agency-Identified Practices and Controls for Managing Potential Post-Employment and Conflict-of-Interest Issues by Select Agencies and SEC 19
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Abbreviations
CFTC Commodity Futures Trading Commission DOD Department of Defense FCC Federal Communications Commission Federal Reserve Board of Governors of the Federal Reserve System FINRA Financial Industry Regulatory Authority FTC Federal Trade Commission NCUA National Credit Union Administration OCIE Office of Compliance Inspections and Examinations OGE Office of Government Ethics OPM Office of Personnel Management SEC Securities and Exchange Commission SEC IG Securities and Exchange Commission Inspector General
This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
Page ii GAO-11-654 Securities and Exchange Commission
United States Government Accountability Office Washington, DC 20548
July 12, 2011
The Honorable Tim Johnson Chairman The Honorable Richard C. Shelby Ranking Member Committee on Banking, Housing, and Urban Affairs United State Senate
The Honorable Spencer Bachus Chairman The Honorable Barney Frank Ranking Member Committee on Financial Services House of Representatives
The Securities and Exchange Commission’s (SEC) mission is to protect investors; maintain fair, orderly, and efficient securities markets; and facilitate capital formation. To meet its goals, SEC requires public companies to disclose meaningful financial and other information to the public, conducts examinations of firms it regulates, and conducts investigations of potential securities law violations. As of June 14, 2011, a total of 3,729 permanent employees were working at SEC. SEC employs many professionals, such as attorneys, securities examiners, and accountants to carry out its mission. A number of employees leave the SEC each year to pursue other opportunities, including working for financial services firms. However, members of Congress, the SEC Inspector General (SEC IG), and others have raised concerns about the potential impact on SEC’s ability to effectively carry out its mission when employees leave the agency to work for firms regulated by SEC or for law firms that may represent firms regulated by SEC. These concerns include the potential for undue influence by former employees on SEC matters or cases, particularly those related to examinations and investigations of firms that may employ or be represented by former SEC employees.
Congress has enacted specific, post-employment restrictions designed to protect the U.S. government from the improper use of government information or undue influence exerted by former government employees. These restrictions prohibit former federal employees from engaging in
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certain activities, such as representing certain clients on particular matters before their former agency, for a specified period of time after leaving federal service.1 SEC also has established agency-specific policies to address post-employment and conflict-of-interest issues.2 Nevertheless, questions remain about the potential for former SEC employees to work on matters in which they have personally and substantially participated and SEC’s efforts to protect against outside influence on current SEC employees.3
Section 968 of the Dodd–Frank Wall Street Reform and Consumer Protection Act required us to review concerns associated with former SEC employees obtaining employment at SEC-regulated entities—a phenomenon often referred to as the “revolving door.”4 This report examines (1) the extent to which employees leave SEC to work for or represent SEC-regulated entities and the potential issues associated with such movement, (2) SEC’s internal controls to manage potential conflicts of interest associated with these movements and how these controls compare to controls of other agencies, and (3) potential options for SEC to better manage potential conflicts of interest.
To address these objectives, we obtained and analyzed SEC data for employees who left the agency between October 2005 and September 2010. We assessed the reliability of these data by verifying that data fields, such as occupation types, job descriptions, and date ranges, were reasonable and consistent with our data request, and determined that the data were reliable for purposes of this report. We also obtained and analyzed documentation on all letters filed by former SEC employees requesting approval to appear before SEC from October 2005 to October
118 U.S.C. § 207. 217 C.F.R. part 200, subpart M. 3For this report, we examined concerns associated with the movement of employees between SEC and private firms, such as regulated financial institutions and law firms that represent them. We focused on concerns related to the criminal conflict-of-interest restrictions for current employees in 18 U.S.C. § 208, the post-employment restrictions in 18 U.S.C. § 207, and the existing procedures for promoting compliance with them. We also examined SEC’s existing controls related to hiring, staffing, decision-making, and its employee exit procedures. Our work does not address other federal ethics laws, such as those related to bribery and those involving the representation of foreign entities.
4Pub. L. No. 111-203, 124 Stat. 1376, 1914 (2010).
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2010, and conducted Web-based searches on a nongeneralizable sample of 150 SEC employees who separated from SEC between October 2005 and September 2010 to determine where they had obtained employment after separating from SEC. To describe SEC’s internal controls, we obtained documentation on controls related to managing potential post- employment and conflict-of-interest issues, reviewed SEC-specific post- employment guidance and policies, and interviewed management and staff of relevant SEC divisions and offices. To determine how SEC’s controls compare to controls of other agencies, we obtained documentation and interviewed officials from seven agencies, some of which are federal enforcement and regulatory agencies with missions similar to that of SEC: Commodity Futures Trading Commission (CFTC), Department of Defense (DOD), Federal Communications Commission (FCC), Board of Governors of the Federal Reserve System (Federal Reserve), Federal Trade Commission (FTC), Financial Industry Regulatory Authority (FINRA), and National Credit Union Administration (NCUA). All of these agencies are federal agencies with the exception of FINRA, which is a self-regulatory organization for broker-dealers. We obtained documentation on their internal controls related to managing potential conflict-of-interest and post-employment issues. In addition, we reviewed Standards for Internal Control in the Federal Government to identify any controls that may help manage potential conflict-of-interest and post-employment issues.5 Finally, we interviewed academic researchers and representatives of law firms, financial firms, and consumer advocacy groups to obtain their perspectives on options to manage potential conflict-of-interest issues relating to the movement of employees between SEC and SEC-regulated firms or firms that represent SEC-regulated firms. For a detailed description of our scope and methodology, see appendix I.
We conducted our work between August 2010 and July 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
5GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1, 1999).
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Background Various criminal statutes, agency-specific policies, and professional standards address potential post-employment and conflict-of-interest questions. Executive branch employees, including SEC employees, are subject to criminal conflict-of-interest statutes. For example, restrictions on the activity of former federal employees and restrictions on current federal employees negotiating for private employment are reflected in sections 207 and 208 of Title 18 of the United States Code (sections 207 and 208) and associated regulations. Specifically, section 208 prohibits employees from personally and substantially participating in government decisions that affect their financial interests, including the interests of any organization with which he or she is in negotiations or with which he or she has a prospective employment relationship. After separating from an agency, section 207 provisions can restrict former employees from representing a firm to his or her former agency for defined cooling-off periods that vary according to the former employee’s involvement and seniority.6 Examples of conduct prohibited by section 207 include the following:
Former personnel are permanently barred from communicating with or appearing before, with the intent to influence, their former agency on behalf of their new employer for particular matters on which they were personally and substantially involved, which involved a specific party or parties at the time of such participation.7
For 2 years after leaving federal service, former personnel may not communicate with or appear before, with the intent to influence, their former agency on behalf of their new employer on particular matters that were pending under their official responsibility in their last year of service, which involved a specific party or parties at the time it was pending, even if the employee was not directly involved with the matter.8
618 U.S.C. § 207. A former employee is not prohibited by this restriction from providing “behind-the-scenes” assistance in connection with the representation of another person or firm. See 5 C.F.R. § 2641.201(d)(2). Further, this restriction prohibits only those communications and appearances that are made “with the intent to influence.” 718 U.S.C. § 207(a)(1). An employee can participate “personally” in a matter even though he or she only directs a subordinate’s participation. He or she participates “substantially” if his or her involvement is of significance to the matter. Therefore, while a series of peripheral involvements may not be substantial, participation in a single critical step may be substantial.
818 U.S.C. § 207(a)(2).
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For 1 year after leaving federal service, a former senior-level employee may not contact his or her former agency on behalf of any other person in connection with any matter on which the person represented by the former employee is seeking official action.9
The Office of Government Ethics (OGE) oversees a uniform system of ethics standards across the executive branch. Among other responsibilities, OGE formulates and interprets ethical standards and conflict-of-interest rules, reviews ethics programs at agencies, and provides support to agency ethics officials. While OGE sets ethical standards and specifies appropriate regulation for the executive branch, individual agencies, such as SEC, are responsible for implementing ethics programs. With OGE’s concurrence, agencies also may supplement executive branch-wide ethics regulations. For example, as part of supplemental regulation specific to SEC, former SEC employees (within 2 years of separating from the agency) must submit a notice of appearance, also referred to as an 8b letter, to request approval to appear before SEC for purposes of representational activity.10 These notices typically contain a former employee’s name, current employer, and the nature of the matter about which they would like to appear before SEC. Federal ethics regulations overseen by OGE include rules requiring that agencies provide training and information about post-employment and other conflict-of-interest issues to their employees.11 SEC’s Ethics Office serves as the agency’s focal point in carrying out these responsibilities.
In addition to criminal statutes and agency-specific regulations, attorneys and accountants are subject to professional standards that relate to post- employment activities. Attorney members of state bar associations are subject to the rules of professional conduct for each state, which may be
918 U.S.C. § 207(c). “Senior” is generally defined as an employee whose basic pay is equal to or greater than 86.5 percent of the rate of basic pay for level II of the Executive Schedule (more than $155,440.50 in 2010). However, the Office of Government Ethics has granted an exception to SEC so that no employees under pay plan SK, which may include pay levels greater than the prescribed threshold, are considered “senior.” See 5 C.F.R. part 2641, app. A. The SK pay plan applies to SEC employees formerly under the GS pay plan.
1017 C.F.R. § 200.735-8(b). 115 C.F.R. § 2638.203(a)(3), (b)(7).
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based on the American Bar Association Model Rules of Professional Conduct. The model rules address client-lawyer relationships, including special conflicts of interest for former and current government officers and employees.12 For certified public accountants, the American Institute of Certified Public Accountants professional code of conduct includes both principles and rules that apply to its members in all areas of accounting practice. Among other tenets, these rules outline standards for an accountant’s independence, integrity, and objectivity.13
Four SEC IG reports issued during 2009 through 2011 have highlighted concerns regarding the appearance of conflicts of interest at SEC.14 These reports did not conclude that former SEC employees violated post- employment restrictions; although, the reports noted some related concerns based on reviews of particular SEC investigations and the actions of former employees, including the following:
The SEC IG’s report found that the SEC’s lack of documentation resulted in an unclear record of what projects a former associate director in the Division of Trading and Markets recused herself from and on what projects she continued to work during employment negotiations with a trading firm.
12American Bar Association Model Rules of Professional Conduct Rule 1.11(a)(2) states that, with some exceptions, a lawyer may not represent a client in connection with a matter in which the lawyer participated personally and substantially as a public officer or government employee, unless the appropriate government agency gives its informed consent. 13Rule 101 states that a member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by the council. Rule 102 states that in the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others. 14See SEC, Office of Inspector General, Investigation of Whether a Former Associate Director in the SEC’s Division of Trading and Markets Violated Conflict of Interest Restrictions in Connection With Her Employment at an Electronic Market Making Firm, OIG-540 (Washington, D.C., Jan. 25, 2011); Investigation of the SEC’s Response to Concerns Regarding Robert Allen Stanford’s Alleged Ponzi Scheme, OIG-526 (Washington, D.C., Mar. 31, 2010); Allegations of Conflict of Interest, Improper Use of Non-Public Information and Failure to Take Sufficient Action Against Fraudulent Company, OIG-496 (Washington, D.C., Jan. 8, 2010); and Allegations of Improper Disclosures and Assurances Given, OIG-502 (Washington, D.C., Sep. 30, 2009).
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The SEC IG report raised questions about the extent to which a company’s SEC connections and aggressive tactics may have influenced SEC decisions about the examination and resulting investigation of the regulated entity.
The SEC IG report found that a former head of the Division of Enforcement at a field office appeared to have violated state bar rules by working for a client involved in ongoing SEC matters in which he had participated while employed at SEC.15
While Employee Movement between SEC and the Private
Sector Offers Potential Benefits to Each Side, It Also Raises Questions
SEC Only Recently Has SEC only recently began asking separating employees—on an Begun to Collect Future agencywide basis—for future employer information. As a result, Employer Information comprehensive data to determine where former employees obtained from Departing Employees employment after separating from SEC were not yet available. We previously recommended that SEC request that departing employees provide the name of their next employer as part of SEC’s exit procedures.16 In response, the Office of Compliance Inspections and Examinations (OCIE) began conducting exit interviews with departing
15SEC informed the former employee that it was improper for him to represent this particular client on three separate occasions. Although federal law prohibits “representation” before a federal agency, “behind-the-scenes” assistance provided by former federal employees is not prohibited if the assistance does not involve a communication to or an appearance before an employee of the United States. 5 C.F.R. § 2641.201(d)(3). 16GAO, Mutual Fund Trading Abuses: SEC Consistently Applied Procedures in Setting Penalties, but Could Strengthen Certain Internal Controls, GAO-05-385 (Washington, D.C.: May 16, 2005).
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OCIE staff in December 2005 that included documentation about their post-employment plans. However, no other divisions or offices appeared to make similar efforts until December 2010—at which time the SEC Ethics Office implemented an agencywide process to collect post- employment information. Specifically, the Ethics Office revised the interview form that ethics officials use when conducting the mandatory exit interviews of all separating employees. The revised interview form includes a question asking for the separating employee’s next employer, which respondents are asked to provide voluntarily. As of March 11, 2011, the Ethics Office had conducted 47 exit interviews and documented future employer information for most of the separating employees.
While SEC recently has started to collect future employer information from separating employees, it consistently has maintained information on the number of employees leaving the agency each year and for what purposes (such as retirement). According to SEC’s data, in fiscal years 2006 through 2010 a total of 2,127 employees separated from the agency.17 About 37 percent of these employees were included in occupation categories that captured examiners, accountants, economists, and attorneys—occupations relevant to SEC’s examination and investigative efforts—who separated from SEC due to resignation, retirement, or removal.18 The other 63 percent of employees had occupations such as information technology specialist, human resource specialist, and secretary, among several other occupations. Figure 1 shows the attrition trend for selected occupation categories for fiscal years 2006 through 2010. In addition to the occupation categories of departing employees, we also reviewed the length of tenure of employees
17The data for fiscal year 2010 are from October 1, 2009 through September 17, 2010. There were a total of 2,173 separation records for 2,127 individuals for this time period. The additional separation records are due to individuals who separated from SEC more than once during this time period. 18These particular occupations are highlighted in organization charts and job descriptions for key SEC offices and divisions, and the reported occupation classifications were commonly associated with higher-level managers (including directors and SEC commissioners) represented in SEC attrition data. To calculate the number of separations, we included resignations, removals, most retirements, and select terminations. Given our focus on the movement of former SEC employees to regulated firms or firms that represent regulated firms, we excluded transfers to other government agencies, retirements due to disability, death, termination during a probationary period, and expiration of term appointments. According to SEC, 48 fellowships were included in separations due to expiration of term appointments from October 1, 2005 through September 17, 2010.
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in the selected categories for the same time period. We found that the average SEC tenure of departing employees increased during this period, with the average service years at time of separation increasing from 8.3 years in fiscal year 2006 to 13.5 years in fiscal year 2010 for employees in occupation categories we considered relevant to SEC’s examination and investigative efforts. According to SEC officials, the decline in the number of employees leaving SEC and the increase in the tenure of departing employees during this period primarily was attributable to the financial crisis and economic recession, which made private-sector employment less available and attractive.
Figure 1: Attrition for Select Occupation Categories of SEC Employees, Fiscal Years 2006 through 2010
Number of separated staff by occupation category 250
200
150
100
50
0 2006 2007 2008 2009 2010 Fiscal year
Economists
Examination
Accounting
Legal
Source: GAO analysis of SEC data.
Note: Data for fiscal year 2010 are through September 17, 2010. In addition to examiners, the examination occupation category includes a smaller number of other occupations such as investigators. To calculate the number of separations, we included resignations, removals, most retirements, and select terminations. Given our focus on the movement of former SEC employees to regulated firms or firms that represent regulated firms, we excluded transfers to other government agencies, retirements due to disability, death, terminations during a probationary period, and expiration of term appointments (including term appointments for fellowship programs).
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Available Data Suggest Using sources such as letters from former employees requesting to Former SEC Employees appear before SEC, Web-based search results, and interviews with those Often Obtained Positions knowledgeable about SEC, we found that former SEC employees with Regulated Entities or frequently obtained employment with financial entities or law or consulting firms that represent them. We reviewed 825 notice of appearance Firms That Represent requests (also referred to as 8b letters) that the agency received from Them October 2005 through October 2010 that were submitted by former SEC employees that the SEC subsequently approved.19 We found that SEC received these notices from 224 individuals employed at 136 separate entities ranging from financial companies to legal and consulting firms.20 Sixteen entities accounted for approximately 35 percent of the individuals filing notices of appearance during this period. Of the 16 entities, 9 were law firms, 5 were consulting firms, 1 was a financial firm, and 1 was an independent regulatory entity.
We also conducted searches for a nongeneralizable sample of 150 former employees who separated from SEC between October 2005 and September 2010, and found that many of these employees later obtained employment at law, consulting, or financial firms.21 Of the 150 former employees we selected, 113 had resigned from SEC, 35 had retired, and 2 had been removed from their positions. We found post-employment information for 64 of the 150, including 2 retirees. Of the 64 former employees, 22 individuals had obtained employment at law firms, 15 at consulting firms, 13 at financial firms, and 14 at other entities after their separation from SEC.22 We also spoke with the Association of SEC Alumni, which collects information on current employer information as part of its membership application.23 Association representatives indicated
19According to an SEC Ethics Office official, SEC historically has not tracked 8b denials. The official said that former employees typically call to informally inquire about their proposed request and usually do not submit an 8b letter if the request is not expected to be approved. 20Many of the 825 individuals filed more than one 8b letter during the sample time period. For example, one former SEC employee filed 21 separate 8b letters during this period. 21From this time period, we selected the first group of 50, the middle group of 50, and the last group of 50 employees according to the date they separated from SEC. 22Other entities included financial regulators, academic entities, and nonfinancial businesses. 23The Association of SEC Alumni was formed in 1990 and is a nonprofit charitable organization that sponsors activities for SEC alumni, among other activities.
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that employment paths vary when employees leave SEC but that, in general, people go to work for law firms, financial firms, or retire. SEC officials also stated that former employees go to work for various firms, such as financial or accounting firms, after separating from the agency.
SEC Officials and Others Collectively, SEC officials, academic researchers, citizen advocacy Cited Both Benefits and groups, and representatives from financial firms and law firms with whom Challenges of Movement we spoke said that there are a number of benefits and challenges of between SEC and employee movement between SEC and the private sector. SEC officials, academic researchers, and representatives from financial firms and law Regulated Entities or firms cited the following benefits: Firms That Represent Them Better regulatory understanding and compliance. SEC experience may bring about a better understanding of securities regulation and compliance in the private sector, which could benefit SEC and securities firms or firms that represent securities firms. Former SEC personnel who take positions in the regulated industry or their representatives, including law firms, may have enhanced credibility as a result of their SEC experience, and thus greatly aid in encouraging firms to adopt a culture of compliance.
Better communications. When employees of regulated entities or law firms representing regulated entities are familiar with SEC regulations and the context of securities investigations and enforcement, SEC and the employees of regulated entities or law firms may communicate more efficiently and openly about the matter being discussed.
Recruitment of specialized expertise. The perceived value of SEC experience may bolster the agency’s ability to recruit individuals with current knowledge and expertise in securities products and other areas that SEC regulates. Attracting specialized market experts, as well as those with the expertise that SEC traditionally has sought (including lawyers, accountants, and compliance personnel) helps the agency fulfill its mission of investor protection.
Academic researchers and citizen advocacy groups identified the following challenges of employee movement between SEC and the private sector:
Competing interests for current SEC employees. SEC employees may be influenced by the prospect of future employment opportunities to
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be more lenient or favor prospective future employers while undertaking SEC actions. For example, according to one academic researcher, a current SEC employee could seek enforcement compromises through settlements rather than pursue prosecution actions. Such an outcome might result in more desirable terms for the securities firm, which might lead to a more favorable reputation of the SEC employee within the industry, while still successfully bringing to conclusion an enforcement action for SEC.
Appearance of undue influence. Personal contact between current and former SEC employees may create the appearance of conflicts of interest. For example, even without direct evidence that undue influence has affected an enforcement action, the appearance of a conflict of interest could undermine confidence in the enforcement process and SEC.
According to SEC officials, SEC has controls to address these challenges, as described in the next section of this report.
Although SEC Has Multiple Controls Related to Conflicts of
Interest, Documentation of Ethics Issues Varies
SEC Provides Information SEC has a number of controls for managing post-employment and to Employees on Post- conflict-of-interest issues. These include training and information for Employment Requirements employees, staffing decisions, work process controls, ethics advice, exit and Restrictions but Has requirements for departing employees, and supplemental post- employment rules for certain employees. Not Consistently Documented Ethics Advice
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Training and Information According to federal ethics regulations, federal agencies must have an ethics training program to educate employees about ethics laws and rules and how to obtain ethics advice.24 SEC requires its new employees to attend initial training that includes ethics-related issues and provides new employees printed information that outlines post-employment restrictions and provides contact information for agency ethics officials. SEC also requires that new employees submit financial disclosures, as applicable, to identify any personal financial interests they may have and determine if any potential financial conflicts of interest exist.
In addition to providing initial training and information to new employees, SEC makes training available and provides information to all employees on an ongoing basis, including information about post-employment rules and conflict-of-interest issues. SEC’s 2011 training plan includes both in- person and online training sessions that cover topics such as conflicts of interest, employment seeking, post-employment issues, and SEC supplemental rules.25 The SEC Ethics Office currently provides information about ethics rules and regulations (as well as conflict-of- interest and post-employment restrictions) to employees through the SEC intranet and by e-mail. For example, the Ethics Office recently completed an SEC ethics manual that summarizes post-employment and conflict-of- interest rules and regulations (both federal and agency-specific). The manual is available to employees through the SEC intranet.
Staffing Decisions SEC divisions and offices we reviewed take steps during their staffing processes that are designed to manage, or that may have the effect of managing, potential conflicts of interest involving current employees. While individuals are ultimately responsible for identifying conflicts of interest, the divisions and offices we spoke with take additional steps to help manage these issues. For example, offices within the Division of Corporation Finance, which reviews company filings and disclosures in 12
24An agency’s training program must include, at least, an initial agency ethics orientation for all employees. 5 C.F.R. § 2638.701. Within 90 days from the time an employee begins work for an agency, the agency must provide employees ethics standards and any agency supplemental standards to keep or view, or summaries of these standards and ethical principles. The agency must also provide employees contact information for the designated agency ethics official and other agency officials available to advise employees on ethics issues. 5 C.F.R. § 2638.703. 25We were unable to obtain information on SEC training plans and materials prior to fiscal year 2011 due to a lack of documentation of prior years’ training plans within the SEC Ethics Office.
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groups organized by industry, often rotate staff assignments for different stages of the file review process each year to provide a fresh look at the disclosures or for training purposes. This rotation process also helps prevent employees from becoming too close to specific companies. Additionally, the Division of Enforcement has a 1-year recusal policy that prohibits new employees from working on matters that involve their former employers or clients of their former employers, regardless of the employees’ previous involvement in a particular matter. Division of Enforcement officials told us supervisors generally were aware of matters from which their staff recuse themselves, and would use that information in future staffing decisions to further avoid potential conflicts of interest involving division employees.
Work Process Controls According to SEC managers and employees with whom we spoke, systems for documenting key decisions, multiple levels of review, and controls for staff involvement and communication reduce the likelihood that any individual employee could exert undue influence on SEC decisions related to examinations and investigations. For example, within OCIE, work papers document decisions and actions related to examinations, and a tracking system documents higher-level data such as examination dates, participants, findings, and actions taken.26 Similarly, the Division of Enforcement documents investigations using an electronic case management system that, among other things, identifies and documents individuals with substantial involvement in particular matters or cases and documents key decisions such as the closing of investigations. This information is available to division managers to research particular conflict-of-interest issues involving specific employees or to support requests for information by the Ethics Office. The division also has a multilayered review process. For example, according to SEC officials, numerous staff and supervisors participate in decisions to recommend whether an enforcement case should be litigated or settled, and if settled, what the specifics of the settlement terms should be. These decisions then are reviewed by staff in other SEC divisions and offices, the Office of General Counsel, and individual commissioners and their counsel. The Division of Enforcement also recently updated its controls for handling tips, complaints, and referrals to better manage and
26An SEC IG report recommended that OCIE consider improving its documentation procedures to limit the ability of OCIE employees to delete examination work papers (OIG- 496). In response, SEC has been considering how to further track all of OCIE’s work on one system.
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document referrals it receives from other SEC divisions and offices.27 The division has developed training to remind employees of their responsibilities regarding impartiality when performing their official duties and to instruct employees where they can find additional information about impartiality. Finally, to help ensure the division maintains its independence and transparency, the Division of Enforcement has an external communication policy that outlines best practices for senior officials’ communications with outside parties related to ongoing, active investigations. The policy encourages senior officials to include the enforcement staff working on an investigation in any material communications with outside parties. It also directs senior officials to consider notifying staff not included in such communications and to consider documenting such events through written notes, emails, or workpapers. Some of these controls were implemented by SEC in response to SEC IG reviews and recommendations related to potential conflict-of-interest issues.28
Ethics Advice The Ethics Office manages issues related to conflicts of interest involving SEC employees. Employees are encouraged to seek guidance from the Ethics Office and to notify supervisors of conflict-of-interest issues, particularly if they have a conflict of interest that requires a recusal from matters to which they have been assigned. According to the SEC Ethics Counsel, ethics officials frequently advise current and former employees about issues related to their involvement in SEC matters. Since 2009, employees have been able to use an internal, online system on a voluntary basis to document their recusal information, as SEC lacks discretionary authority to require employees to document recusal information. Additionally, ethics officials provide written and oral advice to employees about potential conflicts of interest.
27Specifically, Division of Enforcement staff must place comments in a tips, complaints, and referrals system to memorialize decisions and actions regarding the assignment, disposition, and/or resolution of tips, complaints, and referrals. Additionally, SEC has been developing a new, automated system for capturing information related to the work performed by staff assigned to tips, complaints, and referrals. 28See SEC, Office of Inspector General, Program Improvements Needed Within the SEC’s Division of Enforcement, OIG-467 (Washington, D.C., Sept. 29, 2009); Re-Investigation of Claims by Gary Aguirre of Improper Preferential Treatment and Retaliatory Termination, OIG-431 (Washington, D.C., Sept. 30, 2008); and OIG-496.
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Although we found that Ethics Office officials may document their advice through e-mail or other methods, documentation has not been done consistently or routinely and SEC lacks standards for documenting ethics advice about conflicts of interest and post-employment issues to current and former employees.29 According to Standards for Internal Control in the Federal Government, federal agencies’ internal control steps and key events—which in this context could include ethics advice provided— should be clearly documented and readily available.30 Without standards for documenting ethics advice, SEC currently relies on institutional memory and the ability of individuals still working at the agency to recall past ethics advice and documentation they may have kept. These documentation practices may create challenges, particularly in situations in which an ethics official who provided advice has separated from SEC. Further, the lack of standards for documenting ethics advice may impair SEC’s ability to clearly demonstrate that such advice was provided.
According to the SEC Ethics Counsel, the nature of ethics issues, specifically the way that each situation involves circumstances and experiences unique to each employee, makes it difficult to standardize documentation or advice. However, the movement of SEC employees to the private sector presents unique risks to SEC relating to its management of documentation of ethics advice. Findings in a recent SEC IG report highlight these potential risks. The SEC IG reviewed issues involving a former associate director in the Division of Trading and Markets who left SEC to work for a high-frequency trading firm. While at SEC, the employee’s division examined a market event in which the role of high-frequency trading firms was being explored. The SEC IG found that the former employee took appropriate steps to recuse herself after a potential employment offer was initiated by a high-frequency trading firm; however, SEC’s lack of documentation resulted in an unclear record of the projects from which she recused herself and the projects on which she continued to work.31 While the SEC IG’s report concluded that there was no evidence suggesting the former associate director had violated any post-employment restrictions, this case highlighted the potential risks
29Under 5 C.F.R. § 2638.203(b)(8), ethics officials are to ensure that “records are kept, when appropriate, on advice rendered.”
30GAO/AIMD-00-21.3.1. 31OIG-540.
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of inadequate documentation, which could raise questions about the appearance of conflicts of interest and might harm SEC’s reputation.32
Exit Process SEC also has controls in place for managing an employee’s separation from the agency. When employees leave SEC, they must complete an exit process that includes counseling on post-employment restrictions and receiving information about post-employment rules. As mentioned previously, starting in December 2010, the SEC Ethics Office began administering mandatory exit interviews for all departing employees that includes a question asking for the separating employee’s next employer, which respondents are asked to provide voluntarily. This information then can be used as part of the exit interview to advise departing staff about potential conflicts of interest related to their SEC experience they may encounter in their new positions. The Ethics Office maintains hard copies of these employee exit forms. SEC also requires senior employees to obtain post-employment counseling from the Ethics Office prior to seeking outside employment, as a way to provide advice about post-employment rules and regulations and help protect SEC and employees from potential conflicts of interest or misconduct.
Supplemental Rules In addition to agencywide controls and office- or division-specific practices, SEC has supplemental rules, developed under the agency’s authority, that affect the post-employment activities of certain former employees.33 These rules, under specific conditions, require former employees or firms that hire them to receive permission to appear before SEC regarding particular matters. More specifically:
As discussed previously, former employees wishing to appear before SEC within 2 years of separating from the agency must request approval from SEC by filing a notice of appearance letter (an 8b letter). An 8b letter would include the name of the former employee’s current employer, previous position at SEC, and the matter for which the former employee was seeking to appear before SEC.
32The SEC IG noted that there was evidence the former associate director had worked “behind the scenes” at the firm with which she obtained employment, but the nature of the activity did not appear to violate any criminal statutes, the SEC Standards of Ethical Conduct, or Washington, D.C. bar rules. See OIG-540. 3317 C.F.R. § 200.735-8(b)(d).
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Similarly, firms participating in a matter—or with an interest in participating in a matter—that have hired a former SEC employee who is prohibited from working on that matter must provide to SEC in writing (referred to as an 8d letter) that the firm has appropriate controls in place to separate, or “wall off,” the disqualified individual. SEC reviews the firm’s statements about controls and determines whether the firm can participate in the matter. SEC refers to this rule as its “imputation of disqualification” rule.
SEC ethics officials review 8b and 8d letters. For 8b letters, they determine whether any conflicts of interest exist concerning the former employee and the matter for which he or she wishes to appear. Ethics officials consult with former SEC supervisors and peers of the individual, and possibly the former employee, regarding the matter. SEC stamps 8b letters when approved or issues a response to a former employee when an 8b letter is not approved. For 8d letters, the SEC General Counsel forwards the letters to ethics officials, who conduct research and recommend a response. In turn, the General Counsel issues a written response to firms based on the Ethics Office’s review. SEC maintains hard copies of the 8b and 8d letters and the agency’s 8d letter responses.
While Select Agencies SEC’s controls to help manage post-employment and conflict-of-interest Have Controls Similar to issues are similar to the controls of the other agencies we reviewed. We SEC’s to Help Manage spoke with representatives of seven agencies and found that the Post-Employment and agencies shared several types of controls similar to those of SEC, such as training and exit requirements for departing employees (see fig. 2). Conflict-of-Interest Issues, Much like SEC, all the agencies train and educate employees about post- Differences Exist employment restrictions and conflict-of-interest issues and collect financial disclosures from certain employees. Similar to SEC, five agencies reported they had mandatory exit procedures for departing employees, although the form and substance of these procedures may vary. For example, CFTC withholds an employee’s last paycheck until the employee has completed a clearance checklist and requires all senior employees to complete an ethics briefing. No other agency we contacted said they used this approach to ensure employee participation in the exit process.
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Figure 2: Agency-Identified Practices and Controls for Managing Potential Post-Employment and Conflict-of-Interest Issues by Select Agencies and SEC
Select agencies GAO revieweda Federal SEC CFTC DOD FCC Reserve FTC FINRA NCUA Provide training Provide information Collect financial disclosures b Database for potential conflicts of interest Mandatory exit proceduresc Agency-specific supplemental post-employment rules b Other statutory post-employment rules
Source: GAO Interviews with and documentation from selected agencies.
aWe reviewed CFTC, DOD, FCC, Federal Reserve, FTC, FINRA, and NCUA. All of these agencies are federal agencies with the exception of FINRA, a self-regulatory organization for broker-dealers. bFederal Reserve Banks have these controls. Federal Reserve Banks are part of the Federal Reserve System and they combine both public and private elements. cThe other agencies we interviewed have voluntary exit procedures.
Additionally, similar to SEC, three agencies have agency-specific supplemental rules related to post-employment. For example, CFTC has a supplemental rule that requires former employees who intend to represent clients before CFTC within 2 years of leaving the agency to notify CFTC in writing before beginning representation.34 FTC has a supplemental clearance rule that requires former employees to receive clearance to communicate with, appear before, or work behind-the- scenes on any FTC matter or proceeding that was pending while they were employed at FTC, even if their participation in the matter or proceeding at their new place of employment is solely in a behind-the- scenes capacity.35 Further, members of the Federal Reserve’s Board of Governors are prohibited from holding any position with a member bank of the Federal Reserve System for 2 years after they leave the Board, though only if they have not completed the term to which they were appointed.36
3417 C.F.R. § 140.735-6(e). 3516 C.F.R. § 4.1(b). 3612 U.S.C. § 242.
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While SEC’s controls are similar to many of those of other agencies, there are some differences. Within the Federal Reserve System, the Federal Reserve Banks have a system for tracking their examiners’ prior employment and banking relationships to help manage potential conflicts of interest. Specifically, Federal Reserve Banks (which combine both public and private elements) have a system available to compare examiners’ prior employment and banking relationships with staffing assignments to verify that examiners are sufficiently independent of potential impairments. Further, certain former employees of Federal Reserve Banks and NCUA are subject to additional statutory post- employment rules. The Intelligence Reform and Terrorism Prevention Act of 2004 provides that former senior examiners from Federal Reserve Banks and NCUA, as well as former senior examiners of other federal agencies that examine financial institutions, are prohibited for 1 year from accepting compensation from certain banks or credit unions they examined during their last year of employment.37
Finally, SEC’s recently implemented practice of collecting and documenting new employer information during exit interviews is unique among the other federal agencies we reviewed. FINRA, a self-regulatory organization, began requesting new employer information by e-mail from departing employees on a voluntary basis in September 2010, and began compiling the information into a database in November 2010. While many of the agencies we reviewed informally may ask employees the name of their new employer, none but SEC and FINRA systematically document such information.
3712 U.S.C. § 1820(k).
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While Stakeholders Stakeholders with whom we spoke identified additional options for managing potential conflicts of interest, and existing controls at the other Identified Additional agencies provide examples of other options. These options include Options for Managing improving documentation of employee recusals, developing a database to identify potential conflicts, tracking employees’ participation in SEC Potential Conflicts of matters, and the extension or expansion of cooling-off periods. Each of Interest, Each these options has advantages and disadvantages. Involves Advantages Better documentation of recusals. Establishing better documentation of and Disadvantages employee recusals and related matters may provide SEC with additional information that it could use to screen for potential conflicts of interest. While SEC currently has an online system in which recusals can be documented, employee use of the system is optional. According to the SEC IG, better documentation of recusals and the related matters would help in creating a history of steps employees have taken to avoid potential conflicts of interest and would provide supervisors with information on matters for which certain employees have recused themselves and on which they cannot work. However, according to SEC officials, supervisors are generally aware of the matters from which their employees have recused themselves. Further, requiring documentation of recusals would require SEC supervisors or ethics officials to develop a method to enforce the requirement and ensure that recusals are in fact being documented. Some SEC employees stated that documenting recusals may have a limited impact on further managing potential conflicts of interest. Specifically, they stated that it is in an employee’s interest to avoid potential conflicts of interest regardless of whether or not recusals are documented. Lastly, according to the SEC Ethics Counsel, SEC does not have the discretionary authority to require documentation of recusals.
Developing a database to help identify potential conflicts of interest. Developing a database that contains information on each SEC employee’s prior employment, financial interests, and work history while at SEC could help manage potential conflicts of interest involving current and former employees. SEC managers could use the information when considering staffing decisions, such as those related to SEC examinations or investigations. As previously mentioned, the Federal Reserve Banks use a system to track their employees’ prior employment and banking relationships to identify potential conflicts of interest. According to Federal Reserve officials, the system is updated on an annual basis or as necessary based on such events as changes in an employee’s investments. In SEC’s case, such a database could also be used when employees separate from the agency, to document matters for
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which they were personally and substantially involved while an SEC employee. However, setting up such a database would require employees to identify and self report potential conflicts of interest to SEC. Thus, the system would not help identify any potential conflicts or issues that employees do not report. Establishing such a database also would go beyond the current online recusal system SEC has in place, and thus likely would require SEC to either enhance that system to include additional information or develop a new system entirely. Further, while the system would provide additional transparency about potential conflicts of interest, a few SEC employees and academics with whom we spoke suggested that such documentation would not deter an individual from violating conflict-of-interest restrictions if the individual has intentions to do so.
Tracking employees’ participation in SEC matters. Maintaining a list of matters in which employees participate, such as enforcement cases or examinations, may help to promote transparency by documenting what employees have worked on prior to separating from the agency. Such a list could help SEC identify potential conflicts of interest. For example, the list could be maintained by employees and then provided to the Ethics Office during their exit interview so that ethics officials could review the list of matters and discuss any potential issues that might be related to an employee’s post-SEC employment. According to representatives from citizen advocacy groups with whom we spoke, documentation of matters SEC employees participate in may help to provide transparency on potential conflicts when they leave SEC to work for law firms or financial firms. Current systems in the Division of Enforcement, Division of Corporation Finance, and OCIE do not track employee participation in all matters, so SEC would need to evaluate methods to determine the best manner in which to document this information. For example, while providing a list of matters in which employees have participated might be sufficient for a review during their exit interview, documenting this information in a system may provide more benefits, such as the ability to readily search for the information in the future. Further, the level of participation in a matter also would need to be determined before establishing whether employee participation in a specific SEC matter was personal and substantial and therefore subject to specific post- employment restrictions. Lastly, according to SEC officials, such documentation may not be necessary because the Ethics Office can coordinate with SEC managers to determine in which matters an employee participated, and their level of participation.
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Extending cooling-off periods. Extending cooling-off periods beyond the current limits placed on federal government employees under section 207 would further limit former SEC employees, including former senior- level employees, from communicating with or appearing before the SEC for certain matters they participated in while at SEC.38 According to academic researchers with whom we spoke and representatives from citizen advocacy groups, extending these cooling-off periods would allow for additional time to pass so that the impact of a former SEC employee then working on an SEC-related matter would be greatly diminished. Once the former employee is able to work on these matters, their knowledge of and familiarity with specific SEC matters would be limited, and thus the impact of participating in such matters would be reduced. However, representatives from law firms and financial firms stated that existing cooling-off periods are sufficient to diminish the impact or influence that a former SEC employee might have on a matter. Representatives from law firms, including some with former SEC employees, stated that any useful information former SEC employees take with them when they separate from SEC likely would be of little value by the time current cooling-off periods expire. Some SEC employees with whom we spoke also stated that extending cooling-off periods would place significant limitations on the ability of SEC employees to obtain employment outside of the agency. For example, employers might not find it feasible to hire SEC employees that are not able to represent their company or communicate with SEC for an extended period of time. Lastly, an extension of cooling-off periods under section 207 would require legislative action, because federal agencies, including SEC, do not have authority to extend cooling-off periods.
Expanding cooling-off periods. Expanding cooling-off periods to include behind-the-scenes activity may provide an additional mechanism to manage potential conflicts of interest. While section 207 places restrictions on communication and representational activities, it does not bar behind-the-scenes activity.39 Including behind-the-scenes assistance as part of the post-employment restrictions would help manage situations,
38After an individual has separated from an agency, section 207 provisions restrict the individual from representing a firm to their former agency for defined cooling-off periods that vary according to the former employee’s involvement and seniority. 3918 U.S.C. § 207(b) places restrictions on former government employees providing behind-the-scenes assistance to certain interests only if they participated in ongoing trade or treaty negotiations during their last year of government service.
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such as those identified in a recent SEC IG report, in which a former SEC employee can work on a matter shortly after leaving SEC as long as he or she is not communicating with SEC or representing a firm or client before SEC.40 For example, a senior-level SEC employee could leave SEC and obtain employment with a regulated firm and, shortly after separating from SEC, would be able to assist the firm with developing a comment letter or a defense strategy regarding an SEC matter so long as that individual does not sign the comment letter or appear before or communicate with SEC. However, similar to the extension of cooling-off periods, expanding restrictions to include behind-the-scenes assistance would require revisions to governmentwide post-employment statutes. Finally, behind- the-scenes assistance may already be addressed in professional association ethics standards or rules for attorneys and accountants. For example, state bar professional conduct rules generally would prohibit former government attorneys from providing behind-the-scenes assistance if they previously participated personally and substantially in that matter.
Conclusions SEC has established a number of controls to address potential post- employment and conflict-of-interest issues, including providing training to current employees about post-employment restrictions and imposing post-employment requirements and restrictions. However, SEC has not consistently documented ethics-related advice. Better documentation of ethics advice could improve SEC’s ability to demonstrate that its officials are providing appropriate advice to current and former employees, and that the agency is taking steps to minimize the potential for post- employment violations or conflicts of interest. It would also add transparency to SEC’s implementation of agency-specific controls related to post-employment and conflict-of-interest issues, which could better protect the agency from concerns about its employees and their movement between SEC and SEC-regulated firms or firms that represent them. Conversely, without standards for documenting ethics advice, inconsistent documentation prevents SEC from being able to readily determine the extent to which previous conversations or requests occurred regarding specific employees’ post-employment or conflict-of- interest issues, particularly in situations where the relevant ethics official who provided the advice has separated from SEC. Further, without such
40OIG-540.
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documentation, SEC lacks evidence of steps it has taken when providing ethics advice to current and former employees about post-employment or conflict-of-interest issues.
Recommendation for To promote transparency and help strengthen SEC’s procedures for documenting events related to potential current and post-employment Executive Action issues associated with the movement of employees between SEC and other employers, we recommend that the SEC Chairman establish standards for documentation of ethics advice.
Agency Comments We provided a draft of this report to SEC for review and comment. In its comment letter, which is reprinted in appendix II, SEC generally agreed with our findings and recommendation. SEC also stated that, pursuant to our recommendation, it has started to draft standards concerning the documentation of ethics advice relating to the issues identified in this report. SEC also provided technical comments that we incorporated where appropriate.
We are sending copies of this report to the appropriate congressional committees and the Chairman of the Securities and Exchange Commission, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III.
A. Nicole Clowers Director, Financial Markets and Community Investment
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Appendix I: Scope and Methodology Appendix I: Scope and Methodology
To determine how many individuals separated from the Securities and Exchange Commission (SEC), we obtained and analyzed SEC separation data for employees who left the agency between October 1, 2005 and September 17, 2010. We identified 2,127 employees who had left the agency during that time. We assessed the reliability of the data we obtained from SEC by verifying that date ranges were consistent with our data request, that data elements were consistent with agency descriptions, and that occupation types were reasonable for the nature of SEC’s mission. Additionally, we verified that occupation codes matched job descriptions and verified justifications for duplicate entries. We determined that the data were sufficiently reliable for purposes of this report. For reporting on these data, we developed occupation categories relevant to SEC’s examination and investigative efforts—accounting, legal, economists, and examination—based on our review of occupation codes reflected within SEC attrition data and the Office of Personnel Management (OPM) job series codes: accounting and budget group (OPM codes 0500–0599); legal and kindred group (OPM codes 0900– 0999); economists (OPM code 110); and the inspection, investigation, enforcement, and compliance group (OPM codes 1800–1899), respectively. We excluded occupations (such as information technology specialist, human resource specialist, and secretary) not consistent with the categories we developed. We also considered selected separation types for our analysis. We included resignations, removals, select terminations, and most retirements.1 We excluded transfers to other government agencies, retirements due to disability, death, termination during a probationary period, and expiration of term appointments. As shown in table 1, a total of 784 individuals met the selected criteria for type of separation and occupation type. The following table provides the number of individuals who fit in one of the selected separation types from each occupation category:
1We excluded retirements due to disability; we included all other retirements represented in these data.
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Appendix I: Scope and Methodology
Table 1: SEC Separations by Occupation Category, October 2005 through September 2010
Occupation category Number of separated employees Accounting 253 Legal 444 Examination 64 Economists 23 Total 784
Source: GAO analysis of SEC data. Note: Data for fiscal year 2010 are through September 17, 2010. In addition to examiners, the examination occupation category also includes a smaller number of other occupations such as investigators. To calculate the number of separations, we included resignations, removals, most retirements, and select terminations. Given our focus on the movement of former SEC employees to regulated firms or firms that represent regulated firms, we excluded transfers to other government agencies, retirements due to disability, death, termination during a probationary period, and expiration of term appointments (including term appointments for fellowship programs).
To determine where some former SEC employees obtained employment after separating from SEC, we obtained and analyzed notice of appearance requests (also referred to as 8b letters). Specifically, we obtained and analyzed a total of 825 letters filed by former SEC employees requesting approval to appear before SEC from October 3, 2005 through October 4, 2010. These letters typically included the name of the former employee, their former position with SEC, and their current employer at the time they filed the letter, among other information. We also conducted Internet-based searches on a nonprobability sample from the 784 individuals who met the selected criteria for types of separation and occupation types described previously. We selected the sample of 150 individuals by selecting the 50 most recently separated employees in our data set (May 21, 2010 to September 10, 2010), the 50 who separated from SEC in the median period of time in our data set (April 5, 2007 to July 13, 2007), and the 50 least recently separated SEC employees in our data set (October 1, 2005 to December 30, 2005). We searched for the 150 selected individuals using the Web-based information sources Linkedin.com and Martindale.com, which are a professional networking site and a site containing profiles for lawyers and firms in the United States, respectively. We also reviewed Internet search results including employer Web sites and trade journal articles. We considered our Internet search results to be sufficiently reliable for purposes of this report if the search result source specifically referenced the individual’s name, former SEC position, and approximate separation time, as indicated in SEC’s attrition data. When approximate separation time was not included, we considered other publicly available information
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Appendix I: Scope and Methodology
such as location or education. Lastly, we conducted an interview with the Association of SEC Alumni to obtain officials’ perspectives on where former SEC employees obtain employment after separating from SEC.
To describe the advantages and disadvantages of employee movement between SEC and regulated firms or firms that represent them, we conducted in-person and telephone interviews with SEC officials, representatives of three securities firms and three law firms, four academic researchers who have conducted research on the financial industry and government regulators, and representatives of three citizen advocacy groups that conduct work on government ethics issues. We selected securities firms to interview based on reported total sales revenue. Specifically, using Nexis.com’s Company Dossier file, we identified total annual sales revenue for firms with North American Industrial Code 523120, which corresponds to security brokerage firms, or code 523110, which corresponds to investment banking and securities firms. Total sales revenues reflected the most recently reported information for the individual financial institutions. We selected the three firms with the highest total annual sales revenue based on the results of this search.2 We selected law firms to interview based on our analysis of 8b letters filed with SEC from October 3, 2005 to October 4, 2010. We identified and selected firms that were represented most frequently in terms of total number of 8b letters filed by employees, total number of employees that filed 8b letters, and total number of times a firm was in the list of most 8b letters filed by employees across individual years during the time period.
To describe internal controls SEC has in place to manage potential conflicts of interest associated with the movement of employees to the private sector, we obtained documentation on controls related to managing potential post-employment and conflict-of-interest issues. We reviewed SEC-specific post-employment guidance and policies, and interviewed managers and employees of relevant SEC divisions and offices. We selected SEC divisions and offices to review based on our analysis of SEC separation data. Starting with the 784 individuals who met the selected criteria for types of separation and occupation types described above, we categorized individuals as senior or nonsenior
2We excluded one firm from consideration because the company filed for bankruptcy after the latest total sales revenue was reported.
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Appendix I: Scope and Methodology
based on an employee’s pay plan and grade at the time of his or her separation.3 Based on this group of 289 senior and 495 nonsenior individuals, we identified four divisions and offices with the highest attrition of senior and nonsenior employees. They were the Division of Corporation Finance (127 separations: 26 senior employees and 101 nonsenior employees); the Division of Enforcement (92 separations: 40 senior employees and 52 nonsenior employees); the Office of Compliance Inspections and Examinations (45 separations: 11 senior employees and 34 nonsenior employees); and the Office of the Chief Accountant (44 separations: 35 senior employees and 9 nonsenior employees). We interviewed management-level staff in each of these four divisions and offices. We also obtained documentation from the SEC Ethics Office and interviewed the SEC Ethics Counsel about controls and practices the Ethics Office has in place and perspectives on post- employment and conflict-of-interest issues. Furthermore, we reviewed Standards for Internal Control in the Federal Government to identify any controls that may help manage potential post-employment and conflict-of- interest issues.4
We interviewed SEC employees in three of the divisions and offices we selected.5 To collect perspectives from SEC employees on issues related to movements of SEC employees to the private sector and controls SEC has in place to manage these issues, we obtained and analyzed current SEC employee data as of January 24, 2011, for the Divisions of Corporation Finance and Enforcement and for the Office of Compliance Inspections and Examinations. In analyzing these data for 2,573 current employees, we examined current nonsenior employees in two assigned categories—newer employees (employees with 2 to 4.3 years of SEC experience) and more experienced employees (employees with more than 7 years of SEC experience). Based on SEC separation data, 4.3 years was the median amount of time an employee had spent at SEC
3We identified nonsenior employees as those within SEC pay plan SK, grade 14 and lower; senior employees included those within pay plan SK, grades above 14, or all other pay plans reflected in these data. The SK pay plan applies to SEC employees formerly under the GS pay plan. 4GAO/AIMD-00-21.3.1. 5Through our data analysis and initial interviews with SEC managers, we determined the Office of the Chief Accountant is a smaller office that accounted for less nonsenior employee attrition than other divisions and offices. Based on this information, we excluded the office from our employee interview selection criteria.
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Appendix I: Scope and Methodology
prior to separating from the agency. Using these data, we then randomly selected 10 employees to interview based on the following criteria: 1) one new and one experienced employee from each of the three divisions and offices we reviewed (six employees) and 2) two field-based employees— one new and one experienced—from each division or office with a field office location (four employees).6
To compare SEC’s controls with controls across other agencies, we obtained documentation on internal controls related to managing potential conflicts of interest and post-employment issues and interviewed officials from seven agencies. We selected enforcement and regulatory agencies with missions similar to SEC’s and another agency with experience managing post-employment issues. These agencies were the Commodity Futures Trading Commission, the Department of Defense, the Federal Communications Commission, the Board of Governors of the Federal Reserve System, the Federal Trade Commission, the Financial Industry Regulatory Authority, and the National Credit Union Administration.7 We also obtained documentation and interviewed officials from the Office of Government Ethics for perspectives on federal rules, restrictions, and controls related to conflict-of-interest and post-employment issues.
To identify additional options available to manage post-employment and conflict-of-interest concerns, we interviewed officials from the seven agencies identified above, academic researchers, and representatives from law firms, including some with former SEC employees, financial firms, and citizen advocacy groups. We also reviewed existing governmentwide, post-employment restrictions and obtained perspectives on the extent to which extensions or expansions of these restrictions would help to better manage post-employment and conflict-of-interest concerns. We also examined controls and post-employment restrictions specific to other agencies.
We conducted our work between August 2010 and July 2011 in accordance with generally accepted government auditing standards.
6The Division of Corporation Finance does not have employees who work in a field office location. Therefore, we only interviewed employees from SEC’s headquarters location (Washington, D.C.) for this division. 7All these agencies are federal agencies with the exception of the Financial Industry Regulatory Authority, a self-regulatory organization for broker-dealers.
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Appendix I: Scope and Methodology
Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
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Appendix II: Comments from the Securities and Exchange Commission Appendix II: Comments from the Securities and Exchange Commission
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Appendix III: GAO Contact and Staff Acknowledgments Appendix III: GAO Contact and Staff
Acknowledgments
GAO Contact A. Nicole Clowers, (202) 512-8678 or [email protected]
Staff In addition to the contact named above, Andrew Pauline (Assistant Director), Heather Chartier, Chase Cook, James Lager, Tarek Acknowledgments Mahmassani, Marc Molino, Luann Moy, Linda Rego, and Jennifer Schwartz made key contributions to this report.
(250554) Page 33 GAO-11-654 Securities and Exchange Commission
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Please Print on Recycled Paper KOF Working Papers
The Value of the Revolving Door: Political Appointees and the Stock Market
Simon Luechinger and Christoph Moser
No. 310 August 2012 ETH Zurich KOF Swiss Economic Institute WEH D 4 Weinbergstrasse 35 8092 Zurich Switzerland
Phone +41 44 632 42 39 Fax +41 44 632 12 18 www.kof.ethz.ch [email protected]
The Value of the Revolving Door: Political Appointees and the Stock Market
Simon Luechinger a), b) and Christoph Moser b), c) a) University of Lucerne, b) ETH Zurich, KOF Swiss Economic Institute c) CESifo
August 20, 2012
Abstract We analyze stock market reactions to announcements of political appointments from the private sector and corporate appointments of former government officials. Using unique data on corporate affiliations and announcements of all Senate-confirmed U.S. Defense Department appointees of six administrations, we find positive abnormal returns for political appointments. These estimates are not driven by important observations, volatile stocks or industry-wide developments. Placebo events yield no effects. Effects are larger for top government positions and less anticipated announcements. We also find positive abnormal returns for corporate appointments. Our results suggest that conflicts of interest matter also in a country with strong institutions.
JEL: G14, D73, G30, H57. Keywords: Political appointees, revolving door, conflict of interest, event study, stock market
Address for correspondence: ETH Zurich, KOF Swiss Economic Institute, Weinbergstrasse 35, 8092 Zurich, Switzerland. E-mail: Christoph Moser ([email protected]); Simon Luechinger ([email protected]). We thank Philipp Rückheim, Heysook Shin and Omar Abdel Rahman for excellent research assistance. For comments and suggestions we thank Steffi Bansbach, Philipp Denter, Tim Friehe, James Kolari, Francis Kramarz, James Kwak, Sara Lovell, Nolan McCarty, Bernhard Obenhuber, Tobias Seidl and Joachim Voth as well as seminar participants at the KOF Swiss Economic Institute, the 5th BBQ Conference in Schiermonnikoog, University of Konstanz and Vienna University of Economics and Business and participants at the annual meeting of the Swiss Society of Economics and Statistics. 1. Introduction
When President Obama took office in January 2009, he faced a challenge common to incoming Presidents in the United States: Filling top-positions in the federal administration with political appointees. Among other sources, he tapped the reservoir of private sector experts, like all Presidents before him. For example, William J. Lynn III, a Pentagon official under Clinton and later Raytheon executive, was his nominee for Deputy Secretary of Defense. But the revolving door spins in both directions: Legions of leaving Bush appointees joined the industry.
The academic literature on political appointments stresses the trade-off between a decrease in competence and an increase in political control (e.g., Lewis, 2008; Huber and McCarty, 2004). Political appointees lack site-specific knowledge and institutional memory, but shared preferences, aligned incentives and lower informational asymmetries increase the control of elected officials over the bureaucracy. In contrast, the public debate often revolves around the value of industry expertise for regulation or procurement and concerns about potential conflicts of interest. Commenting on Lynn’s nomination, a defense analyst said, “On the one hand, if you don’t have defense-industry experience, then you’re lacking critical insight. On the other hand, if you do, it’s inevitable that in some way it’s going to impact on your judgment.”1 Lynn’s nomination also met resistance over conflicts of interest in Senate hearings: “[T]he revolving door is an important issue for us to talk about, between the Pentagon and the defense community. You went directly from the Pentagon to a defense contractor. You are coming back directly from a defense contractor […] into the Department of Defense. […] This is troubling to a lot of people […] and it’s an incestuous business what’s going on in terms of the defense contractors and the Pentagon […].”2
Concerns over potential conflicts of interest are not unfounded. Political appointees have both opportunities and motives to act in favor of their former employers. Preferential treatments can come in different disguises: Directly in procurement, regulation and oversight, and supervision of mergers and acquisitions; indirectly in strategic planning and preferential access to decision makers and information. At the same time, political appointees also have incentives for preferential treatment towards their former employers either because they expect to rejoin the companies or because they want to return favors. Similarly, former political appointees bring valuable connections and information about processes, upcoming
1 Loren Thompson cited in Defense Daily, “Lynn confirmation vote expected today,” February 11, 2009. 2 Sen. Claire McCaskill cited in Federal News Service, “Hearing of the Senate Armed Services Committee confirmation hearing on expected nominations by President-elect Barack Obama,” January 15, 2009. 2 decisions and competitors to firms hiring them upon leaving government service. However, the generally favorable institutional environment of the United States with checks and balances and a free press as well as specific institutional safeguards embodied in ethic rules counter such concerns. Whether conflicts of interest exist and whether firms can benefit from them are ultimately empirical questions.
Do firms profit from the political appointment of one of its members? Do firms profit from hiring a former political appointee? These two questions lie at the heart of this paper. We address these questions with an event-study. We estimate the effect of announcements of appointments and hirings on firm value. Given that stock prices reflect expected future profits and any news affecting these expectations is immediately priced in by financial markets, stock price reactions to the announcements measure the value of political connections associated with the revolving door. Thus, positive stock market reactions are consistent with the view that conflicts of interest indeed matter.
Event studies have several advantages over alternative approaches. Compared to effects on realized firm performance or the volume of procurement contracts, effects on stock prices are immediate. Thus, it is easier to relate cause and effect and abstract from confounding factors. Further, unlike effects on the volume of procurement contracts, stock price reactions are a comprehensive measure for the value of political connections. Compared to respondents in surveys and expert interviews, financial market participants have a strong financial interest for well-informed and unbiased assessments.
In our empirical analysis, we concentrate on political appointees in the United States Department of Defense. This department is by far the largest department in terms of budget, amounting to over USD 700 billions including supplementals in recent years, and in terms of procurement volume (Gansler, 2011). Furthermore, it has around 700,000 civilian employees and the largest number of executive political appointees, i.e., excluding attorneys, marshals and ambassadors (Lewis, 2008). Thus, focusing on the Department of Defense assures a large and homogenous sample. We cover appointees nominated by or serving under Presidents Bush Sr. to Obama. In other words, our analysis encompasses six administrations and over 20 years. We consider the universe of Senate confirmed positions at the Department of Defense, totalling 527 person-position combinations or 383 individuals. For these observations we reconstruct the employment and affiliation history within two years of government service and gather the exact date of political and corporate appointments through a full-text search using LexisNexis and SEC-filings. We consider an appointee to be connected to a firm, if she
3 has served as a member of board of directors or advisory board, an executive officer or an employee of that firm. We then link the information on political and corporate announcements to daily stock market data of these connected firms. This yields a sample of 85 observations (72 firms and 58 persons) related to political appointments and 85 observations (75 firms and 59 persons) for corporate hirings of former government officials. We use these data and a standard market model approach to estimate abnormal returns for each announcement.
To anticipate our main findings: For political appointments (“ex ante”), we find positive average abnormal returns of 0.82% and 0.84% for the one- and two-day event windows, respectively. Abnormal returns are larger for (former) board members, top pay-grades in the Department of Defense, appointees nominated by a Democratic administration (for the one- day window) and for those events, where the announcement was at least partly unanticipated. But the revolving door works in both ways. For corporate appointments (“ex post”), the announcement results in average positive abnormal returns of 0.79% and 1.05% for one- and two-day event windows, although these results are statistically less strong. We find that stock market reactions tend to be higher for nominations to the board of directors and for corporate appointments of former political appointees of a Democratic President. The baseline results are robust to the exclusion of extreme abnormal returns, scaling of abnormal returns and the adjustment of returns by industry returns. Placebo events yield no effects.
Our paper is related to five different strands of the literature: The literature on the value of political connections established by (i) political appointments and (ii) corporate appointments of former government officials in the United States, (iii) of political connections more generally, (iv) the literature on lobbying, and (v) the literature on the reaction of defense stocks to political decisions. Closest in spirit to our paper is Fisman, Fisman, Galef and Khurana (2006), who investigate the value of connections to Vice President Richard Cheney.3 Firms are defined as connected if either Cheney was on the board of directors or if one of their board members served on Halliburton’s board during Cheney’s watch as chairman and CEO. Fisman et al. (2006) do not find any significant stock market reactions to important news about Cheney and his health. This suggests that the checks and balances of U.S. institutions are strong enough to keep conflicts of interest in check. Another related paper is Acemoglu, Johnson, Kermani, Kwak and Mitton (2010), who document strong and positive abnormal stock returns for firms being
3 The Vice President of the United States is “hand-picked” by the presidential candidate, formally selected by the nominating conventions, and finally elected by the Electoral College. Hence, strictly speaking, the Vice President is not a political appointee. 4 seen as close to the new U.S. Treasury Secretary, Timothy Geithner, upon his appointment amidst the Subprime Crisis in November 2008. Acemoglu et al. (2010) measure connections to Geithner in three ways – two related to his former position as head of the New York Federal Reserve Bank and one based on personal connections as captured by muckety.com – and results are fairly similar across these different variables. Thus, these two papers provide mixed evidence on the value of political connections in the United States. Our paper differs from these papers in several respects. Acemoglu et al. (2010) are not concerned with the revolving door or conflicts of interest stemming from political appointments of individuals from the private sector. Similarly, only a small subset of the political connections studied by Fisman et al. (2006) is related to the revolving door phenomenon. Both papers provide valuable insights into the value of political connections for one politician and appointee, respectively. In contrast, our paper is based on a large number of appointees over more than two decades. At the same time, appointees are from one department, assuring a homogenous sample. Importantly, we also include below cabinet level positions. As the tanker-leasing scandal has demonstrated, political appointees at lower levels have opportunities for preferential treatment of specific firms. Darleen A. Druyun, acting Assistant Secretary of the Air Force (Acquisition), gave Boeing Company an inflated price on the contract and shared confidential information about a competitor in return for a generous job deal at Boeing.4 Moreover, sub-cabinet level appointees are more likely to fly under the radar of the media.
Although we look at both sides of the revolving door, our main focus is on political appointments. In our view, conflicts of interest are more worrisome, when political appointees are in office and can exert direct influence within the administration in favor of their former employers. Nevertheless, we also look at corporate appointments of former government officials. In this context, the study of Goldman, Rocholl and So (2009) is closely related to ours.5 Goldman et al. (2009) analyze announcements of corporate board appointments of individuals who at any time of their past career held a high political position and who served on the boards of S&P 500 from 1996 to 2000. Differences to our study exist with regard to corporate affiliations. We consider executive appointments in addition to board appointments and include all listed firms. Our results generally confirm the findings of Goldman et al. (2009). They find positive abnormal returns for corporate appointments. To highlight two
4 Associated Press, “Boeing fires two executives for unethical conduct in tanker-leasing case,” November 24, 2003 and Associated Press, “Former Boeing executive gets four months in prison,” February 18, 2005. 5 We focus in our discussion of Goldman et al. (2009) on the section closest to our empirical strategy. Goldman et al. (2009) also exploit the close presidential election in 2000 and the partisanship of the board members. Other papers focusing on this election include Knight (2006) and Snowberg, Wolfers, and Zitzewitz (2007). While this empirical strategy is convincing in their context, it would not be helpful in our case, since most political appointees are not even perceived as candidates at the time of presidential elections. 5 further interesting results: Corporate announcement-effects are more pronounced for companies connected to the Democratic party and there are no positive abnormal returns for comparable board nominations of not politically connected candidates to the same company.
An important and growing literature assesses the value of political connections more generally, mainly in countries with weak institutions. In a seminal paper, Fisman (2001) demonstrates that political connections to the Suharto family were very valuable during Indonesian President Suharto’s reign. For identification, he exploits negative news about the health of the elderly President and its effect on Indonesian stock returns. Similarly, Johnson and Mitton (2003) establish that connections to Malaysia’s Prime Minister Mahathir paid out in the aftermath of the Asian financial crisis. Ferguson and Voth (2008) show that firms with close links to the National Socialist German Workers’ Party enjoyed strong, positive abnormal returns during Hitler’s accession to power in 1932-1933. For Thailand, Bunkanwanicha and Wiwattanakantang (2009) find not only that higher wealth and dependence on regulated industries make business leaders more likely to run for public office, but that their firms gain in market value during their tenure. Finally, in another seminal paper, Faccio (2006) documents that corporate political connections are widespread in a large cross- section of 47 countries. These connections can add to firm value, even though this holds true only for countries with weak institutions, when large shareholders or top executives get elected into a high political position.6
There is empirical evidence for different channels through which political connections are valuable for firms in developing countries. Politically connected firms enjoy preferential access to finance, government bail-out or profit from regularity changes.7 For the United States, Goldman, Rocholl, and So (2010) are the first to provide evidence for a specific channel of political connections. Their study shows that firms with former politicians on the board of directors enjoy higher growth in procurement contracts after a change in the political landscape. Interestingly, these networks through former politicians are apparently more important for procurement than firms’ campaign contributions.8, 9
6 Analyzing the effect of geographical ties, i.e., firms headquartered in birth or home towns of politicians, Faccio and Parsley (2009) confirm that political connections matter more in countries with weaker institutions. However, Roberts (1990) found geographical ties to matter even in the United States. 7 See Khwaja and Mian (2005), Faccio, Masulis and McConnell (2006), Leuz and Oberholzer-Gee (2006), Claessens, Feijen, and Laeven (2008) and Bunkanwanicha and Wiwattanakantang (2009) for this evidence. 8 For the literature on political connections established through firms’ campaign contributions to parties or specific politicians in the United States, see among others Roberts (1990), Jayachandran (2006), Cooper, Gulen and Ovtchinnikov (2010) and Huber and Kirchler (2012). 9 Bertrand, Kramarz, Schoar and Thesmar (2007) provide evidence that political connections can also entail higher labor costs for connected firms in France. 6 Lobbying is often seen as another way through which firms seek to influence government decisions.10 Two innovative recent studies suggest that corporate lobbying in the United States indeed adds to firm value. Borisov, Goldman and Gupta (2011) exploit a top lobbyist’s corruption scandal and consequent heightened public scrutiny of lobbying and show stronger negative market reactions to this news for firms with higher lobbying expenditures. Blanes i Vidal, Draca and Fons-Rosen (2012) analyze the lobbying effect of former government officials on lobbying firm’s revenue and find that personal connections to U.S. Senators are of substantial value to these firms. In contrast to these studies, the focus of our paper is on personal ties through corporate affiliations and not on lobbying. Furthermore, lobbying firms cannot enter our event study, since they are not listed on the U.S. stock market.
Finally, our paper is related to the literature on the reaction of defense stocks to Department of Defense decisions.11 Rogerson (1989) estimates the value of contract awards of major weapon systems. There is often competition in the development phase, but later one company typically becomes the sole supplier and earns economic profits (see also Lichtenberg, 1989; Gansler, 2011). Analyzing stock market reactions to the announcements of twelve aerospace contract award decisions, Rogerson (1989) indeed finds evidence for expected profits. In another event study, Karpoff, Lee and Vendrzyk (1999) demonstrate that firms responsible for defense procurement fraud are penalized by financial markets, but this penalty is smaller for established contractors. Finally, Bechtel and Schneider (2010) document that European defense stocks rise due to EU summit decisions that strengthen Europe’s military capacity. Although these papers are loosely related to our paper, our study is not primarily or exclusively about the defense sector, but about the value of political connections for corporations more generally. The Department of Defense is also important for many firms beyond the defense sector.12
The remainder of the paper is organized as follows. Section 2 discusses why and how (former) political appointees could preferentially treat their (former) employers. Section 3 provides a description of the data and outline of the empirical strategy. Section 4 presents the empirical results and Section 5 offers concluding remarks.
10 For an excellent overview of in-house lobbying and lobbying for other firms in the United States, see Bertrand, Bombardini and Trebbi (2011). 11 For excellent surveys on the economics of defense procurement and the defense industry, see Rogerson (1994), Kovacic and Smallwood (1994) and Gansler (2011). A major question in this literature is how innovation can be secured and costs controlled in a heavily regulated sector, where the government is often the sole purchaser of goods. 12 This fact is vividly exemplified by a Senate rule requiring political appointees to divest from bonds and stocks in over 48,000 companies with contracts with the Department of Defense (see Washington Post, “Senate panel ban seen as double standard”, December 19, 2010). 7 2. Background
The revolving door between industry and government entails potential conflicts of interest. Political appointees can both directly and indirectly act in favor of their former employers and they have various motives to do so. In a similar vein, former government officials have different means to bring value to firms hiring them. But there are numerous institutional safeguards at all levels preventing conflicts of interest. These arguments will be outlined in more detail in the remainder of this section.
The potential of direct preferential treatment is probably most obvious in procurement. Political appointees are involved in decisions affecting their former employers at all stages of the procurement process. When Gerald A. Cann, General Dynamics Corp.’s former chief of undersea warfare, became Assistant Secretary of the Navy (Research, Development, and Acquisition), he had to select among three standoff anti-submarine weapons, one of which he developed at his former employer. “It is a little wrong to be involved with a weapon system [in industry] and then be put in charge of deciding [at the Department of Defense] what system will replace the one that’s performing the mission now,” said Sen. Al Gore.13 When James G. Roche, a former Northrop Grumman Corp. executive, served as Secretary of the Air Force, he was the source selection authority in the F-35 competition and his former employer a main partner of one of the bidders. This team ultimately won and was expected “[…] to dominate warplane construction worldwide for the first half of this century.”14
Direct preferential treatment is also possible in case of regulation and oversight and supervision of mergers and acquisitions. As Assistant Secretary of the Air Force (Installations and Environment) Terry A. Yonkers was in charge of drafting environmental regulations of the Air Force, affecting his former employer Arcadis NV.15 John M. Deutch, Under Secretary of Defense (Acquisition, Technology, and Logistics), followed an initiative of Martin Marietta’s head and approved a new rule allowing the Department of Defense to partly cover merger costs. Later, as Deputy Secretary of Defense, he gave the nod to the merger between Lockheed Corp. and Martin Marietta Corp.16 This merger eventually cost the Department of
13 Cited in Aerospace Daily, “Navy official denies conflict of interest with Tomahawk variant,” June 10, 1991. 14 Washington Post, “Decision on Joint Strike Fighter; Lockheed Martin and Boeing competing for huge Pentagon jet contract,” October 21, 2001. 15 Washington Times, “Conflicts aplenty for Obama nominees; yet another pick undercuts new influence policies,” November 12, 2009. 16 Associated Press, “Pentagon endorses merger of Lockheed and Martin Marietta,” December 29, 1994. 8 Defense more than USD 1 billion.17 Did we mention that he was formerly a member of the advisory board of Martin Marietta Corp.?
Political appointees can also influence the fate of their former employers in less direct ways. In particular, strategic planning can have important long-lasting implications on the Pentagon budget and prospective contractors. Thomas E. White pushed for the privatization of army base utilities, both as an Enron Corp. executive and later as the Secretary of the Army.18 At the time of the nomination of the Northrop Grumman executive Donald C. Winter as Secretary of the Navy, a debate over the future of Navy shipbuilding was ongoing with Northrop Grumman Corp. being one of the key players.19
Firms also potentially profit from better access to decision makers and information, if one of their members joins the Pentagon. Sen. Claire McCaskill worried that “[…] there is maybe too much shortcutting of picking up the phone and dialing into the Pentagon from a defense contract agency because of former friends that are there and vice versa?”20 Indeed, Thomas E. White acknowledged such contacts and attempted contacts with former Enron colleagues on various occasions and Donald C. Winter met Northrop Grumman’s CEO for a private luncheon (as he did with some other defense executives).21
Political appointees have not only opportunities but also incentives to favor their former employers. They may expect to return to the company or at least want to keep this option alive. One prominent returnee is the Deputy Secretary of Defense and Secretary of Defense William J. Perry, who re-joined the board of directors of United Technologies Corp. after his stint at the Department of Defense. Further, political appointees may simply wish to return previous favors, such as generous help in the nomination process or lavish retirement bonuses. Enron supported Thomas E. White’s nomination with a letter of recommendation by the
17 Washingtonian, “Mission impossible; John Deutch is quick, smart, and tough -- and a poster boy for the military-industrial-academic complex; with the central intelligence agency in shambles, does he have what it takes to save it?” November 1995. 18 Associated Press, “Military utilities may go private,” June 19, 2001. New York Times, “Enron’s collapse: The Secretary; army chief being challenged on ties to company,” January 25, 2002. Washington Post, “Pentagon official from Enron in hot seat; questions raised about Army Secretary White and possible conflicts of interest,” January 27, 2002. 19 Defense Daily, “Northrop Grumman executive’s bid for SECNAV raises conflict of interest fears,” September 23, 2005. 20 Cited in Federal News Service, “Hearing of the Senate Armed Services Committee confirmation hearing on expected nominations by President-elect Barack Obama,” January 15, 2009. 21 Washington Post, “Army Secretary defends support from Enron,” April 5, 2002. Defense Daily, “SECNAV Winter wins ethics waivers for work on Northrop Grumman issues,” March 24, 2006. 9 Chairman and by rides in the company’s jet and Donald C. Winter received several million dollars on his way out of the door of Northrop Grumman.22
There are various reasons why firms can benefit from hiring former government employees (see also Agrawal and Knoeber, 2001, Goldman et al., 2009, 2010). Former political appointees are valuable because of their connections, access and clout.23 According to Washington insiders, schmoozing government officials at all stages of the procurement process is essential for landing contracts.24 Probably, nobody is better qualified for this job than former political appointees. Furthermore, former political appointees have precious knowledge and information. First, they have considerable institutional insights and can instruct companies in the way the Pentagon works.25 Second, they have inside information about upcoming decisions. According to retired Admiral Robert Inman, former Secretary of Defense nominee and long-time SAIC board member, “[t]hese people bring with them years of experience and can help the company identify what’s ahead so they can better anticipate and prepare for the future.”26 Third, during their term, political appointees gain special insights into competitors of their future employers.27
A favorable institutional environment – like a vigilant free press, independent watch dogs and congressional committees – and specific provisions are likely to prevent fraud and abuse and keep potential conflicts of interest in check in the United States. Numerous ethic regulations aim at preventing improper behavior. Prime among these are recusal requirements for political appointees in decisions affecting their former employers, demands to sever financial interests with companies doing business with the Pentagon by divesting from stock positions and by insuring pension claims, and prohibitions to lobby former colleagues during a cool-off period upon leaving the administration. Yet, despite numerous rules on the books, it is less clear to what extent they are actually enforced. While Senators usually take a tough stand during the confirmation hearings, political appointees are often successful in receiving waivers later on. For instance, in the confirmation process of the former corporate executives and service secretary nominees, Thomas E. White and Donald C. Winter, the members of the Senate
22 Washington Post, “Army Secretary defends support from Enron,” April 5, 2002. Defense Daily, “SECNAV got several million dollars from Northrop Grumman before taking job,” April 14, 2006. 23 This view was expressed for instance by the Director of of the Center for Public Integrity in Associated Press, “Half of top Clinton aides now lobbyists trying to use Washington influence,” March 30, 2003. 24 Government Executive, “Schmooze or lose: Contractors rely on personal connections and insider information to win contracts,” December 1, 2005. 25 Washington Post, “Recruiting Uncle Sam; the military uses a revolving door to defense jobs,” February 19, 2004. 26 San Diego Union-Tribune, “SAIC uses big bucks, makes powerful friends,” November 12, 1995. 27 Washington Post, “A revolving door? So what?” July 2, 2003. 10 Armed Services Committee took ethic issues very seriously.28 However, Donald C. Winter won waivers on the rule requiring nominees to buy pension insurance and to participate in decisions regarding his former employer.29 Thomas E. White failed to divest from his Enron financial positions in time and to notify the Congress.30 On the very same day that President Obama tightened recusal requirements, William J. Lynn, III, received a waiver from this rule. President spokesman defended this move: “Even the toughest rules require reasonable exceptions.”31 Enforcement seems to be especially sloppy when it comes down to post- employment restrictions (Mackenzie, 1987; Rasor and Bauman, 2007).
Given these considerations, it is an empirical question, whether firms indeed profit from the revolving door. Therefore, we now turn to our empirical analysis.
3. Data and Empirical Strategy
We gather data for all political appointees in positions of the U.S. Department of Defense requiring Senate confirmation. For political appointments, we consider announcements for the six administrations from Bush Sr. to Obama. Similarly, for corporate appointments, we include all announcements regarding appointees, who served in these administrations.
We identify the persons holding these positions on the basis of Department of Defense (2004), the Plum Book (Government Printing Office, various years), the THOMAS database of the Library of Congress and other documents. In all, we have observations for 527 person and position combinations or 383 persons. For these appointees, we reconstruct their affiliations and employment history in the two years before and after their government service and the exact dates of announcements of political and corporate appointments. In particular, we are interested in connections to listed firms for our event study. We consider only official firm connections, namely corporate executives, members of the board of directors and advisory boards and employees.
We perform an extensive full-text search via LexisNexis to collect this information. Thereby, we mainly draw on newswires, press releases, transcripts of press conferences and news papers for the announcement dates. Overall, we rely on over 7,000 individual documents (see
28 FDCH Political Transcripts, “U.S. Senator John Warner (R-VA) holds hearing on Department of Defense nominations,” May 10, 2001. Federal News Service, “Hearing of the Senate Armed Services Committee,” October 6, 2005. 29 Defense Daily, “SASC changes ethics rules for top Pentagon officials,” September 28, 2005. Defense Daily, “SECNAV Winter wins ethics waivers for work on Northrop Grumman issues,” March 24, 2006. 30 Washington Post, “Army Secretary defends support from Enron,” April 5, 2002. 31 Cited in Associated Press, “Fact check: Exceptions made to anti-lobbyist rule,” January 22, 2009. 11 Table A1 in Appendix). In addition to these sources, we use the SEC-filings and Marquis Who’s Who for affiliations and employment history. The SEC-filings proved to be especially important for the identification of board memberships.32
We need four types of daily stock market data for our analysis, whereby we rely in each case on Datastream. First, we gather daily stock prices for politically connected individual firms. Second, we employ national stock market indices for our market model. Thereby, we chose the S&P 500 as our market index for the United States stock market.33 Third, we will later augment the market model by an industry index. Thereby, we use the ICB industry classification to identify firms’ main source of revenue and download the corresponding industry index from Datastream. Finally, we rely on Datastream for daily stock market data on market capitalization and trading volume.
In order to isolate stock market reactions to announcements of political and corporate appointments, we control for market co-movement and exclude potentially confounded events. We purge stock returns from market-wide stock market developments using a standard market model (MacKinlay, 1997). Thereby, we first regress the returns of individual stocks on the returns of the relevant market index for an estimation window prior to the announcement day :
Ri,t i i Rm,t i,t , over t = (1) where Ri,t and Rm,t stand for daily returns of individual stock i and market index m, respectively, and t for trading days. Based on the resulting parameter estimates, we compute the daily abnormal return for the announcement day and the next day, and in the following way:
ˆ ARi,t Ri,t ˆi i Rm,t . (2)
We aggregate the abnormal returns in two dimensions. First, we estimate average abnormal returns across observations and corresponding standard errors. We report two different standard errors. One set of standard errors is computed using the residual variance from the market model of the estimation window. A second set of standard errors is based on the cross-
32 In LexisNexis, the SEC-filings are available in electronic form for around 4000 U.S. firms since 1987 and for all listed U.S. firms since 1991. Furthermore, news paper and newswire coverage in LexisNexis is much more limited before the late 1980s. For these reasons, our analysis starts with the Bush Sr. administration. 33 Non-U.S. listed firms represent about 10% of our observations for political appointments and private sector appointments, respectively. In these cases, we use the DAX30 for Germany, the CAC40 for France, Vienna Stock Exchange for Austria, the Amsterdam Stock Exchange All Shares for the Netherlands, the FTSE100 for the United Kingdom, the OMX Stockholm Benchmark for Sweden, the Singapore Straits Times Index for Singapore, the SMI for Switzerland, the Tel Aviv Stock Exchange for Israel and the S&P/TSX for Canada. 12 section variance of abnormal returns. The latter method accounts for variance inflation on the announcement day. Second, we report both one-day and two-day cumulative abnormal returns.
The event date is the day of the announcement in case the announcement was on a trading day before markets closed or the next trading day otherwise. Because it was not possible to determine the exact time of the announcement in all cases, we also estimate the two-day cumulative returns. In this way, we make sure to capture the stock market reactions to all announcements.
In a final, but important step, we want to make sure that our abnormal returns are not driven by confounding factors. We exclude observations from the analysis, if other important firm- news identified in a full-text search such as earnings and dividend announcements, share repurchases and M&A activity were also announced on the announcement day. If such firm- news is released on the day after the announcement day, observations remain in the sample, but the two-day abnormal return is set equal to the (unconfounded) one-day abnormal return. We also drop illiquid stocks.34 Eliminating confounded and illiquid observations reduces our sample for political appointments from 95 to 85 and for corporate appointments from 109 to 85 observations. The higher number of confounded corporate announcements stems from the fact that board members are often announced during annual share holder meetings with the concurrent release of earnings and dividends. Online Appendix 1 provides detailed information on the all political and corporate announcements and their firm connections and Online Appendix 2 lists all positions at the Department of Defense considered for this study.
4. Empirical Results for Political Appointments
4.1. Baseline Results and Robustness
We start the discussion of our results by giving a picture of the revolving door of the Pentagon. Table 1 depicts the affiliations of all the appointees in our sample both before and after their current position at the Department of Defense. Two aspects are worth noting: First, the largest part of appointees comes from and remains in the Department of Defense. One explanation for this is that some appointees get nominated for other positions within the department, serve in an acting position or get promoted. Another reason is that career
34 We compute a measure for daily liquidity based on Amihud (2002) and equation (1) in Karolyi et al. (2012) and drop the bottom 2 percent of the distribution for a time window of +/- 20 days around political and corporate appointments. This price impact measure relates firm i’s absolute return to its trading volume on a given day. 13 bureaucrats are sometimes appointed to these top positions. This is also reflected by the large share of appointees whose ex ante and ex post affiliation is both the Department of Defense.35 Second, a substantial share of appointees comes from or goes to the private sector. The private sector accounts for nearly 21% of all affiliations held by appointees prior to their current position. Around 28% of appointees move to the industry after leaving their current position at the Department of Defense. Note that in case of nearly 16% of observations, there is no ex post affiliation for one out of three reasons. Appointees are marked as not applicable, if they have been nominated, but never took office, if they passed away during their tenure or if they are still in office.
We now turn to stock market reactions to political appointments. Panel A of Table 2 presents the results for the main sample of 85 observations. Firm ties to these political appointees are well established, with an average tenure at firms of around seven and a half years.36 We find positive abnormal returns of 0.82% for the announcement day and of 0.84% for a two-day window including the announcement day and the next trading day. Both estimates are statistically significant at conventional levels. One might be concerned that these results are driven by either important or noisier observations or by industry-wide stock market movements. Another potential concern is that an omitted variable could induce the positive correlation between stock returns and political appointments. To address these concerns, we report four robustness tests.
First, Panel B of Table 2 exhibits the average abnormal returns for a trimmed sample, excluding the top and bottom 5% of the abnormal return distribution during the event windows. As can be seen, the point estimates are smaller, but statistically significant at least at the 95% level.
Second, Panel C of Table 2 presents average scaled abnormal returns, i.e., abnormal returns divided by the standard deviation of estimation period residuals. Thereby, abnormal returns of noisier observations receive less weight than more reliable ones. According to Kolari and Pynnönen (2010), scaled abnormal returns are a preferred signal detection device. At the same time, it is important to note that the point estimates are not informative about economic magnitude. The results remain statistically significant at conventional levels.
35 Also included in this category is acting Army Secretary John W. Shannon, who was caught shoplifting a women’s blouse and skirt at an Army post exchange but nevertheless got an USD 85,000-a-year consulting job at the Department of Defense (see, e.g., Washington Post, “Shannon checking Pentagon’s inventory,” December 8, 1993). 36 Tenure does not seem to explain the variation in abnormal returns reported later on (see Online Appendix 3). 14 Third, we control for market- and industry-wide stock market movements in Panel D of Table 2. Political appointees with an industry background might be expected to be more responsive to industry interests in general, without favoring a particular firm. For instance, the Wall Street Journal heralded the likely appointment of General Dynamic Corp. top executive Gordon England to Deputy Secretary of Defense as “good news for the defense industry.”37 Therefore, we augment the market model by an industry index, based on ICB’s industries in Datastream. If we then found no positive abnormal returns, this would be consistent with industry-wide effects. The interpretation and implications of industry-wide effects are radically different from firm-specific effects. Only the latter can be interpreted in terms of conflicts of interest. The estimates are slightly smaller, but still positive and statistically significant.
Fourth, we conduct a placebo test in the spirit of Dube, Kaplan and Naidu (2011). We shift all political appointments backward by 30, 50, 70, 90, 110, 130 and 150 trading days and, then, generate for these placebo appointments the abnormal and cumulative abnormal returns as described in section 3. Note that shifting events forwards would be problematic in our context, since the estimation window for the placebo events would be confounded by the political appointment.38 Furthermore, the pooling of (up to seven) placebo appointments per observation has two advantages. First, we are conservative in the sense that the null hypothesis of no stock market reaction is more likely to be rejected. Second, instead of controlling for other important firm-news like earnings or dividend announcements, the high number of placebo events assures that any potential positive and negative confounding factors are likely to be cancelled out. The placebo estimates reported in Panel E of Table 2 are very small and not significantly different from zero for the one- or two-day window. This robustness check confirms our main finding that political appointments - and not unobserved firm-characteristics potentially correlated with political announcements - lead to positive abnormal returns.
Figure 1 displays kernel densities for the one-day abnormal returns for political appointments and for placebo appointments. While both distributions peak around zero, the return distribution for political appointments is flatter and modestly shifted to the right. This visual impression is also confirmed by a Kolmogorov-Smirnoff test, which rejects the equality of these two distributions at the 1 percent significance level.
37 Wall Street Journal cited in The Frontrunner, “England expected to be nominated to fill Wolfowitz's post,” March 30, 2005 38 To be consistent with the baseline results, we drop placebo observations that are illiquid or fall within the 30 days before a political appointment. 15 One might conjecture that the positive abnormal returns are rather associated with the departure of the (leaving) appointee from the firm than with her political appointment. Although this is theoretically possible, we deem it very implausible. Firing costs in the United States are low by international standards and anecdotal evidence suggests that it is much more likely that skilled people rather than “lemons” leave the firm for government. Top-positions at the Department of Defense are usually popular and subject to considerable prestige and competition. This should rather depress, not increase firms’ stock prices. Furthermore, the successor is not made public on the same day as the announcement of the political appointment. In the following, we give two additional pieces of evidence that are inconsistent with this alternative interpretation of the abnormal returns.
First, we consider stock market reactions to news about withdrawals or deaths of political appointees. In such instances, strong expectations aroused by the nomination regarding the pending establishment of political connections are disappointed.39 If the political connection is perceived as valuable, stock prices will be expected to fall on such negative news. It is quite rare that political appointees withdraw or are forced to withdraw their nomination due to political resistance in the Senate and it’s even rarer that political appointees decease during their confirmation process or tenure. This is also reflected in our dataset. Still, there are some cases like for instance the designated Secretary of the Navy, Colin R. McMillan, who died before taking office,40 or the nomination of John G. Tower as the new Secretary of Defense on December 16, 1988. His nomination by President Bush Sr. was controversial. Both political parties had concerns about his intimate ties with the defense industry and his health.41 There were also allegations that he had been a womanizer with a drinking problem.42 His confirmation was rejected by the Senate with 53-47 votes – the first rejection of the confirmation of a cabinet member in 30 years.43 The following results have to be interpreted with some caution due to the small number of (unconfounded) observations. Based on 13 observations, we find negative abnormal returns of -0.52% for the announcement day and of -0.93% for a two-day window (see Table 3, Panel B). Even though these estimates are not
39 Note that some of these withdrawals are largely expected, while others are surprising. 40 Associated Press, “Colin McMillan, Nominee for Navy Secretary, Dies at Age 67,” July 24, 2003. 41 Washington Post, “FBI Undertakes Exhaustive Check on Tower; Probe of Former Senator for Defense Post May be the Most Thorough Done by Agency,” December 11, 1988. Associated Press, “Tower in Fair Condition After Polyp Surgery,” January 6, 1989. 42 Aerospace Daily, “Tower Nomination Poses Problems for Senate Committee,” February 1, 1989. Associated Press, “Panel Vote on Tower Expected Next Week Despite New Allegations,” February 3, 1989. 43 New York Times, “Senate Rejects Tower, 53-47; First Cabinet Veto since `59; Bush Confers on New Choice,” March 10, 1989. 16 statistically significant, it is reassuring that the effect goes in the right direction and is of a similar magnitude.
Second, we assess whether political appointments also lead to positive abnormal returns in cases where the appointee is no longer officially associated with the firm? This implies that financial markets are able to price in the consequences of her departure of the firm and later on (within two years) the news about the political appointment. Gordon R. England constitutes a good example in this regard. His tenure with General Dynamics Corp. has lasted for nearly two decades, when he retired as Executive Vice President and his successor was announced a few weeks before his nomination as Secretary of the Navy. Panel C of Table 3 reports the announcement effects with and without “active” firm connections. For the later group, we find – based on 19 observations with an average tenure of nine and a half years – positive and significant abnormal returns of 0.93% for the announcement day. While abnormal returns are not significant for a two-day window, the announcement effects for both groups are similar in magnitude.
4.2. Further Results for Subsamples
The overall effects in Table 2 may hide informative heterogeneity across subgroups. Therefore, Table 4 presents the results for four sample splits, whereby Panel A reproduces the baseline result from Table 2 for comparability. First, according to Panel B stock markets react more strongly to the political appointment of former board members than to other candidates.
Second, we find larger effects for political appointments to top-position at the Department of Defense. To split samples, we use pay-grades of the executive schedule and code as a “Top pay-grades” the two highest pay-grades. This includes the Secretary of Defense, his deputy, the service secretaries, and the Under Secretary of Defense (Acquisition, Technology, and Logistics). “Other high pay-grades” includes the third and fourth highest level of pay-grades, i.e., all other Senate confirmed appointees. The results suggest that investors expect political connections to top officials at the Pentagon to be more valuable.
Third, stock markets react more strongly to political appointments by Democratic than Republican administrations on the announcement day. This is consistent with the view expressed by Goldman et al. (2009) that there is a limited supply of political connections, which is especially limited in Democratic administrations. As can be seen from Table 4, there are fewer events related to Democrats.
Fourth, not all announcements were equally surprising. For example, Secretary of Defense Richard Cheney was probed in a press conference in 1989 about rumors about his choice of 17 service secretaries more than a week before the official announcement. He virtually confirmed these rumors by saying that they were based on “good sources”.44 We distinguish between two different levels of anticipation. We code as “Higher anticipation” all events for which the – later appointed – person but nobody else was rumored to be the candidate for this particular position. In contrast to that, “Lower anticipation” captures all other events. The latter announcements entail a higher surprise-content and, hence, are expected to lead to stronger stock market reactions. This is indeed what we find. Point estimates for largely unexpected political appointments are substantially larger and amount to 1.20% and 1.40% for the one- and two-day event window.
Figure 2 compares the kernel densities for the one-day abnormal returns for political appointments of “lower anticipation” with the placebo appointments. The distribution for more surprising political appointments is peaking at a positive abnormal return of around 1 percent and is slightly skewed to the right. The Kolmogorov-Smirnoff test rejects the equality of these two distributions at the 1 percent significance level.
In Table 5, we look again at the subgroups, but this time in a multivariate setting. For both event-windows, top-pay grades and the extent to which announcements are anticipated play a role. There is also some evidence that being nominated by the Democratic party has some significant explanatory power on the announcement day, but having been a board member does not come out significantly, conditional on the other characteristics. Given the relatively small number of observations, these results need to be interpreted with some caution.45
All our results so far refer to one- and two-day average cumulative abnormal returns. We expect financial markets to immediately price in important firm news. The motivation for two-day average cumulative abnormal returns mainly stems from the fact that it is sometimes uncertain, whether the appointment became public before or after trading closed on a given day. Over longer time horizons, the identifying assumption that markets only react to the announcements of political appointments and not to other news becomes more tenuous. Nevertheless, in Figure 3, we examine the temporal pattern of average cumulative abnormal returns for the four trading weeks prior to and after the announcement day, whereby the shaded area represents the two-day event window. We deal with confounding factors as described in section 3 and use all 85 observations of our baseline sample as well as the 39 less anticipated events. In order to facilitate comparability with the results presented in Tables 2
44 Washington Post, “Cheney Believes Gorbachev Sincere; But Defense Chief Says Cutting West's Forces Would Be Premature,” April 5, 1989. 45 Online Appendix 3 presents further results in a multivariate setting. In short, augmenting the parsimonious model with firm tenure, firm size or war times does not add further insights into the cross-sectional variation. 18 and 4, we normalize the average cumulative abnormal returns so that they are zero on the day before the announcement date.
Although there is some variation over time, Figure 3 shows two important findings. First, cumulative abnormal returns are on average around one and two percentage points higher in the period after the event compared to the period before the event for the baseline sample and the sample of less anticipated events, respectively. Second, our one- and two-day average cumulative abnormal returns are comparable to longer-term effects. The remaining variation in the time-series could be explained in the following ways. There remains some uncertainty about the exact timing of other important firm news and, hence, some of these events may still confound the estimates. Further, we obviously cannot reconstruct the full information set of investors. Finally, some of the price movements may be related to political appointments. On the one hand, rumors regarding pending nominations may be reflected in the price movements of the baseline sample before the event date. For example, sources close to the transition team were cited on day -18 that Paul D. Wolfowitz’s nomination as Deputy Secretary of Defense was likely.46 On the other hand, price movements after the event date may reflect uncertainties in the confirmation process. For example, William J. Lynn’s nomination met resistance in the Senate on day +10 and has been temporarily stalled. 47
5. Empirical Results for Corporate Appointments
We now turn to the results of private sector appointments of (former) political appointees and look at the other side of the revolving door. In Panel A of Table 6, we report the baseline results. We also find positive abnormal returns for the one- and two-day event window between 0.79% and 1.05%, even though only significant at the 10 percent level. To compare the magnitudes of abnormal returns for corporate appointments with the respective magnitudes for political appointments, it is worth stressing that virtually all private sector appointments are unanticipated. Thus, the abnormal returns for comparative purposes are in Table 4, Panel E, “Lower anticipation” amounting to 1.20% and 1.40%, respectively. Generally speaking, our results for corporate appointments are slightly lower and less statistically significant than the results for political appointments. Panel B to Panel E presents the same robustness checks as reported in Table 2. The results for corporate appointments are largely similar to the baseline results. One exception is the results for the trimmed sample,
46 United Press International, “Wolfowitz Tipped for Pentagon’s No. 2,” January 10, 2001. 47 Associated Press Financial Wire, “Pentagon Nomination Stalls Amid Lobbying Concerns,” January 23, 2009. Associated Press, “McCain Disappointed by Ethics Waiver,” January 23, 2009. 19 which fall below conventional levels of statistical significance for one method of calculating the standard errors. This suggests that the results for corporate appointments rest to a certain degree on outlier observations.
Figure 4 displays kernel densities for the one-day abnormal returns for corporate appointments of former political appointees and for placebo appointments. The return distribution for corporate appointments is flatter and the right site of the distribution is shifted outward. The Kolmogorov-Smirnoff test rejects the equality of these two distributions at the 5 percent significance level.
Table 7 deals with the results for the different subgroups. Once more, Panel A of Table 7 replicates the baseline results for private sector appointments. According to Panel B of Table 7, we find larger positive abnormal returns for corporate board appointments than for other corporate appointments. The two-day event window abnormal returns for board members can be directly compared to the results of Goldman et al. (2009). They estimate an abnormal return of 0.69% as compared to 1.29% in our case. Thus, the estimates are in the same ballpark.
We find no evidence that corporate appointments of former top officials have larger effects. Consistent with our results for political appointments and with results from Goldman et al. (2009), we find stronger effects for people that served in Democratic administrations.48
6. Conclusions
All our results point in the same direction. Investors expect firms to profit from their political connections to appointees. In particular, we find positive abnormal average returns of about between 0.82% and 0.84% for the one- and two-day event window in case of political appointments. These main results are insensitive to a number of robustness checks. Furthermore, these results for the overall sample are a lower bound of the true value of firm connection, because some of the appointments are largely anticipated. Restricting the sample to largely unexpected events, the average abnormal returns amount to between 1.20% and 1.40%. Similarly, in case of corporate appointments there are also positive, but smaller and less robust, positive abnormal returns between 0.79% and 1.05% for the one- and two-day event window.
48 For the sake of brevity and lack of robust results, we do not report the multivariate analysis for corporate appointments in the main text. There is some weak evidence that hiring a former political appointee is better news for smaller firms (see Online Appendix 4). 20 It is important to keep in mind that these stock market reactions reflect expectations of investors. Thus, this is obviously no proof for any wrong-doing of individual political appointees during their tenure for two reasons. First, expectations need not to realize in individual cases even if they are accurate on average. Second, our empirical strategy does not allow us to pin down one particular reason for why firms are expected to profit. However, it is hard to think of other reasons for higher expected returns than conflicts of interest. In the best case, conflicts of interest distort procurement contract award competitions, because some firms have informational advantages. In the worst case, decisions are tilted towards specific firms and against the interest of taxpayers and the armed forces.
We find evidence consistent with conflicts of interest despite a generally strong institutional environment in the United States with checks and balances and a free media as well as specific institutional safeguards. However, our results do not necessarily suggest that the benefits of more regulation outweigh the costs. According to Gansler (2011), the tight net of regulation currently in place already entails enormous compliance costs for both the Department of Defense and the industry. Furthermore, our results do not allow for an overall assessment of the costs and benefits of political appointments from the private sector. Although our results highlight one important cost, they are silent about potential benefits.
In our view, an important area for future research is to identify the channels through which firms profit from their connections to political appointees in office. Given the enormous volume of procurement contracts in the Department of Defense, one might expect preferential treatment in procurement decisions to be one important channel. A natural starting point would, therefore, be to look at the effect of political appointments on the volume or growth of procurement contracts (analogous to the study of Goldman et al., 2009, for corporate appointments). Yet, as we outlined above, other channels are likely to be important as well. Therefore, it might be instructive to investigate an agency with mainly regulatory competencies.
21 References:
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Cooper, Michael, Huseyin Gulen, and Alexei Ovtchinnikov (2010), “Corporate political contributions and stock returns,” Journal of Finance, Vol. 65, pp. 687-724. Department of Defense (2004), “Department of Defense key officials (1947-2004),” Historical Office, Office of the Secretary of Defense. Dube, Arindrajit, Ethan Kaplan and Suresh Naidu (2011), “Coups, corporations, and classified information,” Quarterly Journal of Economics, Vol. 126, pp. 1375-1409. Faccio, Mara (2006), “Polically connected firms,” American Economic Review, Vol. 96, pp. 369-386. Faccio, Mara and David Parsley (2009), “Sudden deaths: Taking stock of geographic ties,” Journal of Financial and Quantitative Analysis, Vol. 44, pp. 683-718. Faccio, Mara, Ronald Masulis, and John McConnell (2006), “Political connections and corporate bailouts,” Journal of Finance, Vol. 61, pp. 2597-2635. Ferguson, Thomas and Hans-Joachim Voth (2008), “Betting on Hitler – The value of political connections in Nazi Germany,” Quarterly Journal of Economics, Vol. 123, pp. 101-137. Fisman, Raymond (2001), “Estimating the value of political connections,” American Economic Review, Vol. 91, pp. 1095-1102. 22 Fisman, David, Ray Fisman, Julia Galef, and Rakesh Khurana (2006), “Estimating the value of connections to Vice-president Cheney,” mimeo, Columbia University. Gansler, Jacques (2011), “Democracy’s arsenal: Creating a twenty-first-century defense industry,” MIT Press. Goldman, Eitan, Jörg Rocholl, and Jongsil So (2009), “Do politically connected boards affect firm value?” Review of Financial Studies, Vol. 22, pp. 2332-2360. Goldman, Eitan, Jörg Rocholl, and Jongsil So (2010), “Political connections and the allocation of procurement contracts,” mimeo, Indiana University. Government Printing Office (various years), “United States government policy and supporting positions (Plum Book),” Government Printing Office. Huber, John and Nolan McCarty (2004), “Bureaucratic Capacity, Delegation, and Political Reform,” American Political Science Review, Vol. 98, pp. 481-494. Huber, Jürgen and Michael Kirchler (2012), “Corporate campaign contributions and abnormal stock returns after presidential elections,” Public Choice, forthcoming. Jayachandran, Seema (2006), “The Jeffords effect,” Journal of Law and Economics, Vol. 49, pp. 397-425. Johnson, Simon and Todd Mitton (2003), “Cronyism and capital controls: Evidence from Malaysia,” Journal of Financial Economics, Vol. 67, pp. 351-382. Karolyi, Andrew, Kuan-Hui Lee and Mathijs van Djik (2012), “Understanding commonality in liquidity around the world,” Journal of Financial Economics, Vol. 105, pp. 82-112. Karpoff, Jonathan, Scott Lee and Valaria Vendrzyk (1999), “Defense procurement fraud, penalties, and contractor influence,” Journal of Political Economy, Vol. 107, pp. 809-842. Knight, Brian (2006), “Are policy platforms capitalized into equity prices? Evidence from the Bush/Gore 2000 Presidential election,” Journal of Public Economics, Vol. 90, pp. 751- 773. Khwaja, Asif and Atif Mian (2005), “Do lenders favor politically connected firms? Rent provision in an emerging financial market,” Quarterly Journal of Economics, Vol. 120, pp. 1371-1411. Kovacic, William and Dennis Smallwood (1994), “Competition policy, rivalvries, and defense industry consolidation,” Journal of Economic Perspectives, Vol. 8, pp. 91-110. Kolari, James and Seppo Pynnönen (2010), “Event study testing with cross-sectional correlation of abnormal returns,” Review of Financial Studies, Vol. 23, pp. 3996-4025. Leuz, Christian and Felix Oberholzer-Gee (2006), “Political relationships, global financing, and corporate transparency: Evidence from Indonesia,” Journal of Financial Economics, Vol. 81, pp. 411-439. Lewis, David (2008), “The politics of Presidential appointments: Political control and bureaucratic performance,” Princeton University Press. Lichtenberg, Frank (1989), “How elastic is the government’s demand for weapons?” Journal of Public Economics, Vol. 40, pp. 57-78. Mackenzie, Calvin (1987), “’If you want to play, you’ve got to pay:’ Ethics regulation and the Presidential appointments system, 1964-1984,” pp. 77-99, in: Mackenzie, Calvin (ed.), “The in-and-outers: Presidential appointees and transient government in Washington,” John Hopkins University Press.
23 MacKinlay, Craig (1997), “Event studies in economics and finance,” Journal of Economic Literature, Vol. 35, pp. 13-39. Rasor, Dina and Robert Baumann (2007), “Betraying our troops: The destructive results of privatizing war,” Palgrave Macmillan. Roberts, Brian (1990), “A dead Senator tells no lies: Seniority and the distribution of federal benefits,” American Journal of Political Science, Vol. 34, pp. 31-58. Rogerson, William (1989), “Profit regulation of defense contractors and prizes for innovation,” Journal of Political Economy, Vol. 97, pp. 1284-1305. Rogerson, William (1994), “Economic incentives and the defense procurement process,” Journal of Economic Perspectives, Vol. 8, pp. 65-90. Silverman, Bernard (1986), “Density Estimation for Statistics and Data Analysis,” Chapman and Hall. Snowberg, Eric, Justin Wolfers, and Eric Zitzewitz (2007), “Partisan impacts on the economy: Evidence from prediction markets and close elections,” Quarterly Journal of Economics, Vol. 122, pp. 807-829.
24 Table 1. The revolving door of the Pentagon: Political appointees' affiliations before/after current position Panel A: Type of affiliations ex ante and Panel B: Most common ex ante/ex post-combinations ex post Type of affiliation Ex ante Ex post Type of affiliation ex ante Type of affiliation ex post Public sector general 10.96 7.17 Dpt. of Defense Dpt. of Defense 19.80 Dpt. of Defense 46.30 30.04 Dpt. of Defense Private sector general 7.64 U.S. Congress 9.19 0.92 Dpt. of Defense NPO, think tank, academia 4.76 NPO, think tank, academia 11.75 13.21 Dpt. of Defense Not applicable 4.33 Private sector general 13.69 17.23 Dpt. of Defense Law and consulting firms 4.16 Law and consulting firms 6.97 11.12 Private sector general Private sector general 3.63 Not known 1.14 4.74 NPO, think tank, academia Not applicable 3.49 Not applicable - 15.56 Other 52.19 Notes: All figures are in percent. The table reports affiliations of the 527 person/position-observations or 383 persons in our sample. Affiliations refer to all positions held two years prior to the announcement (ex ante) and two years after leaving the position (ex post). Multiple affiliations are possible; in this table, observations are weighted by the inverse of the number of affiliations per observation. If a person changes positions within the Dpt. of Defense, outside affiliations ex ante are recorded for the first position, outside affiliations ex post for the last position in order to avoid double counting. "Not applicable" is used for persons who were nominated only, who died while in office or incumbents.
25 Table 2. Baseline for the announcement effect of political appointments to the U.S. department of defense (“ex ante”) Number Abnormal Return Cumulative Abnormal of Obs. (%): [0] Return (%): [0, +1] Panel A: Baseline 0.82 0.84 All appointees 85 (0.27)*** (0.39)** [0.21]*** [0.31]*** Panel B: Robustness – Trimmed sample 0.68 0.58 All appointees 77 (0.26)** (0.36)** [0.14]*** [0.19]*** Panel C: Robustness – Scaled abnormal returns 0.32 0.21 All appointees 85 (0.11)*** (0.11)* [0.10]*** [0.09]** Panel D: Robustness – Market model augmented by industry index 0.69 0.71 All appointees 85 (0.27)** (0.37)* [0.20]*** [0.28]** Panel E: Robustness – Time-shifted placebos -0.02 0.09 Placebo events 563 (0.11) (0.16) [0.10] [0.14] Notes: The sample is based on political appointments to the U.S. Department of Defense in the years 1988 to 2009. Abnormal returns relate to the announcements of nominations of political appointees who were serving within the last two years as a member of board of directors or advisory board, an executive officer or an employee for a listed firm. Announcement dates and prior affiliations to listed firms are gathered on the basis of a full-text search on LexisNexis and SEC-filings. This yields 95 observations. Observations are excluded, i) if they are confounded by other important firm-news (such as earnings and dividend announcements, share repurchases and M&A activity on the announcement day), ii) if their underlying stock is illiquid or if iii) the announcement falls in the first trading week after September 11 in 2001. The resulting baseline sample consists of 85 observations. Abnormal Returns (ARs) and Cumulative Abnormal Returns (CARs) are based on a market model, whereby for example S&P 500, CAC 40 and DAX 30 is used as the measure of market returns for United States, France and Germany, respectively. Standard errors in parenthesis are calculated on the basis of the standard deviation of estimation-period residuals. Standard errors in brackets are computed using the cross- section standard deviation of ARs and CARs, respectively, and account for variance inflation at the announcement day. Panel A reports the baseline results (“ex ante”) and the remaining panels offer different robustness checks to the baseline. Panel B displays results for average ARs and CARs, where the top and bottom 5% are dropped. Panel C shows results for average scaled AR and CAR, i.e., AR and CAR divided by regression residual standard deviation of the estimation period. Here, standard errors in parenthesis are computed using the variance of scaled abnormal returns under the assumption of no-event induced variance, which is (T – p – 1)/(T – p – 3), where T and p are the length of the estimation window and the number of explanatory variables in the market model. Standard errors in brackets are again calculated using the cross- section standard deviation of scaled ARs and scaled CARs to account for variance inflation at the announcement day. Panel D augments one factor market model by including Datastream industry index for the respective company in addition to market model (10 different industries based on ICB-classification). Panel E generates for each appointee-firm observation placebo announcements dates, which are 30, 50, 70, 90, 110, 130 and 150 days prior to the true announcement date. For these placebo events ARs and CARs are computed in the same way as before and reported in this panel. ***, **, * denote statistical significance at the 1%, 5% and 10% levels, respectively.
26 Table 3. Corroborating evidence for the announcement effect of political appointments to the U.S. department of defense (“ex ante”) Number Abnormal Return Cumulative Abnormal Return of Obs. (%): [0] (%): [0, +1] Panel A: Baseline 0.82 0.84 All appointees 85 (0.27)*** (0.39)** [0.21]*** [0.31]*** Panel B: Withdrawals -0.52 -0.93 Withdrawals 13 (0.68) (0.96) [0.43] [0.69] Panel C: Status of firm connection 0.93 0.74 No active connection 19 (0.50)* (0.70) [0.36]** [0.46] 0.78 0.87 Active connection 66 (0.32)** (0.46)* [0.26]*** [0.37]** Notes: The sample is based on political appointments to the U.S. Department of Defense in the years 1988 to 2009. Abnormal returns relate to the announcements of nominations, withdrawals in the confirmation process or deaths of political appointees who were serving within the last two years as a member of board of directors or advisory board, an executive officer or an employee for a listed firm. Announcement dates and prior affiliations to listed firms are gathered on the basis of a full-text search on LexisNexis and SEC-filings (for further details see Table 2). Standard errors in parenthesis are calculated on the basis of the standard deviation of estimation- period residuals. Standard errors in brackets are computed using the cross-section standard deviation of ARs and CARs, respectively, and account for variance inflation at the announcement day. Panel A reproduces the baseline results (“ex ante”) from Table 2 for comparability and the remaining panels offer various sample splits. Panel B shows results for the announcement effect of individuals, whose appointment has been withdrawn during the confirmation process or who have died during this process or their tenure. Panel C distinguishes between those political appointments, where the political appointee was still associated with the firm at the time of the political appointment, and those without such an active firm connection. ***, **, * denote statistical significance at the 1%, 5% and 10% levels, respectively.
27 Table 4. Subsamples of the announcement effect of political appointments to the U.S. department of defense (“ex ante”) Number Abnormal Return Cumulative Abnormal Return of Obs. (%): [0] (%): [0, +1] Panel A: Baseline 0.82 0.84 All appointees 85 (0.27)*** (0.39)** [0.21]*** [0.31]*** Panel B: Subsamples - Firm position 0.93 1.26 Board member 52 (0.36)** (0.51)** [0.29]*** [0.44]*** 0.63 0.17 Non-board member 33 (0.41) (0.58) [0.31]** [0.35] Panel C: Subsamples - Position at the defense department 1.18 1.36 Top pay-grades 46 (0.38)*** (0.53)*** [0.31]*** [0.45]*** 0.39 0.23 Other high pay-grades 39 (0.40) (0.57) [0.28] [0.38] Panel D: Subsamples - Party of nomination 1.00 0.74 Democratic 34 (0.42)** (0.59) [0.31]*** [0.40]* 0.69 0.91 Republican 51 (0.36)* (0.51)* [0.29]** [0.44]** Panel E: Subsamples – Anticipation 1.20 1.40 Lower anticipation 39 (0.43)*** (0.61)** [0.35]*** [0.49]*** 0.49 0.37 Higher anticipation 46 (0.35) (0.50) [0.25]* [0.37] Notes: The sample is based on political appointments to the U.S. Department of Defense in the years 1988 to 2009. Abnormal returns relate to the announcements of nominations of political appointees who were serving within the last two years as a member of board of directors or advisory board, an executive officer or an employee for a listed firm. Announcement dates and prior affiliations to listed firms are gathered on the basis of a full-text search on LexisNexis and SEC-filings (for further details see Table 2). Standard errors in parenthesis are calculated on the basis of the standard deviation of estimation-period residuals. Standard errors in brackets are computed using the cross-section standard deviation of ARs and CARs, respectively, and account for variance inflation at the announcement day. Panel A reproduces the baseline results (“ex ante”) from Table 2 for comparability and the remaining panels offer various sample splits. Panel B shows results for individuals being aligned to firm as a board member or in another position. Panel C distinguishes between the top two pay- grades and the next two highest levels of pay-grades in federal government. Panel D offers insights into the nominating party. Panel E differentiates between at least partly unanticipated (“Lower anticipation”) and largely anticipated announcements of political appointees (“Higher anticipation”). ***, **, * denote statistical significance at the 1%, 5% and 10% levels, respectively.
28 Table 5. Multivariate analysis of announcement effect of political appointments to the U.S. department of defense (“ex ante”) Abnormal Return Cumulative Abnormal Return (%): [0] (%): [0, +1] 0.05 0.77 Board member (0.41) (0.58) 0.90** 0.98* Top pay-grades (0.41) (0.56) 0.81* 0.53 Democratic (0.46) (0.73) 1.14** 1.34* Lower anticipation (0.46) (0.73) -0.55 -0.99 Constant (0.52) (0.76) Number of Obs. 85 85 R-squared 0.12 0.10 Notes: The sample is based on political appointments to the U.S. Department of Defense in the years 1988 to 2009. Abnormal returns relate to the announcements of political appointees who were serving within the last two years as a member of board of directors or advisory board, an executive officer or an employee for a listed firm. Announcement dates and prior affiliations to listed firms are gathered on the basis of a full-text search on LexisNexis and SEC-filings (for further details see Tables 2 and 4). Standard errors reported in parenthesis are based on 1000 bootstraps. ***, **, * denote statistical significance at the 1%, 5% and 10% levels, respectively.
29 Table 6. Baseline for the announcement effect of private sector appointments of (former) political appointees (“ex post”) Number Abnormal Return Cumulative Abnormal of Obs. (%): [0] Return (%): [0, +1] Panel A: Baseline 0.79 1.05 All appointees 85 (0.40)* (0.57)* [0.46]* [0.50]** Panel B: Robustness – Trimmed sample 0.49 0.66 All appointees 77 (0.40) (0.49) [0.23]** [0.26]*** Panel C: Robustness – Scaled abnormal returns 0.22 0.22 All appointees 85 (0.11)** (0.11)** [0.13]* [0.10]** Panel D: Robustness – Market model augmented by industry index 0.78 1.04 All appointees 85 (0.40)* (0.56)* [0.45]* [0.49]** Panel E: Robustness – Time-shifted placebos 0.09 0.03 Placebo events 586 (0.15) (0.21) [0.17] [0.33] Notes: The sample is based on appointments to the private sector of (former) political appointees to the U.S. Department of Defense in the years 1989 to 2011. Abnormal returns relate to the announcements of (former) political appointees who were working (at least some time) for the U.S. Department of Defense during the last two years before their move to the private sector. Announcement dates and affiliations to listed firms are gathered on the basis of a full-text search on LexisNexis and SEC-filings. This yields 109 observations. Observations are excluded, i) if they are confounded by other important firm-news (such as earnings and dividend announcements, share repurchases and M&A activity on the announcement day), ii) if their underlying stock is illiquid or if iii) the announcement falls in the first trading week after September 11 in 2001. The resulting baseline sample consists of 85 observations. Abnormal Returns (ARs) and Cumulative Abnormal Returns (CARs) are based on a market model, whereby for example S&P 500, CAC 40 and DAX 30 is used as the measure of market returns for United States, France and Germany, respectively. Standard errors in parenthesis are calculated on the basis of the standard deviation of estimation-period residuals. Standard errors in brackets are computed using the cross-section standard deviation of ARs and CARs, respectively, and account for variance inflation at the announcement day. Panel A reports the baseline results (“ex post”) and the remaining panels offer different robustness checks to the baseline. Panel B displays results for ARs and CARs, where the top and bottom 5% are dropped. Panel C shows results for average scaled AR and CAR, i.e., AR and CAR divided by regression residual standard deviation of the estimation period. Here, standard errors in parenthesis are computed using the variance of scaled abnormal returns under the assumption of no-event induced variance, which is (T – p – 1)/(T – p – 3), where T and p are the length of the estimation window and the number of explanatory variables in the market model. Standard errors in brackets are again calculated using the cross-section standard deviation of scaled ARs and scaled CARs to account for variance inflation at the announcement day. Panel D augments one factor market model by including Datastream industry index for the respective company in addition to market model (10 different industries based on ICB-classification). Panel E generates for each appointee-firm observation placebo announcements dates, which are 30, 50, 70, 90, 110, 130 and 150 days prior to the true announcement date. For these placebo events ARs and CARs are computed in the same way as before and reported in this panel. ***, **, * denote statistical significance at the 1%, 5% and 10% levels, respectively.
30 Table 7. Subsamples of the announcement effect of private sector appointments of (former) political appointees (“ex post”) Number Abnormal Return Cumulative Abnormal Return of Obs. (%): [0] (%): [0, +1] Panel A: Baseline 0.79 1.05 All appointees 85 (0.40)* (0.57)* [0.46]* [0.50]** Panel B: Subsamples - Firm position 0.96 1.29 Board member 59 (0.52)* (0.74)* [0.64] [0.69]* 0.41 0.49 Non-board member 26 (0.58) (0.82) [0.34] [0.39] Panel C: Subsamples - Position at the defense department 0.55 1.07 Top pay-grades 40 (0.58) (0.82) [0.83] [0.70] 1.00 1.03 Other high pay-grades 45 (0.56)* (0.80) [0.45]** [0.72] Panel D: Subsamples - Party of nomination 1.24 1.71 Democratic 43 (0.71)* (1.01)* [0.83] [0.92]* 0.33 0.37 Republican 42 (0.37) (0.52) [0.35] [0.36] Notes: The sample is based on appointments to the private sector of (former) political appointees to the U.S. Department of Defense in the years 1989 to 2011. Abnormal returns relate to the announcements of (former) political appointees who were working (at least some time) for the U.S. Department of Defense during the last two years before their move to the private sector (for further details see Table 6). Standard errors in parenthesis are calculated on the basis of the standard deviation of estimation-period residuals. Standard errors in brackets are computed using the cross-section standard deviation of ARs and CARs, respectively, and account for variance inflation at the announcement day. Panel A reproduces the baseline results (“ex post”) from Table 5 for comparability and the remaining panels offer various sample splits. Panel B shows results for former political appointees being nominated as a board member or in another position. Panel C distinguishes between the top two pay-grades and the next two levels of pay-grades in federal government of former political appointees. Panel D offers insights into the nominating party of former political appointee. Note that virtually all private sector announcements are unanticipated. ***, **, * denote statistical significance at the 1%, 5% and 10% levels, respectively.
31 Figure 1: Kernel Densities for Political Appointments and Placebo Appointments .3 .2 Density .1 0
-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 AR(%): [0]
Ex Ante (All appointees) Ex Ante (Placebo)
Notes: Figure 1 presents the cross-sectional distribution of abnormal returns for placebo appointments (dotted line) and for political appointments (straight line) at t=0. The distributions are smoothed by a kernel density estimator. We generate the plot using a Gaussian kernel function. The optimal bandwidth is determined according to Silverman`s plug-in estimate (see Silverman, 1986, and Cameron and Trivedi, 2005). The Kolmogorov-Smirnov test for the equality of distributions is rejected at the 1 percent significance level.
32 Figure 2: Kernel Densities for Political Appointments and Placebo Appointments .3 .2 Density .1 0
-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 AR(%): [0]
Ex Ante (Lower anticipation) Ex Ante (Placebo)
Notes: Figure 2 presents the cross-sectional distribution of abnormal returns for placebo appointments (dotted line) and for political appointments with lower anticipation (dashed line) at t=0. The distributions are smoothed by a kernel density estimator. We generate the plot using a Gaussian kernel function. The optimal bandwidth is determined according to Silverman`s plug-in estimate (see Silverman, 1986, and Cameron and Trivedi, 2005). The Kolmogorov-Smirnov test for the equality of distributions is rejected at the 1 percent significance level.
33 Figure 3: Cumulative Abnormal Returns around Announcements of Political Appointments 3 2 1 0 Cumulative Abnormal Return (%) Return Abnormal Cumulative -1
-20 -10 0 10 20 Days
Ex Ante (All appointees) Ex Ante (Lower anticipation)
Notes: Figure 3 presents the average cumulative abnormal returns for day -20 up to the specified day for the 85 events in the baseline and the 39 less anticipated events. The shaded area represents the two-day event window. The average cumulative abnormal returns immediately preceding the event are set to zero. We deal with confounding factors as described in section 3 and in Table 2. The vertical lines around the event date denote the time-period of the two-day cumulative abnormal returns reported in Tables 2 and 4.
34 Figure 4: Kernel Densities for Corporate Appointments and Placebo Appointments .3 .2 Density .1 0
-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 AR(%): [0]
Ex Post (All appointees) Ex Post (Placebo)
Notes: Figure 4 presents the cross-sectional distribution of abnormal returns for placebo appointments (dotted line) and for corporate appointments of (former) political appointees (solid line) at t=0. The distributions are smoothed by a kernel density estimator. We generate the plot using a Gaussian kernel function. The optimal bandwidth is determined according to Silverman`s plug-in estimate (see Silverman, 1986, and Cameron and Trivedi, 2005). The Kolmogorov-Smirnov test for the equality of distributions is rejected at the 5 percent significance level.
35 Appendix Table A1. Sources used in full-text search (except SEC -filings) 1. Newswires and press releases The Associated Press 776 CQ Federal Department and Agency Documents, Congressional Press Releases, Congressional Testimony, Congressional Testimony, Daily Monitor, Today, Weekly 337 PR Newswire 232 States News Service 228 United Press International (UPI) 190 U.S. Newswire 168 Federal News Service 159 US Fed News 116 Business Wire 108 White House Press Releases 103 Other 452 2. Government publications and documents Public Papers of the Presidents 340 Defense Department Documents and Publications 89 White House Documents and Publications 73 Congressional Documents and Publications, Hearing Transcripts, Schedules 52 US Department of Defense Information 29 Other 11 3. Newspapers The Washington Post 794 The New York Times 318 The Washington Times 294 The Wall Street Journal 69 Other 341 4. Magazines The National Journal (including NJ's Congress Daily and NJ's Technology Daily) 241 Other 55 5. Professional and trade journals (including newsletters) Aerospace Daily 369 Defense Daily 354 Inside the Pentagon, the Army, the Navy, the Air Force, Missile Defense 296 Other 436 6. Web based publications Politico.com 24 Other 38 7. News transcripts CNN 25 NPR 14 Other 43 Total 7174
36 US Justice: Print Friendly Version Page 1 of 2
Home » Agencies » Justice Management Division » Departmental Ethics Office »Leaving Government
Seeking Employment| Employee Contact by a Bidder| Post-Employment Restrictions| Payment by Contractor to Former Officials
An employee may not take official action on a matter which can affect the financial interests of an organization with which she is negotiating or has an arrangement for future employment. The remedy is disqualification.
18 U.S.C. § 208
In addition, an employee may have to disqualify herself from working on a matter when she is merely seeking employment, but before actually negotiating for a job. An employee would be considered to be seeking employment if she sends her resume to companies or if she is approached by someone about a position with a company and she responds that she is interested.
5 C.F.R. § 2635.601(see Subpart F - Seeking Other Employment)
Three-Day Notice Requirement for Negotiations/Agreements
This requirement applies only to employees who file a Public Financial Disclosure report. Public Financial Disclosure filers must inform their Deputy Designated Agency Ethics Official ( DDAEO) of any negotiation or agreement for post-government employment or compensation within three (3) business days of commencing negotiations or reaching agreement (whichever occurs first). An approved format for this notification and recusal may be found here. You may send a signed PDF copy to your Deputy DAEO, but the original must also be sent.
The notification requirement is two-fold:
1) First, the requirement to send the notice to your Component’s Deputy DAEO is triggered when you enter into discussions or communications with another person, or such person’s agent or intermediary, that is mutually conducted with the goal of reaching an agreement regarding possible employment or compensation. Simply submitting resumes to several law firms without prior invitation is not a negotiation. As soon as a communication takes place that is a meaningful step toward reaching an agreement (e.g., discussing the specific terms of a partnership offer), you must send the notice to your Deputy DAEO within 3 business days.
2) Second, if the negotiation or agreement results in a conflict of interest, or appearance of a conflict, you must also sign the recusal statement at the bottom of the notice. However, filers should sign the recusal statement when submitting the negotiation notice even if a conflict does not currently exist, to serve as an acknowledgement to abide by the recusal obligation should it arise.
REMEMBER : The 3-day notice requirement does not change the longstanding obligation under the conflict of interest regulations (5 CFR 2635.601, et al) to recuse yourself from working on matters affecting a potential employer when you are seeking employment. The seeking employment recusal obligation will occur before your obligation to submit the negotiation/recusal statement arises, so you must be aware of both mandates at all times once you commence seeking employment with anyone.
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An employee participating in a procurement over $100,000 shall notify his supervisor and the designated agency ethics official in writing when he contacts or is contacted by a bidder regarding the possibility of employment. The employee must either reject the possibility of employment or disqualify himself from further participation in the procurement.
48 C.F.R. § 3.104-4(c) and 104-6
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There are statutory prohibitions on a former government employee that generally prevent her from “switching sides” after leaving the government. The following are the main restrictions:
Lifetime Ban - An employee is prohibited from representing anyone else before the government on a particular matter involving specific parties in which she participated personally and substantially. US Justice: Print Friendly Version Page 2 of 2
Two-Year Ban - An employee is prohibited for two years from representing another person on a particular matter involving specific parties which was pending under her responsibility during her last year of government service.
One-Year Ban - A senior employee includes Executive Level officials and all other employees whose rate of basic pay is equal to or greater than 86.5% of the rate for Level II of the Executive Schedule, which is $155,441 as of January, 2010. Therefore, SES officials whose pay is at least $155,441 are covered by this additional one year restriction. As of April, 2009, Senior Level (SL), Scientific or Professional (ST), or other employees whose pay is at least $155,441 are senior employees, and are also covered by the additional one year restriction. Although some GS-15 employees may receive more than $155,441 in overall pay, they are not covered by the additional one year restriction in that their rate of basic pay is below the threshold.
Certain components of the Department of Justice are considered separate for purposes of the one-year ban. An employee who works in a designated separate component is barred only from appearing before her own component. An employee not from a separate component is barred only from parts of the Department not designated as separate. An employee paid according to the Executive Schedule does not benefit from the separation of components. She is barred from representing before the whole Department. 5 C. F.R. § 2641
18 U.S.C. § 207and 5 CFR 2641
There are restrictions on an employee receiving compensation, even after she leaves, based on anyone's representations before the Federal government that took place while she was still a government employee.
18 U.S.C. § 203
Also available is a chart summarizing the post-employment restrictions, a summary of the post employment provisionsprepared by the Office of Government Ethics and a summary of the seeking employment and post employment provisionsprepared by the Departmental Ethics Office.
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A former employee is prohibited from accepting compensation from a contractor within one year after such employee served, at the time of selection of the contractor or the award of a contract to that contractor, in certain positions or made certain decisions on the resulting contract. This prohibition only applies to contracts in excess of $10 million.
48 C.F.R. § 3.104-4(d)
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Updated:
FEDERAL RESERVE BANK OF NEW YORK
CODE OF CONDUCT
As revised June 15, 2009
TABLE OF CONTENTS
1. Basic Obligation ...... 3
2. Employee Conduct ...... 4 2.1 Gambling and Lotteries ...... 4 2.2 Alcoholic Beverages ...... 4 2.3 Illegal Drugs ...... 4 2.4 Firearms/Hazardous Materials ...... 4
3. Bank Property and Information ...... 5 3.1 Bank Property ...... 5 3.2 Bank Information ...... 5 3.3 Use of Non-public Information for Private Gain ...... 5
4. Use of Position ...... 7 4.1 For Private Gain ...... 7 4.2 Endorsements ...... 7
5. Conflicts of Interest ...... 8 5.1 General Standard ...... 8 5.2 Statutory Prohibition on Conflicts ...... 8 5.3 Prohibited Financial Interests ...... 11 5.4 Gifts, Meals, and Entertainment from Outsiders ...... 13
6. Seeking Other Employment ...... 15
7. Outside Activities ...... 16 7.1 General ...... 16 7.2 Teaching, Speaking and Writing ...... 16 7.3 Political Activity ...... 17
8. Post Employment Activities ...... 18 8.1 Post Employment Contacts ...... 18 8.2 Non-public Information ...... 18
9. Disclosure Statements ...... 19
10. Violations ...... 20 10.1 Reporting ...... 20 10.2 Disciplinary Action ...... 20
APPENDIX A: Detailed Provisions Regarding Disqualifying Interests and Seeking Other Employment
APPENDIX B: Provisions Applicable to Employees with Banking Supervision and Examination Responsibilities
APPENDIX C: Responsibilities of the Ethics Officer
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CODE OF CONDUCT
1. Basic Obligation
It is indispensable to the proper functioning of, and the maintenance of public confidence in, the Federal Reserve Bank of New York ("Bank") and the Federal Reserve System ("System") that every employee perform his or her duties with honesty, integrity and impartiality, and without improper preferential treatment of any person. Each employee has a responsibility to the Bank and to the System to avoid conduct which places private gain above his or her duties to the Bank, which gives rise to an actual or apparent conflict of interest, or which might result in a question being raised regarding the independence of the employee's judgment or the employee's ability to perform the duties of his or her position satisfactorily. Each employee should conduct his or her financial affairs with integrity and honesty. To ensure the foregoing, each employee, including all Bank officers, shall respect and comply with the principles and standards of conduct contained in this Code. An employee who needs assistance in interpreting the provisions of the Code or who desires additional information should contact the Bank's Ethics Officer.
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2. Employee Conduct
2.1 Gambling and Lotteries
An employee shall not participate in any gambling or illegal lottery activity, for money or anything of value, while on Bank premises.
2.2 Alcoholic Beverages
Except at Bank approved functions, the Bank prohibits the sale or consumption of beer, wine or other alcoholic beverages by anyone on the Bank's premises. The Bank prohibits an employee from reporting to work or performing job duties if, as a result of consuming alcoholic beverages, the employee is under the influence of alcohol, i.e., the employee's physical or mental abilities are impaired.
2.3 Illegal Drugs
An employee shall not possess, use, sell, distribute, or be under the influence of any unauthorized substance on Bank premises or while conducting business on behalf of the Bank. An unauthorized substance is any illegal drug or illegal controlled substance, or any drug which has been legally obtained but is not being used in the prescribed dosage for prescribed purposes.
2.4 Firearms/Hazardous Materials
The possession or use of firearms or other lethal weapons, ammunition, explosives or hazardous materials by an employee on Bank premises is prohibited. This restriction does not apply to items that are owned by the Bank and used by a Bank employee in the conduct of Bank business.
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3. Bank Property and Information
3.1 Bank Property
An employee has a duty to protect and conserve Bank property and ensure its use for proper purposes.
3.2 Bank Information
Bank information should be released or used only as authorized by Bank policy. Bank examination and other bank or bank holding company supervisory information is the property of the Board of Governors of the Federal Reserve System ("Board") and may be disclosed only in accordance with Board procedures.
Information maintained as fiscal agent for any federal agency may be disclosed only in accordance with that agency's procedures.
In the course of working at the Bank, an employee may have access to non-public information. Non-public information is information that the employee knows, or reasonably should know and:
(a) Has not been made available to the general public. (b) Is designated as confidential, private or proprietary. (c) Is routinely treated by the Bank as confidential.
This may include information related to the Bank, the System, the Federal Open Market Committee (“FOMC”), or another person or institution (such as a banking organization, a vendor, an employee or former employee of the Bank, or a federal agency). An employee must strictly preserve the confidentiality of such information. It can be disclosed only as required for Bank purposes and only as authorized.
3.3 Use of Non-public Information for Private Gain
An employee is prohibited from using non-public information for any purpose other than Bank business. In addition, an employee may not engage, directly or indirectly, in any financial transaction as a result of, or in reliance on, non-public information, whether such information relates to the Bank or any other person or institution. An employee may not allow the improper use of such non-public information to further the employee's own private interest or that of another person, whether through advice, recommendation, or a knowing, unauthorized disclosure.
An employee with access to Class I FOMC information should avoid engaging in any financial transaction the timing of which could create the appearance of acting on inside information concerning Federal Reserve deliberations and actions. In order to avoid even the appearance of acting on confidential information, an employee authorized to have regular and ongoing access to Class I FOMC information should not knowingly:
-5 - a) Purchase or sell any security (including any interest in the Thrift Plan for Employees of the Federal Reserve System, but not including shares of a money market mutual fund) during the seven calendar day period prior to and the day (s) of a meeting of the FOMC.
b) Hold any security for less than 30 days, other than shares of a money market mutual fund.
This purchase or sale restriction does not apply if the investment decision is made before the seven day period (in the case of rollover, for example). An employee authorized to have regular and ongoing access to Class I FOMC information also should make every effort to ensure that the financial transactions of his or her spouse and dependent children comply with these restrictions. In unusual circumstances, after consultation with the Ethics Officer, these restrictions may be waived.
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4. Use of Position
4.1 For Private Gain
An employee may not, directly or indirectly, use the employee's position for his or her own private gain or that of any other person.
4.2 Endorsements
An employee shall not use or permit the use of his or her position or title, or any authority associated with his or her office, to endorse any product, service or enterprise except in connection with Bank products and services or as otherwise authorized by the Bank.
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5. Conflicts of Interest
5.1 General Standard
An employee should avoid any situation that might give rise to an actual conflict of interest or even the appearance of a conflict of interest. An employee who routinely represents the Bank in dealing with the public must be particularly careful in this regard. Where the circumstances might cause a reasonable person to question the employee's impartiality or otherwise give rise to an appearance of a conflict of interest, the employee should not participate in a matter unless he or she has informed the Bank of the situation and received authorization from the Bank's Ethics Officer.
Example
A conflict of interest, or the appearance of a conflict of interest, may arise where an employee is working on a matter involving a potential contract award and the employee's sibling or close friend works for one of the bidders. As a result, the employee should consult with the Bank's Ethics Officer before participating in the matter.
5.2 Statutory Prohibition on Conflicts
A. Background. The rules in this section are derived from provisions of the federal criminal conflict of interest statute and related regulations. Key portions of the regulations, modified as appropriate for the Bank's use, are contained in Appendix A and are part of this Code. In light of the serious consequences of violating this criminal statute, each employee is strongly urged to read Appendix A in its entirety. An employee who has any questions about the prohibitions contained in this section should contact the Bank's Ethics Officer.
B. General Statutory Prohibition. Notwithstanding the provisions of Section 5.3 (B), an employee may not participate personally and substantially in an official capacity in any particular matter in which, to the employee’s knowledge, the employee or certain related parties listed in Section 5.2 (C) have a financial interest if the particular matter will have a direct and predictable effect on that interest. Participation in a particular matter includes making a decision or recommendation, providing advice, or taking part in an investigation.
C. Imputed Interests. The financial interests of the following individuals and entities are imputed to the employee and will disqualify the employee from participating in a matter:
(1) The employee's spouse.
(2) The employee's minor children.
(3) The employee's general partner(s).
(4) An organization or entity for which the employee is an officer, director, trustee, general partner or employee (regardless of the nonprofit status of the organization or whether the employee is paid).
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(5) A person or entity with whom the employee is negotiating for employment or has an arrangement concerning prospective employment. (See Section 6 for more detail.)
Example
An employee whose job is to participate in the review of bank holding company applications also serves, without compensation, on the board of directors of a fraternal organization. At a meeting of its board of directors, the employee discovers that the organization, as part of its investment portfolio, owns stock in Bank A. After this meeting takes place, the employee is asked to review an application of Bank Holding Company B to acquire Bank A and to recommend whether the application should be approved. Even though the employee's personal financial interests will not be affected by the approval or denial of the application, the employee should not review the application. The approval or denial of the application will affect the value of Bank A stock, a financial interest of the organization. The organization's financial interests are attributed to the employee as a member of its board of directors.
D. Particular Matter. The term "particular matter" includes a supervisory matter involving a depository institution or its affiliate, rule making that is focused on a discrete class, an application, enforcement action, examination, request for ruling or other determination, an acquisition or sale (e.g., securities, foreign exchange or real estate), formation of contracts, and the provision of priced and non-priced services.
E. Direct and Predictable Effect. In order for a particular matter to have a direct effect on a financial interest, there must be a close causal link between any decision or action to be taken in the matter and any expected effect of the matter on the financial interest. An effect may be direct even though it does not occur immediately. A particular matter that has an effect on a financial interest only as a consequence of its effect on the general economy does not have a direct effect within the meaning of this rule.
A matter will have a predictable effect on a financial interest if there is a real, as opposed to a speculative, possibility that the particular matter will affect the financial interest.
Example 1
An employee in data processing is asked to serve on a technical evaluation panel to review proposals for a new computer system. ABC Computer Corporation ("ABC") has submitted a proposal. The employee owns ABC stock. The award of the systems contract to ABC or to any other company that bids will have a direct and predictable effect on the value of the ABC stock. The fact that the gain or loss cannot be measured and that the value of the gain or loss may be extremely small is irrelevant. The employee may not serve on the evaluation panel unless an exemption is applicable [see Section 5.2 (F)] or the employee receives a waiver [see Section 5.2 (G)].
-9 - Example 2
An employee in the Check Processing Department is asked to buy a new software program. The employee has a choice between purchasing the software program designed by XYZ Computer Corp. or the software program designed by Mammoth Co. The employee's spouse works for Mammoth Co. and participates in Mammoth Co.'s stock option plan. Through that plan, the employee's spouse receives shares of Mammoth Co. The purchase or non-purchase of Mammoth Co.'s software program will have a direct and predictable effect on the value of Mammoth Co.'s stock and thus the spouse's financial interest. The spouse's interest is imputed to the employee and, therefore, the employee may not decide which software program to purchase unless an exemption is applicable [see Section 5.2 (F)] or the employee receives a written waiver [see Section 5.2 (G)]. The fact that the potential gain or loss is immeasurable is immaterial.
Example 3
If, on the other hand, the employee's spouse was a salaried employee of Mammoth Co. and had no ownership interest in Mammoth Co., the employee could decide which software program to purchase, assuming that the purchase or non-purchase of Mammoth Co.'s software program would have no effect on the spouse's salary or employment. While the employee would not be prohibited by the criminal conflict of interest statute from participating in this decision, the employee's participation could still give rise to an appearance of a conflict of interest suggesting the employee's disqualification should be considered under Section 5.1. Therefore, an employee in this situation should not participate in the matter without first obtaining authorization from the Bank's Ethics Officer.
F. Exempt Financial Interests. Under regulations issued by the Office of Government Ethics (“OGE”), which are set forth in part in Appendix A, a number of financial interests are exempt, and therefore, an employee may participate in a particular matter that will affect those interests.
1. The following interests are exempt:
(a) Investments held through a diversified non-sector mutual fund or unit investment trust.
(b) An employee's interest in any System retirement and/or thrift plan.
(c) Short-term federal government securities (maturity of one year or less) and US Savings Bonds.
2. The OGE regulations also provide additional exemptions relating to financial interests:
(a) In certain employee benefit plans.
(b) In publicly traded securities, municipal securities, sector mutual funds, and long-term federal government securities where the aggregate fair market value of the securities
-10 - owned by the employee and his or her spouse and any minor child is below a certain amount.
(c) Of certain tax-exempt organizations whose interests are imputed to the employee because of his or her association with the organization.
(d) Of an employee’s general partner.
The OGE regulations also provide for exemptions in addition to those summarized in this Section. The primary exemptions for the various financial interests, which are set forth in Part II of Appendix A, are complex. An employee who has such an interest or to whom such an interest is imputed from a family member or other related person should carefully read Part II of Appendix A to see whether his or her participation in a particular matter affecting the interest is allowable.
G. Individual Waiver. An employee who would otherwise be disqualified may participate in a particular matter if he or she receives a written waiver prior to participating in the matter. If you want to request a waiver, you should consult the Bank's Ethics Officer.
5.3 Prohibited Financial Interests
A. Prohibition of Certain Debt or Equity Interests. Notwithstanding anything to the contrary in Section 5.2, an employee may not own or control, directly or indirectly, any debt or equity interest in a depository institution or an affiliate of a depository institution. A "depository institution" means a bank, a trust company, or any institution that accepts deposits, including a bank chartered under the laws of a foreign country. In addition, an employee with regular and ongoing access to Class I FOMC information and members of the Markets Group may not own or control, directly or indirectly, any debt or equity interest in a primary government securities dealer or an entity that directly or indirectly controls a primary dealer. The employee is regarded as controlling any debt or equity interest held by the employee's spouse or minor child.
B. Exceptions. The following are not prohibited debt or equity interests within the meaning of Section 5.3 (A):
(1) An interest in a publicly traded money market fund or other mutual fund (including a fund that is an affiliate of a depository institution or primary dealer of government securities), provided that: (a) the fund does not have a policy of concentrating its investments in the financial services industry; and (b) neither the employee nor the employee’s spouse has the ability to exercise control over the financial interests held in the fund.
(2) An interest acquired by the employee’s spouse or minor child—other than from the employee:
(i) Prior to the marriage. (ii) Prior to the employee’s being employed by the Bank. (iii) As compensation or a fringe benefit in connection with his or her employment, or as “qualifying shares” as a condition of service as a director or employee.
(3) A future interest created by someone other than the employee; his or her spouse or child.
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(4) An interest of an employee, spouse or minor child as a beneficiary of an estate where the interest has not been distributed by the estate’s legal representative.
(5) An interest in a widely held, diversified pension or other retirement fund that is administered by a trustee independent from the employee and the employee’s spouse.
(6) An interest in a publicly-traded holding company that is not predominantly engaged in the banking or thrift business, is not supervised by the System, and does not control a state member bank, a foreign bank with U.S. operations or a federally insured U.S. office, or a “bank” within the meaning of the Bank Holding Company Act.
(7) For those employees prohibited from owning stock of a primary dealer or its affiliate, an interest in a publicly-traded holding company that owns a primary dealer provided that the holding company is not predominately engaged in the banking, thrift, or securities business.
An employee who is required to file a disclosure statement pursuant to Section 9 must report an interest that the employee or the employee’s spouse or minor child holds pursuant to any of the foregoing exceptions. Also, it is important to understand that the ability to retain an otherwise prohibited interest pursuant to one of the exceptions does not constitute a waiver for purposes of the general statutory prohibition on conflicts of interest that is described in Section 5.2.
C. Definition of Debt or Equity Interest. For purposes of this section, the term "debt or equity interest" includes secured and unsecured bonds, debentures, notes, securitized assets, commercial paper, preferred and common stock, short positions, instruments convertible into the above, as well as options, rights or warrants to acquire such instruments, but does not include a deposit, credit union shares, insurance policy or annuity. Although excluded from the definition of a “debt or equity interest,” insurance policies and annuities may be financial interests and may result in conflicts of interest under Section 5.2.
D. Divestiture. In addition to any appropriate disciplinary action, an employee who violates this section may be required to divest the prohibited interest. Divestiture also may be required if the ownership or control of an interest, though permissible under this section, would likely disqualify an employee from handling matters to an extent that substantially interferes with the employee’s ability to perform his or her job.
Whenever the Bank directs divestiture, the employee will be given a reasonable period of time to divest, considering the nature of the employee’s particular duties and the nature and marketability of the interest. Except in cases of unusual hardship, as determined by the Bank, a reasonable period ordinarily will not exceed 90 days from the date divestiture is directed.
E. Waiver. The Bank’s Ethics Officer, in consultation with the officer with responsibility for the department in which the employee works, may grant a written waiver permitting an employee to own or control a debt or equity interest prohibited by paragraph A of this section if extenuating circumstances exist and if any required disqualification from a particular matter(s) due to the financial interest would not unduly interfere with the full performance of the employee’s duties.
-12 - Examples of extenuating circumstances are:
(1) Ownership or control of the interest (including a preemptive right or option) was acquired before Federal Reserve employment.
(2) Ownership or control of the interest was acquired through inheritance, gift, stock split, stock dividend, merger acquisition, or other change in corporate structure, or otherwise without specific intent on the part of the employee to acquire the interest.
5.4 Gifts, Meals, and Entertainment from Outsiders
A. Gifts, Meals, and Entertainment.
1. General Prohibition. Except as permitted below, an employee may not solicit or accept, directly or indirectly, any gift, meal, favor, service, entertainment or other thing of monetary value ("gift") from a person or institution that does, or seeks to do, business with the Bank or is supervised by the System, or has interests that are substantially affected by the employee's duties at the Bank ("covered sources"), or from an organization, a majority of whose members are covered sources. A gift received by an employee's spouse or child, or given to a person or entity at the specific direction of the employee, is considered to be received by the employee.
An employee who is offered a prohibited gift should decline to accept it. If an employee receives a prohibited gift, arrangements should be made to return or dispose of the gift, and the source should be advised of the Bank's policy.
2. Exceptions. (a) A gift that otherwise would be prohibited is permitted if the employee clearly can establish that the gift:
(i) Has a de minimis market value (i.e., $20 or less), provided the number of times the employee has received a de minimis gift from the same covered source is infrequent.
(ii) Is a reduced or waived admission fee to attend, or a meal provided in connection with, a widely attended conference or gathering which is in furtherance of the employee's duties at the Bank.
(iii) Is given or offered under circumstances that indicate it is motivated by a personal relationship that exists independently of his or her employment with the Bank.
(iv) Results from his or her spouse's employment and has not been offered or enhanced because of the employee's position with the Bank.
(v) Results from his or her outside employment or business activities and has not been offered or enhanced because of the employee's position with the Bank.
(vi) Is a meal provided in connection with a charitable or civic function or organization in which the employee is a participant.
-13 - (vii) Is a meal authorized in writing in advance by the Bank's Ethics Officer based on a determination that:
(a) Special circumstances exist which make the acceptance of the meal appropriate in furtherance of Bank business. (b) Payment by the employee is not feasible. (c) Acceptance of the meal will not create a conflict of interest; or
(viii) Is a discount or benefit available to the general public and is not offered to the employee or enhanced because of his or her employment with the Bank.
Even when permissible under an exception listed above, an employee always may decline a gift offered by a covered source.
(b) With the Bank’s prior approval, an employee may accept a bona fide award given for achievement, provided that:
(i) The award is made as part of an established program of recognition under which awards have been made on a regular basis or which is funded, wholly or in part, to ensure its continuation on a regular basis. (ii) The program selects recipients pursuant to established standards.
B. Examiners. The exceptions described in Section 5.4 (A) (2) do not apply to a gift or a meal offered to an examiner by an institution that the examiner examines, has examined or has authority to examine. Furthermore, an examiner may never accept a meal or gift pursuant to the de minimis exception of Section 5.4 (A) (2) (a) from an institution for which the System is the primary federal regulator. An examiner should consult Appendix B, Part I, paragraph 4.
C. Gift from Foreign Governmental Source. An employee may not accept a gift from a foreign government, including a foreign central bank, unless the gift is valued at $350 or less and is offered and received as a souvenir or mark of courtesy. An employee may accept a gift from a foreign government valued above $350 under certain limited circumstances. An employee should consult with the Bank's Ethics Officer to determine whether the employee may accept such a gift.
D. Treasury Borrowing Advisory Committee. An employee may not accept any gift from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association (“SIFMA”) or any member of the advisory committee.
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6. Seeking Other Employment
An employee is prohibited from personally and substantially participating in an official capacity in any matter that will have a direct and predictable effect upon the financial interest of any entity with which the employee is seeking employment or has an arrangement for future employment. Under some circumstances such participation may violate the federal criminal conflict of interest statute. Refer to Part III of Appendix A for more information on this prohibition. The following examples illustrate when an employee is seeking employment for purposes of this prohibition.
Example 1
An employee in the Credit and Discount Department receives a call from Bank B asking the employee whether the employee is interested in leaving the Reserve Bank and going to work for Bank B. The employee informs Bank B that she is involved in a project that will be completed by year-end and that, until the project is completed, she cannot consider leaving the Reserve Bank. After this conversation, Bank B approaches the Reserve Bank for an advance. The employee is typically asked to advise whether an advance should be made. The employee is considered to be seeking employment with Bank B because the employee did not clearly reject Bank B's offer but merely postponed discussion to the foreseeable future. Thus, the employee must refrain from participating in the decision to approve or deny the advance to Bank B.
Example 2
An employee is considered to be seeking employment with a company as soon as she makes an inquiry about employment with the company, unless the inquiry is part of a mass-mailing to a large class of potential employers. If the employee's inquiry to the company is part of a mass mailing, the employee is not considered to have begun seeking employment unless she receives a response from the company that indicates an interest in employment discussions.
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7. Outside Activities
7.1 General
An employee's outside activity, including outside employment, should not bring discredit to the reputation of the Bank or the System, interfere with the full and proper discharge of the employee's duties and responsibilities, or be incompatible with the employee's duties and responsibilities.
Incompatible activities include, for example, those which are prohibited by statute, regulation or any provision of this Code, those which create the appearance of a conflict of interest, or those which would require the employee's disqualification from matters so central or critical to the performance of his or her duties and responsibilities that the employee's ability to give satisfactory service to the Bank would be materially impaired. Before engaging in compensated outside employment, an employee should obtain the prior approval of the Bank.
The financial interests of any organization of which an employee serves as officer, director, trustee, general partner, or employee will be attributed to the employee for purposes of the statutory prohibitions of Section 5.2.
7.2 Teaching, Speaking and Writing
A. General Prohibition. Except as provided in Sections 5.4 (A) (2) (a) (i) and (ii), 5.4 (A) (2) (b), and Section 5.4 (C), an employee may not accept compensation, a gift, or honorarium from any source other than the Bank for teaching, speaking or writing on a subject that relates to the employee's duties and responsibilities. This restriction precludes acceptance by an employee, but not the Bank, of reimbursement for travel or lodging expenses in connection with an appearance, speech or publication.
B. Exceptions. With the Bank's prior approval, an employee may accept compensation and reimbursement of travel/lodging expenses for:
(1) Teaching a course related to the employee's duties if the course is offered as part of the regularly established curriculum of a school, college, or other educational entity (for example, the American Institute of Banking).
(2) Preparing an article or other publication utilizing or incorporating information obtained by the employee in the course of, or as a result of, performing his or her job duties at the Bank, provided the publication is prepared on the employee's own time.
C. Use of Bank Title in Connection with Teaching, Speaking, or Writing. An employee may not use or permit the use of his or her title at the Bank in connection with teaching, speaking, or writing, or to promote any book, seminar, or course when such activities are not part of the employee's Bank duties except:
(1) As one of several biographical notes when such note is given no more prominence than any other.
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(2) As part of an article published in a scientific or professional journal, as long as a reasonably prominent disclaimer states that the views expressed in the article do not necessarily represent the views of the Bank.
7.3 Political Activity
A. General. The Federal Reserve Banks have a unique need to protect their independence from the political process. Therefore, although an employee may participate or become involved in issues of general public concern or debate, the employee's association with the Bank must not be publicized in connection with any political activity. Further, an employee may not engage in political activity while on duty or on Bank premises, and must be extremely cautious to avoid any suggestion of Bank sponsorship or support of such activities.
B. Partisan Politics.
1. Non-Officers. An employee, other than an officer, may participate in a partisan political campaign, except that an employee may not run for any partisan political office (federal, state, or local) or solicit or accept political contributions (i.e., anything of value, including personal services) on behalf of any candidate, party or political organization. An employee may hold a position within a political party so long as the position does not otherwise interfere with the employee's performance of Bank duties.
2. Officers. An officer must be particularly vigilant in avoiding any appearance that his or her personal political views reflect the views of the Bank or the System. An officer may participate in partisan politics only as an individual voter, e.g., vote, express a private opinion, or make a contribution. An officer may not take an active role in partisan politics; for example, an officer may not run for any partisan political office; solicit or accept political contributions (i.e., anything of value, including personal services) on behalf of any candidate, party, or political organization; or hold a position (other than general membership) within a political party.
C. Non-Partisan Public Service. There are various types of public service activities that do not bring into question the independent and non-partisan character of the Bank, and that are viewed as a community service rather than as political activity, even if the position is one to which an employee is appointed by a partisan public official. Examples are serving as a member of a board of education, a roads and bridges commission, a parks and recreation commission, a planning commission, a board of health, or a university board, provided election or appointment under a party label is not involved. For instance, an employee, including an officer, may accept appointment by the governor of a state to that state’s board of education. However, if there is a requirement that the board of education be comprised of a certain number of representatives from each major political party, then the employee may not accept the appointment. If an employee has any question about the propriety of a particular position or activity, the employee should consult the Bank's Ethics Officer.
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8. Post Employment Activities
8.1 Post Employment Contacts
An employee who ceases to be employed by the Bank should not contact the Bank concerning a particular matter in which he or she participated while employed at the Bank. If a current employee is contacted by a former employee concerning such a matter, the current employee must not discuss the matter or provide any information to that individual that is not available to the general public, unless authorized to do so by Bank management. In performing his or her duties, a current employee may contact a former employee to obtain information concerning work performed by the former employee while employed at the Bank.
8.2 Non-public Information
An employee's duty to maintain the confidentiality of non-public information (as defined in Section 3.2) continues after his or her employment ends. An employee must leave all Bank documents, files, computer diskettes, reports and records containing non-public information, and all copies of such information, with the Bank when his or her employment ends.
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9. Disclosure Statements
In order to obtain information about circumstances that might constitute an actual or potential conflict of interest or a violation of applicable Bank policy or law, the following employees are required to file a disclosure statement as prescribed by the Bank at least annually:
(a) All officers.
(b) Any employee:
(i) Whose duties and responsibilities require that he or she participate personally and substantially in any supervisory matter, examination, application, investigation, etc. concerning a depository institution or any affiliate or subsidiary of a depository institution.
(ii) Whose duties and responsibilities require that he or she participate personally and substantially through decision making or the exercise of significant judgment in taking action regarding contracting or procurement.
(iii) Who has authority to make an exception to established operating or internal control procedures.
(iv) Who has access to Class I FOMC information.
(c) Any manager or supervisor in a valuables handling area.
(d) Any other employee upon request of the Bank's Ethics Officer.
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10. Violations
10.1 Reporting
Employees are encouraged to report violations of this Code to the Bank's Ethics Officer. A violation that involves corruption, fraud, or theft, should also be reported to the Bank's General Auditor.
10.2 Disciplinary Action
Any employee who violates any provision of this Code is subject to disciplinary action up to and including termination of employment.
-20 - APPENDIX A
This Appendix contains a summary of significant portions of the federal conflicts of financial interest regulations (5 C. F. R. Parts 2635 and 2640), as modified for the Bank's use. It provides additional detail regarding: (i) the conflict of interest rule in Section 5.2 of the Code; and (ii) the rule regarding seeking other employment in Section 6 of the Code. A copy of the complete regulations may be obtained from the Legal Department or the Ethics Officer.
PART I. DISQUALIFYING FINANCIAL INTERESTS
1. Statutory Prohibition. An employee is prohibited by federal criminal law [18 U.S.C. § 208 (a)] from participating personally and substantially in an official capacity in any particular matter in which, to the employee’s knowledge, he or she, or any person whose interests are imputed to the employee under the statute, has a financial interest, if the particular matter will have a direct and predictable effect on that interest.
2. Definitions. For purposes of this Part, the following definitions apply:
A. Direct and predictable effect. A particular matter1 will have a direct effect on a financial interest if there is a close causal link between any decision or action to be taken in the matter and any expected effect of the matter on the financial interest. An effect may be direct even though it does not occur immediately. However, a particular matter will not have a direct effect on a financial interest if the chain of causation is attenuated or is contingent upon the occurrence of an event that is speculative or that is independent of, and unrelated to, the matter. A particular matter that has an effect on a financial interest only as a consequence of its effect on the general economy does not have a direct effect within the meaning of this paragraph.
A particular matter will have a predictable effect if there is a real, as opposed to a speculative possibility, that the matter will affect the financial interest. However, it is not necessary that the magnitude of the gain or loss be known, and the dollar amount of the gain or loss is immaterial.
Example 1 An employee with procurement responsibilities has just been asked to serve on the evaluation panel to review proposals for a new Research Library computer search system. DEF Computer Corporation, a closely held company in which the employee and his wife own stock, has submitted a proposal. Because award of the systems contract to DEF or to any other offeror will have a direct and predictable effect on both his and his wife's financial interests, the employee may not participate on the evaluation panel unless he requests and receives a waiver or an exemption applies.
1 If a particular matter involves a specific party, generally the matter will only have a direct and predictable effect on the financial interest of the employee in or with the party, for example where the employee owns stock in the party. However, there may be some situations in which a particular matter will have a direct and predictable effect on an employee's financial interests in or with a non-party. For example, if the party is a corporation, a particular matter also may have a direct and predictable effect on an employee's financial interest through ownership of stock in an affiliate of the party. Similarly, the award of a contract to a particular company also may have a direct and predictable effect on an employee's financial interest in another company, such as a subcontractor or a competitor.
-21 -
Example 2
Upon assignment to the evaluation panel, the employee in the preceding example finds that DEF Computer Corporation has not submitted a proposal. However, LMN Corp., a competitor of DEF, is one of the offerors. The employee is not disqualified from serving on the evaluation panel. Any effect on the employee's financial interests as a result of the decision to award or not award the contract to LMN at most would be indirect and speculative.
B. Financial interest means the potential for gain or loss to an employee or other person specified in paragraph 2 (c) as a result of Bank action on a particular matter. The financial interest might arise from ownership of certain financial instruments or investments such as a stock, bond, mutual fund, or real estate. Additionally, a financial interest might derive from a salary, indebtedness, job offer, or any similar interest that may be affected by the matter.
C. Imputed interests. For purposes of the federal criminal law and this Part, the financial interests of any of the following persons will disqualify an employee to the same extent as if they were the employee's own interests:
(i) The employee's spouse. (ii) The employee's minor child. (iii) The employee's general partner. (iv) An organization or entity in which the employee serves as officer, director, trustee, general partner or employee. (v) A person with whom the employee is negotiating for or has an arrangement concerning prospective employment. (An employee who is seeking other employment should comply with the standards in Part III of this Appendix regarding "Seeking Other Employment.")
Example 1
An employee of the Department of Education serves without compensation on the board of directors of Kinder World, Inc., a nonprofit corporation that engages in good works. Even though her personal financial interests will not be affected, the employee must disqualify herself from participating in the review of a grant application submitted by Kinder World. Award or denial of the grant will affect the financial interests of Kinder World and its financial interests are imputed to her as a member of its board of directors.
Example 2
The spouse of an employee of the Food and Drug Administration is employed by a biomedical research company that is seeking FDA approval for a new product. The employee ordinarily would be asked to participate in the FDA's review and approval process. The employee's spouse is a salaried employee and has no direct ownership interest in the company. Moreover, she does not have an indirect ownership interest such as an interest in a pension plan that holds stock in the company. Her position with the company is such that the granting or withholding of FDA approval
-22 - will not have a direct and predictable effect on her salary or on her continued employment with the company. Since the FDA approval process will not affect his spouse's financial interests, the employee may participate in that process.2
D. Particular matter means a matter that involves deliberation, decision or action that is focused upon the interests of a specific person, or a discrete and identifiable class of persons. Such a matter is covered by the federal conflict of interest regulations even if it does not involve formal parties, and may include governmental action such as legislation or policymaking that is narrowly focused on the interests of a discrete and identifiable class of persons. However, the term particular matter does not extend to the consideration or adoption of a broad policy option that is directed to the interests of a large and diverse group of persons. The particular matters covered by the federal conflict of interest regulations include a judicial or other proceeding, application, request for a ruling or other determination, contract, claim, controversy, charge, accusation or arrest.
Example 1
An employee's evaluation of proposals received in response to a Request for Proposal is a particular matter. An employee's review of an application filed by a bank holding company also is a particular matter.
Example 2
Consideration by the Interstate Commerce Commission of regulations establishing safety standards for trucks on interstate highways involves a particular matter.
E. Personal and substantial. To participate personally means to participate directly. It includes the direct and active supervision of the participation of a subordinate in the matter. To participate substantially means that the employee's involvement is of significance to the matter. Participation may be substantial even though it is not determinative of the outcome of a particular matter. However, it requires more than official responsibility, knowledge, perfunctory involvement, or involvement on an administrative or peripheral issue. A finding of substantiality should be based not only on the effort devoted to a matter, but also on the importance of the effort. While a series of peripheral involvements may be insubstantial, the single act of approving or participating in a critical step may be substantial. Personal and substantial participation may occur when, for example, an employee participates through decision, approval, disapproval, recommendation, investigation or the rendering of advice in a particular matter.
3. Disqualification. Unless the employee is authorized to participate in the particular matter by virtue of a waiver described in paragraph (4) of this Part or because the interest has been divested in accordance with paragraph (5) of this Part, an employee must disqualify himself or herself from participating in a particular matter in which, to the employee's knowledge, he or she, or a person whose interests are imputed to the employee, has a financial interest, if the particular matter will
2 Note that the Code of Conduct does not apply to FDA employees. If the example had involved a Bank employee, the employee should consult with the Bank’s Ethics Officer before participating since the employee's participation in the review and approval process might result in the appearance of a conflict of interest, contrary to Section 5.1 of the Code.
-23 - have a direct and predictable effect on that interest. Disqualification is accomplished by not participating in the particular matter.
a) Notification. An employee who becomes aware of the need to disqualify himself or herself from participating in a particular matter should notify the person responsible for his or her assignment or the Bank's Ethics Officer. An employee who is responsible for his or her own assignment should take whatever steps are necessary to ensure that he or she does not participate in the matter from which he or she is disqualified. Appropriate oral or written notification of the employee's disqualification may be made to coworkers by the employee or a supervisor to ensure that the employee is not involved in a matter from which he or she is disqualified.
b) Documentation. An employee need not file a written disqualification statement unless asked to do so by the Bank's Ethics Officer or a supervisor. However, an employee may elect to create a record of his or her actions by providing written notice to a supervisor or other appropriate officer.
4. Waiver of disqualification. An employee who would otherwise be disqualified may be permitted to participate in a particular matter where the otherwise disqualifying financial interest is exempt (see Part II of this Appendix), is the subject of an individual waiver described in this paragraph, or results from certain Indian birthrights as described in 18 U.S.C. § 208 (b) (4). An individual waiver may be requested pursuant to 18 U.S.C. § 208 (b) (1). In advance of the employee's participation, the employee must advise the officer responsible for the employee's appointment (or other officer to whom authority to issue such a waiver for the employee has been delegated) about the nature and circumstances of the particular matter and the employee's role in the matter; and make full disclosure to the officer of the nature and extent of the disqualifying financial interest. If the officer determines that the employee's financial interest in the particular matter is not so substantial as to be deemed likely to affect the integrity of the services which the Bank may expect from the employee, the officer may issue a written waiver to the employee.
5. Divestiture of a disqualifying financial interest. Upon sale or other disposal of the interest that causes his or her disqualification from participation in a particular matter, the employee may participate in the matter.
a) Voluntary divestiture. An employee who otherwise would be disqualified from participating in a particular matter may voluntarily sell or otherwise dispose of the interest that causes the disqualification. b) Directed divestiture. An employee may be required to sell or otherwise dispose of the disqualifying financial interest if the continued holding of that interest is prohibited by Section 5 of the Code or substantially interferes with the ability of the employee to perform his or her job.
6. Official duties that give rise to potential conflicts. When an employee's duties create a substantial likelihood that the employee may be assigned to a particular matter from which he or she is disqualified, the employee should advise his or her supervisor or the Bank's Ethics Officer of that potential so that a conflicting assignment can be avoided.
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PART II. EXEMPTIONS PURSUANT TO 18 U.S.C. § 208 (b) (2)
1. Definitions. For purposes of this Part, the following definitions apply.
A. Diversified means that a fund, trust or plan does not have a stated policy of concentrating its investments in any industry, business, single country other than the United States, or bonds of a single state within the United States. In the case of an employee benefit plan, diversified means that the plan's trustee has a written policy of varying plan investments.
B. Long-term federal government security means a bond or note, except for a US Savings bond, with a maturity of more than one year, issued by the United States Treasury pursuant to 31 U.S.C. Chapter 31.
C. Municipal security means direct obligation of, or obligation guaranteed as to principal or interest by, a state (or any of its political subdivisions, or any municipal corporate instrumentality of one or more states), or the District of Columbia, Puerto Rico, the Virgin Islands, or any other possession of the United States.
D. Mutual fund means an entity which is registered as a management company under the Investment Company Act of 1940, as amended (15 U.S.C.§§ 80a-1 et seq.). Mutual fund includes open-end and closed-end mutual funds and registered money market funds.
E. Sector mutual fund means a mutual fund that concentrates its investments in an industry, business, single country other than the United States, or bonds of a single state within the United States.
F. Short-term federal government security means a bill with a maturity of one year or less issued by the United States Treasury pursuant to 31 U.S.C. Chapter 31.
2. Exemption for Interest in Mutual Fund, Unit Investment Trust, and Employee Benefit Plan.
A. Diversified mutual fund and unit investment trust. An employee may participate in a particular matter affecting holdings of a diversified mutual fund or a diversified unit investment trust where the disqualifying financial interest in the matter arises because of the ownership of an interest in the fund or trust.
Example
An employee owns shares worth $60,000 in several mutual funds whose portfolios contain stock in a nationally known computer company. Each fund prospectus describes the fund as a "management company," but does not characterize the fund as having a policy of concentrating its investments in any particular industry, business, single country (other than the U.S.) or bonds of a single state. The employee may participate in a matter affecting the computer company.
-25 - B. Sector mutual fund. An employee may participate in a particular matter affecting holdings of a sector mutual fund where the disqualifying financial interest in the matter arises because of ownership of an interest in the fund and:
(1) The affected holding is not invested in the sector in which the fund concentrates. (2) The aggregate market value of interests in any sector fund or funds does not exceed $50,000.
For purposes of calculating the $50,000 de minimis amount, an employee must aggregate the market value of all sector mutual funds in which the employee has a disqualifying interest and that concentrate in the same sector and have one or more holdings that may be affected by the particular matter.
Example 1
A Bank employee owns shares in a mutual fund that expressly concentrates its holdings in the stock of utility companies. In addition to holdings in utility companies, the fund contains stock in certain regional banks and bank holding companies whose financial interests would be affected by a matter in which the employee would participate. The employee is not disqualified from participating in the matter because the banks and bank holding companies that would be affected are not part of the sector in which the fund concentrates.
Example 2
An analyst is assigned at the Federal Reserve Board’s request to help draft standards for approving loan guarantee applications for the Air Transportation Stabilization Board. The analyst owns $35,000 worth of shares in XYZ Global Transportation Fund, a sector mutual fund invested primarily in shipping firms and airlines. The analyst may participate in the recommendations. If the analyst’s spouse also owns $40,000 worth of shares in ABC Specialized Portfolios: Transport, a sector mutual fund that focuses on the same sector, and if both funds contain holdings that may be affected by the particular matter, the analyst may not rely on the $50,000 de minimis exemption.
C. Employee benefit plan. An employee may participate in:
(1) A particular matter affecting holdings of an employee benefit plan where the disqualifying financial interest in the matter arises from membership in:
(a) The Thrift Savings Plan for Federal Employees described in 5 U.S.C. §8437. (b) A pension plan established or maintained by a state government or any political subdivision of a state government for its employees. (c) A diversified employee benefit plan, provided: (i) The investments of the plan are administered by an independent trustee, and the employee, or other person specified in section 208(a), does not participate in the selection of the plan's investments or designate specific plan investments (except for directing that contributions be divided among several different categories of investments, such as stocks, bonds or mutual funds, which are available to plan participants).
-26 - (ii) The plan is not a profit-sharing or stock bonus plan.
(2) A particular matter of general applicability, such as rulemaking, affecting the state or local government sponsor of a state or local government pension plan described in paragraph 2(C)(1)(b) where the disqualifying financial interest in the matter arises because of participation in the plan.
3. Exemption for Interest in Securities.
a) De minimis exemption for a matter involving parties. An employee may participate in a particular matter involving specific parties where the disqualifying financial interest arises from ownership by the employee, his or her spouse or minor children of securities issued by one or more entities affected by the matter, if:
(1) The securities are publicly traded,3 or are long-term federal government securities or municipal securities. (2) The aggregate market value of the holdings of the employee, his spouse and minor children in the securities of all entities does not exceed $15,000.
Example
A Bank employee owns $10,000 worth of publicly traded stock in a major office equipment manufacturer, EQP Corp. The employee may evaluate the proposals submitted by EQP Corp. and others in response to an RFP. If the employee's spouse also owns $6,000 worth of EQP Corp. stock, the employee may not evaluate the proposals unless the employee requests and is granted a waiver.
b) De minimis exemption for matters affecting nonparties.4 An employee may participate in a particular matter involving specific parties in which the disqualifying interest arises from the ownership by the employee, his spouse, or minor children of securities issued by one or more entities that are not parties to the matter but that are affected by the matter if:
(1) The securities are publicly traded, or are long-term federal government or municipal securities.
(2) The aggregate market value of the holdings of the employee, his spouse and minor children in the securities of all affected entities (including securities exempted under subparagraph (A) of this section) does not exceed $25,000.
c) De minimis exemption for a matter of general applicability. An employee may participate in a particular matter of general applicability, such as rulemaking, where the disqualifying financial interest arises from ownership by the employee, his or her spouse or minor children of securities issued by one or more entities affected by the matter, if:
3 Securities issued by Government Sponsored Enterprises, such as Freddie Mac, are not eligible for the exemptions in paragraphs 3(A) (C) since they are not “publicly traded.”
4 See footnote 1 of this Appendix for examples of particular matters that may affect nonparties, such as affiliates or competitors of parties.
-27 -
(1) The securities are publicly traded, or are municipal securities, the market value of which does not exceed: (a) $25,000 in any one such entity. (b) $50,000 in all affected entities.
(2) The securities are long-term federal government securities, the market value of which does not exceed $50,000.
For purposes of this subparagraph (c), the value of securities owned by the employee, his or her spouse and minor children must be aggregated. d) Exemption for certain federal government securities. An employee may participate in a particular matter where the disqualifying financial interest arises from ownership of short-term federal government securities or from U.S. Savings Bonds. e) Exemption for interests of tax-exempt organization. An employee may participate in a particular matter where the disqualifying financial interest arises from the ownership of publicly traded or municipal securities or long-term federal government securities by an organization which is tax- exempt pursuant to 26 U.S.C. § 501(c)(3) or (4), and of which the employee is an unpaid officer, director, trustee or employee, if:
(1) The matter affects only the organization's investments, not the organization directly.
(2) The employee plays no role in making investment decisions for the organization, except for participating in the decision to invest in several different categories of investments such as stocks, bonds, or mutual funds.
(3) The organization's only relationship to the issuer, other than that which arises from routine commercial transactions, is that of an investor.
Example
An employee is a director of the National Association to Save Trees (“NAST”), an environmental organization that is tax-exempt under section 501(c)(3) of the Internal Revenue Code. The employee knows that NAST has an endowment fund that is partially invested in the publicly traded stock of Computer, Inc. The employee's position at the Bank involves the procurement of computer software, including software sold by Computer, Inc. The employee may participate in the procurement of software from Computer, Inc. provided he is not involved in selecting NAST’s investments, and provided NAST has no relationship to Computer, Inc. other than as an investor in the company and routine purchaser of Computer, Inc. software. f) Exemption for certain interests of general partner. An employee may participate in any particular matter where the disqualifying financial interest arises from:
(1) The ownership of publicly traded securities, long-term federal government securities, or municipal securities by the employee's general partner, if:
-28 -
(a) ownership of the securities is not related to the partnership between the employee and the general partner.
(b) The value of the securities does not exceed $200,000; or
(2) An interest of the employee's general partner, if the employee's relationship to the general partner is as a limited partner in a partnership that has at least 100 limited partners.
4. Exemption for financial interest arising from federal government or Bank employment or from Social Security or veteran's benefits. An employee may participate in any particular matter where the disqualifying financial interest arises from federal government or Federal Reserve Bank salary or benefits, or from Social Security or veterans' benefits, except an employee may not:
(a) Make a determination that individually or specially affects the employee's own salary and benefits.
(b) Make a determination, request, or recommendation that individually or specially relates to, or affects, the salary or benefits of any other person specified in 18 U.S.C. § 208.
PART III. SEEKING OTHER EMPLOYMENT
1. Overview
An employee who seeks other employment or has an arrangement for prospective employment must comply with the applicable disqualification requirements of this Part if his or her Bank duties would affect the financial interests of the prospective employer or the person with whom he or she has an arrangement concerning prospective employment.
2. Definitions
(a) Direct and predictable effect and particular matter have the respective meanings set forth in Part I of this Appendix regarding "Disqualifying Financial Interests."
(b) Employment means any form of non-Bank employment or business relationship involving the provision of personal services by the employee, whether to be undertaken at the same time as or subsequent to Bank employment, even if the employee is not compensated for the services. It includes but is not limited to personal services provided as an officer, director, employee, agent, attorney, consultant, contractor, general partner or trustee.
(c) Prospective employer means any person with whom the employee is seeking employment. Where a contact that constitutes seeking employment is made by or with an agent or other intermediary, the term prospective employer includes:
-29 - (1) The person using the agent or other intermediary for the purpose of trying to hire the employee, provided the agent identifies the prospective employer to the employee.
(2) A person contacted by the employee's agent or other intermediary for the purpose of seeking a job offer for the employee if the agent identifies the prospective employer to the employee.
Example
An examiner has retained an employment search firm to help her find another job. The search firm has just reported to her that it has given her resume to and had promising discussions with two bank holding companies in the District. Even though the employee has not personally had employment discussions with either, each bank holding company is her prospective employer. She began seeking employment with each upon learning its identity and that it has been given her resume.
(d) Seeking employment means that an employee has, directly or indirectly:
(1) Engaged in negotiations for employment with any person. Negotiations mean discussion or communication with another person, or such person's agent or intermediary, mutually conducted with a view toward reaching an agreement regarding possible employment with that person. The term is not limited to discussions of specific terms and conditions of employment in a specific position.
(2) Made an unsolicited communication to any person, or such person's agent or intermediary, regarding possible employment with that person. However, the employee has not begun seeking employment if that communication was:
(a) For the sole purpose of requesting a job application. (b) For the purpose of submitting a resume or other employment proposal to a person affected by the performance or nonperformance of the employee's duties only as part of an industry or other discrete class. The employee is considered to have begun seeking employment upon receipt of any response indicating an interest in employment discussions.
(3) Made a response other than rejection to an unsolicited communication from any person, or such person's agent or intermediary, regarding possible employment with that person.
Example
An employee in the Check Collection Department has mailed his resume to 25 commercial banks. He has not begun seeking employment with any of the twenty-five. If he receives a response from one of the commercial banks indicating an interest in employment discussions, the employee will have begun seeking employment with that bank at that time.
(e) Not seeking employment. An employee is no longer seeking employment when:
(1) The employee or the prospective employer rejects the possibility of employment and all discussions of possible employment have terminated.
-30 -
(2) Two months have transpired after the employee sent an unsolicited resume or employment proposal, and the employee has received no indication of interest in employment discussions from the prospective employer. A response that defers discussions until the foreseeable future does not constitute rejection of an unsolicited employment proposal, nor rejection of a prospective employment possibility.
Example 1
An employee with procurement responsibilities is complimented by a vendor's representative who asks her to call if she is interested in leaving the Bank. The employee explains to the vendor that she is very happy with her job at the Bank and is not interested in another job. She thanks him for his compliment regarding her work and adds that she'll remember his interest if she ever decides to leave the Bank. The employee has rejected the unsolicited employment overture and has not begun seeking employment.
Example 2
The employee in the preceding example responds by stating that she cannot discuss future employment while she is working on a project affecting the vendor's relationship with the Bank but would like to discuss employment when the project is completed. Because the employee has merely deferred employment discussions until the foreseeable future, she has begun seeking employment.
Example 3
An economist responsible for reviewing certain bank holding company applications sends her resume to a bank holding company in the District. The employee has begun seeking employment with that company and will be seeking employment for two months from the date the resume was mailed. However, if she withdraws her application or is notified within the two-month period that her resume has been rejected, she will no longer be seeking employment with the company as of the date she makes such withdrawal or receives such notification.
3. Disqualification While Seeking Employment
a) Obligation to disqualify. Unless the employee's participation is authorized in accordance with paragraph 4 of this Part, the employee must not participate in a particular matter that, to the employee's knowledge, has a direct and predictable effect on the financial interests of a prospective employer with whom he or she is seeking employment. Disqualification is accomplished by not participating in the particular matter.
b) Notification. An employee who becomes aware of the need to disqualify himself or herself from participation in a particular matter should notify the person responsible for his or her assignment or the Bank's Ethics Officer. An employee who is responsible for his or her own assignment should take whatever steps are necessary to ensure that he or she does not participate in the matter from which he or she is disqualified. Appropriate oral or written notification of the employee's disqualification may be made to coworkers by the employee or a supervisor to ensure that the employee is not involved in a matter from which he or she is disqualified.
-31 - c) Documentation. An employee need not file a written disqualification statement unless he or she is specifically asked to do so by the Bank's Ethics Officer or a supervisor. However, an employee may elect to create a record of his actions by providing written notice to a supervisor or other appropriate officer.
d) Bank determination of substantial conflict. When the Bank determines that the employee's action in seeking employment with a particular person requires disqualification from a matter so central or critical to the performance of the employee's duties that the employee's ability to perform the duties of his or her position will be materially impaired, the Bank may take appropriate action, including termination of employment.
4. Waiver or Authorization Permitting Participation While Seeking Employment
a) Waiver. When an employee is engaged in discussions that constitute seeking employment, the employee may participate in a particular matter that has a direct and predictable effect on the financial interest of a prospective employer only after receiving a written waiver issued under the authority of 18 U.S.C.§ 208 (b) (1). The requirements for a waiver are described in paragraph 4 of Part I. b) Authorization by Bank. Where an employee is seeking employment and a reasonable person would be likely to question the employee's impartiality if the employee were to participate in a particular matter that has a direct and predictable effect on the financial interests of the prospective employer, the employee may participate in such matters only where the Bank has authorized his or her participation after consideration of all relevant factors, including:
(1) The nature of the relationship involved. (2) The effect that resolution of the matter would have upon the financial interests of the person involved in the relationship. (3) The nature and importance of the employee's role in the matter, including the extent to which the employee is called upon to exercise discretion in the matter. (4) The sensitivity of the matter. (5) The difficulty of reassigning the matter to another employee. (6) Adjustments that may be made in the employee's duties that would reduce or eliminate the likelihood that a reasonable person would question the employee's impartiality.
5. Disqualification Based on an Arrangement Concerning Prospective Employment or Otherwise After Negotiations
A. Employment or arrangement concerning employment. An employee must not take any official action in a particular matter that will have a direct and predictable effect on the financial interests of the person by whom he or she is employed or with whom he or she has an arrangement concerning future employment, unless authorized to participate in the matter by a written waiver issued under the authority of 18 U.S.C. § 208 (b) (1). The requirements for a waiver are described in paragraph 4 of Part I of this Appendix.
B. Offer rejected or not made. The Bank may, in an appropriate case, determine that an employee who has sought but is no longer seeking employment nevertheless shall be subject to a period of
-32 - disqualification upon the conclusion of employment negotiations. Any such determination shall be based on a consideration of all the relevant factors and a determination that the concern that a reasonable person may question the integrity of the Bank's decision making process outweighs the Bank's interest in the employee's participation in the particular matter. Relevant factors are listed in paragraph 4 (B) of this Part.
Example
An employee with purchasing responsibilities was relieved of responsibility for handing the evaluation of responses to an RFP while seeking employment with a bidder. The firm did not offer her employment. Even though she is no longer seeking employment with the firm, she may continue to be disqualified from evaluating the RFP responses based on a determination that the concern that a reasonable person might question whether, in view of the history of the employment negotiations, she could act impartially in the matter outweighs the Bank's interest in her participation.
-33 - APPENDIX B
This Appendix contains a description of the rules adopted by the Board of Governors (the "Board"), that are applicable to examiners and also to other employees who participate in supervision or regulation matters other than examinations and inspections, such as an attorney or economist who reviews bank holding company applications or an employee who has a substantive role in discount/lending decisions, regardless of reporting relationships within the Bank.
The rules described in this Appendix are a condensed version of the rules set forth in the document entitled "Banking Supervision and Regulation Administrative Policy Statements" [SR-05-02 dated February 3, 2005, which is set forth in Sections 5-035 and 5-041 of Part 5 of the Federal Reserve Administrative Manual (the "FRAM"); and SR-05-26, dated December 8, 2005, regarding post- employment restrictions for senior examiners, which is set forth in Section 5-043 of FRAM]. For more detailed information, you should review the SR-letters or FRAM.
The Board's rules supplement the Bank's Code of Conduct (the "Code"). To the extent the rules set more stringent standards for employees covered by this Appendix than those contained in the Code, the Board's rules are to be followed.
Part I contains a description of the rules for examiners; Part II contains a description of the rules for other employees with substantive responsibilities relating to supervision or regulation matters.
When used in this Appendix:
• The word "examine" or "examination" refers both to examining a depository institution and to inspecting a bank holding company (including a financial holding company) or any non- bank subsidiary.
• "Supervisory matter" includes, but is not limited to, an application, audit, review (including report review), institution-specific analysis or surveillance, enforcement action, investigation, credit review, collateral analysis, or lending decision. However, supervisory matter does not include an examination.
An employee who needs assistance in interpreting the Board's rules or who desires additional information, for example about a waiver, should contact the Bank's Ethics Officer.
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PART I. RULES FOR CREDENTIALED STAFF
The rules in this Part apply to all employees holding a Board issued standard, special, temporary or ad hoc credential. However, paragraph 1 (B), concerning prohibited borrowing relationships, applies only to employees holding a standard or special credential.
1. Prohibited Borrowing
a) Criminal Prohibition. It is a crime under federal law (18 U.S.C. § 213) for an examiner to accept a loan or gratuity from an institution the examiner examined. It is also a federal crime (18 U.S.C. § 212) for an employee or director of a member bank or certain other institutions which an examiner examines or has authority to examine to grant a loan or gratuity to the examiner. Under these provisions, the term “loan” does not include any credit card account established under an open end consumer credit plan or a loan secured by residential real property that is the principal residence of the examiner, if:
1. The applicant satisfies any financial requirements for the credit card account or residential real property loan that are generally applicable to all applicants for the same type of credit card account or residential real property loan.
2. The terms and conditions applicable with respect to such account or residential real property loan, and any credit extended to the examiner under such account or residential real property loan, are no more favorable generally to the examiner than the terms and conditions that are generally applicable to credit card accounts or residential real property loans offered by the same financial institution to other borrowers or cardholders in comparable circumstances under open end consumer credit plans or for residential real property loans.
3. With respect to residential real property loans, the loan is with respect to the primary residence of the applicant.
b) Borrowings Prohibited by the Federal Reserve System for Employees Holding Standard or Special Credentials.
1. General prohibition.
An examiner holding a standard or special credential may not borrow from any entity for which the Federal Reserve System ("System") is the primary supervisor 5 other than through certain credit cards or home mortgage loans (see paragraph B (2) (a) below). Debt incurred
5 The System is the primary supervisor for state member banks, bank holding companies, nonbank subsidiaries of a bank holding company (except thrift and functionally regulated subsidiaries), Edge and Agreement corporations, and state licensed US branches and agencies, representative offices and non-bank subsidiaries of foreign banks having a US banking presence.
-35 - by the examiner's spouse or dependent child is attributed to the examiner for purposes of this prohibition unless the debt: (a) is supported solely by the income or independent means of the spouse or child; (b) was not provided on terms more favorable than those available to the public (i.e., was not offered or enhanced because of the examiner's position at the Bank); and (c) was not negotiated, endorsed, guaranteed or co-signed by the examiner.
An examiner may borrow from a national bank, state nonmember bank or savings and loan association even if it is an affiliate of a bank holding company or state member bank. An examiner may also borrow from a functionally regulated subsidiary of a bank holding company, for example, an insurance or securities broker/dealer subsidiary.6 In these cases, the borrowing may result in recusal from an examination or inspection of that entity or an affiliate of that subsidiary.
2. Exceptions
a) Credit cards and Residential mortgage loans. The prohibition in paragraph B (1) above shall not apply to any credit card account established under an open-end consumer credit plan or a loan (including a home equity line of credit) secured by residential real property that is the principal residence of the examiner, if:
i) The applicant satisfies any financial requirements for the credit card account or residential real property loan that are generally applicable to all applicants for the same type of credit card account or residential real property loan.
ii) The terms and conditions applicable with respect to such account or residential real property loan, and any credit extended to the examiner under such account or residential real property loan, are no more favorable generally to the examiner than the terms and conditions that are generally applicable to credit card accounts or residential real property loans offered by the same financial institution to other cardholders or borrowers in comparable circumstances under open-end consumer credit plans or residential real property loans.
b) Loan acquired. If a debt that was permissible when it was originated becomes impermissible under paragraph B (1) above as a result of having been acquired by an institution for which the System is the primary supervisor, the debt may be retained if:
i) The debt is amortizing. ii) The debt is not renewed, renegotiated or increased. iii) Payments are current. iv) The examiner is restricted from examining the institution which currently holds the debt.
6 “Functionally regulated subsidiary” means a registered broker or dealer, registered investment advisor, investment company, insurance company, or entity engaged in commodities activities as these entities are defined by section 5 (c)(5) of the Bank Holding Company Act.
-36 - A loan originated at an entity for which the System becomes the primary supervisor as a result of a charter conversion, a change in membership, or merger is treated in the same manner as a loan acquired.
An examiner may not retain debt extended under a revolving line of credit, other than a consumer credit card or home equity loan, which is sold or transferred to, or acquired by an impermissible credit source. Such debt must be eliminated or converted to an amortizing facility within six months after the date the examiner is notified of the sale or transfer of the debt.
c) Pre-existing debt. An examiner may retain any debt that is prohibited under paragraph B (1) above if it was incurred prior to appointment as an examiner so long as:
i) The debt is amortizing. ii) The debt is not renewed, renegotiated or increased. iii) Payments are current. iv) The examiner's credential specifically excludes authority to examine the creditor institution and any affiliate. v) The examiner does not participate in any examination of the institution or any affiliate. vi) The examiner indicates, in writing, that he or she understands and will comply with the foregoing conditions while the debt is outstanding.
An examiner with other types of preexisting debt that are prohibited under paragraph B (1) above, such as credit extended under a revolving line of credit (other than a consumer credit card or home equity loan) or non-amortizing debt, must retire the debt or convert it to an amortizing facility within six months after appointment as an examiner. Until then, (i) the debt may not be increased; (ii) the examiner's credential must specifically exclude authority to examine the creditor institution and any affiliate; and (iii) the examiner may not examine the institution or any affiliate.
3. Waiver.
The Board's Director of the Division of Banking Supervision and Regulation is authorized to waive the prohibitions described in paragraph B (1) above in certain limited circumstances. However, it is anticipated that a waiver will be rarely given.
2. Instances Where Recusal Is Required a) Recusal from Examinations and Inspections Based Upon Borrowing Relationship/Seeking Credit.
1. Recusal required. An examiner may not examine any entity, or an affiliate of any entity, from which the examiner or the examiner's spouse or dependent child, or a related entity,7 is borrowing, leasing, or seeking credit.
7 A “related entity” means an entity in which the examiner, the examiner’s spouse or dependent child owns or controls more than ten percent of its equity, or a partnership in which the examiner or his or her spouse is a general partner.
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2. Exceptions:
a) An examiner may examine any entity, including any affiliate of such entity, from which the examiner, the examiner’s spouse or dependent child has obtained a credit card in accordance with paragraph 1 (B) (2) (a) above.
b) An examiner may examine the affiliate of any entity from which the examiner, the examiner's spouse or dependent child:
i. Has a loan secured by residential real property in accordance with paragraph 1 (B) (2) (a) above. ii. Has an overdraft protection line. iii Is borrowing against the cash value of a life insurance policy.
The credit card, loan secured by residential real property, overdraft protection line, or insurance policy loan must not have been provided on terms more favorable than those available to the public.
Example
An examiner has an overdraft protection line on his checking account at a national bank subsidiary of a bank holding company. The examiner may examine any affiliate of the national bank, including the parent bank holding company. However, as pointed out in paragraph 2 (A) (1) of this Part, the examiner may not examine the national bank.
Another example is borrowing against the cash value of a life insurance policy issued by an insurance subsidiary of a financial holding company. The examiner may participate in an examination or inspection of an affiliate that is supervised by the Federal Reserve.
3. Servicing relationships. An examiner may participate in an examination of, or a supervisory matter involving, an organization that services a loan of the employee or the employee's spouse or dependent child, unless the examiner knows the servicer has retained a financial interest in the underlying value of the credit.
4. Waiver. In limited circumstances, the examiner's supervising officer, in consultation with the Bank's Ethics Officer, may provide written authorization for an examiner to examine an institution, or an affiliate of an institution, with which the examiner, his or her spouse, dependent child or a related entity has a borrowing relationship, although participation in the examination otherwise would be prohibited under paragraph 2 (A) (1) above.
-38 - b) Recusal from Supervisory Matters (Other Than Examination/Inspection) Based on Borrowing Relationship.
1 Recusal requirement. An examiner may not participate in any supervisory matter involving an institution or any affiliate if the examiner, or the examiner's spouse or dependent child, or a related entity, is indebted to the institution or any affiliate.
2 Exceptions.
a) Recusal is not required if the debt was not extended on terms more favorable than those available to the public, all payments are current, and the debt is extended through:
i) A line of credit extended through a credit card. ii) An amortizing consumer credit loan (including a first or second mortgage on a personal residence) or a home equity line of credit. iii) An overdraft protection line. iv) A student loan. v) A car lease. vi) A loan against the cash value of an insurance policy.
b) In addition, recusal is not required with respect to any debt of the examiner's spouse or dependent child, or a related entity of the spouse or dependent child if:
i) The debt is the sole responsibility of the spouse, child or related entity, and is not derived from the examiner's income, assets or activities. ii) The examiner has no knowledge of the identity of the lender.
Example
The following illustrates how the recusal standards described in paragraphs 2 (A) and 2 (B) are based on the type of assignment, rather than if the person is credentialed.
An examiner with a student loan from a national bank may not participate in an examination of the bank, its parent or any affiliate as such participation would violate System policy and could be a violation of criminal law. On the other hand, System policy allows the examiner to be assigned to handle a supervisory matter concerning the bank, the parent company or an affiliate, so long as payments on the student loan with the national bank are current, and it was obtained on terms not more favorable than those available to the public. If, instead, the examiner has a business loan with the bank, System policy requires that the examiner be restricted from handling any supervisory matter involving the bank, the parent company or an affiliate. c) Prohibition Against Seeking Credit if Handling Supervisory Matter (Other Than Examination/Inspection).
1) General Prohibition. An examiner may not, on his or her own behalf, or on behalf of anyone else, seek or accept a loan from, or renew or renegotiate a loan with, an institution
-39 - or any affiliate if the examiner is working on or knows he or she will be assigned a supervisory matter which involves the institution or any affiliate. Furthermore, an examiner must disqualify himself or herself from handling a supervisory matter involving an institution or any affiliate if the examiner learns that his or her spouse or dependent child or a related entity is seeking or has sought or accepted a loan from, or has renewed or renegotiated a loan with, the institution or any affiliate while the matter is pending before the Bank or the Board. The foregoing prohibitions continue for three months after the examiner's participation in the matter ends.
2) Exceptions. These prohibitions do not apply to: i) obtaining or using a credit card; ii) borrowing against the cash value of a life insurance policy; or iii) an overdraft protection plan. The credit card, overdraft protection line, or insurance policy loan must not have been provided on terms more favorable than those available to the public.
3) Waiver. A written waiver from the prohibitions of this paragraph 2 (C) may, in some limited circumstances, be obtained from the examiner's supervising officer, in consultation with the Bank's Ethics Officer.
3. Recusal Based Upon Past Employment, Family Relationships or Financial Interests
A. Past Employment. An examiner may not examine, or participate in a supervisory matter involving, an institution or any affiliate if the examiner was employed by the institution within the preceding 12 months. The examiner's supervising officer, in consultation with the Bank's Ethics Officer, may determine that recusal should be required for a longer period.
B. Continuing Participation in Pension/Retirement Plan. If an examiner continues to participate in a pension or retirement plan obtained through prior employment at an institution or any affiliate, the examiner may not participate in an examination of that institution or any affiliate, nor may the examiner participate in a supervisory matter involving the institution or any affiliate unless the examiner receives a written opinion from the Bank's General Counsel authorizing such participation.
C. Family Relationships. An examiner may not examine an institution or any affiliate, or participate in a supervisory matter involving the institution or any affiliate if the examiner's spouse, child, parent, or sibling is employed by the institution or any affiliate. The examiner's supervising officer, in consultation with the Bank's Ethics Officer, may require recusal in other situations that might give rise to an appearance of a conflict of interest—for example, if the examiner's sister-in-law is employed by the institution.
D. Financial Interests. Under Section 5.2 of the Code and federal criminal law (18 U.S.C. § 208), a Bank employee is prohibited from participating personally and substantially in an official capacity in any particular matter in which, to the employee's knowledge, the employee has a financial interest if the particular matter will have a direct and predictable effect on that interest. Participation in a particular matter may include making a decision or recommendation, providing advice, or taking part in an investigation. See Section 5.2 and Appendix A of the Code for more information.
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Example
An examiner may not participate in the review of a credit file during an examination, inspection, or a shared national credit examination, if the examiner or the examiner's spouse, minor child, general partner, or any organization for which the examiner serves as an employee, director or trustee, has a financial interest in the borrower, or if the examiner is negotiating for or has an agreement concerning future employment with the borrower.
An insurance policy may be a financial interest under the Federal conflicts of interest statute and an examiner holding an insurance policy should not participate in any particular matter affecting a company that issued the policy unless the examiner's participation is approved in advance and in writing by the Reserve Bank's legal department.
Example
An examiner who has an insurance policy from an insurance subsidiary of a financial holding company is generally permitted to examine an affiliate. However, cases may arise that require an examiner to recuse himself from all matters involving the financial holding company or its affiliates. For example, recusal may be appropriate if an examiner is filing or appealing a claim under the policy or if the insurance company is experiencing financial difficulties. Such situations should be discussed with the Bank's Ethics Officer to determine if recusal is appropriate.
E) Waiver. In certain cases, the prohibitions described in paragraphs 3 (A) and 3 (C) may be waived by the examiner's supervising officer, in consultation with the Bank's Ethics Officer. The prohibition described in paragraph 3 (D) may be waived only in accordance with the federal statute, and the examiner should consult with the Bank's Ethics Officer if such a waiver is desired.
4. Acceptance of Meals and Gratuities a) Gifts or Meals from Examined Entity. Notwithstanding anything to the contrary in the Code, under federal criminal law an examiner may not accept a gift from an entity that the examiner examined. As a matter of policy, the Board has decided that an examiner may not accept a gift or meal from an entity that the examiner has examined, examines or is authorized to examine. However, an examiner may:
1. Eat in the entity's cafeteria provided he or she pays for the meal at the rate charged the general public. 2. Accept refreshments such as soft drinks, coffee and donuts offered other than as part of a meal. 3. Accept items with little intrinsic value, such as a pen or calendar, provided such items are also offered to the general public. b) Gifts or Meals from other "Covered Sources". All Bank employees are subject to the provisions in the Code concerning acceptance of gifts and meals from "covered sources." Under the Code, the term covered source includes other entities in addition to institutions subject to examination by the System (See Section 5.4 of the Code).
-41 - c) Exceptions. The Code provides limited exceptions under which an employee may accept a gift or meal from a covered source. However, an examiner may never use the $20 "de minimis" exception (see Section 5.4 (A) (2) (a) (i) of the Code) to accept a gift or a meal from an institution for which the System is the primary supervisor (see footnote 1 to this Appendix). An examiner may accept a gift or a meal from a covered source pursuant to one of the other exceptions, provided that the covered source is not an entity that the examiner is examining, has examined, or is authorized to examine.
Example
An examiner's spouse is a loan officer at a state member bank. The examiner has never examined the bank, and will not be authorized to examine the bank as long as her spouse is employed by the bank. The examiner may accompany her spouse to the commercial bank's annual dinner dance for its employees and their guests pursuant to Section 5.4 (A) (2) (a) (iv) of the Code.
5. Special Post-Employment Restriction
A. Coverage. An examiner who has served as the “senior examiner” for a state member bank, bank holding company, or foreign bank for two or more months during the examiner’s final twelve months of employment with the Bank may not knowingly accept compensation as an employee, officer, director, or consultant from such state member bank, bank holding company, or foreign bank, or from certain related entities, for one year following the termination of the examiner’s employment with the Bank.
B. Definitions. An “examiner” is considered to be a “senior examiner” for a particular state member bank, bank holding company, or foreign bank if the examiner meets all of the following criteria:
1. The examiner has been authorized by the Board to conduct examinations or inspections on behalf of the Board.
2. The examiner has been assigned continuing, broad, and lead responsibility for examining or inspecting that state member bank, bank holding company, or foreign bank.
3. The examiner’s responsibilities for examining, inspecting, and supervising the state member bank, bank holding company, or foreign bank:
A. Represent a substantial portion of the examiner’s assigned responsibilities.
B. Require the examiner to interact routinely with officers or employees of the state member bank, bank holding company, or foreign bank or their respective affiliates.
-42 - By “related entities,” this restriction means:
1. With respect to a state member bank, a subsidiary of the state member bank or a company that controls the state member bank.
2. With respect to a bank holding company, any depository institution controlled by the bank holding company, including any subsidiary of the depository institution.
3. With respect to a foreign bank, any United States branch or agency of the foreign bank or any United States depository institution controlled by the foreign bank (including any subsidiary of the depository institution).
C. Limited Application of the Restriction. This restriction on post-employment does not apply to an examiner who performs only periodic, short-term examinations of a depository institution or holding company and who does not have ongoing, continuing responsibility for the institution or holding company. Moreover, this restriction does not cover an examiner who spends a substantial portion of his or her time conducting or leading a targeted examination (such as a review of an institution’s credit risk management, information systems, or internal audit functions) and who does not have broad and lead responsibility for the overall examination program for the institution or holding company.
D. Penalty. An examiner who violates this restriction shall be subject to (i) an order removing the examiner from the prohibited position, and (ii) an industry-wide employment prohibition for not more than five years, a civil penalty of not more than $250,000, or both.
E. Waiver. In exceptional circumstances, the Chairman of the Board may waive this restriction for a senior examiner by certifying in writing that granting the examiner a waiver would not affect the integrity of the Federal Reserve System’s supervisory program.
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PART II. RULES FOR OTHER EMPLOYEES WITH SUBSTANTIVE RESPONSIBILITIES RELATING TO SUPERVISION AND REGULATION MATTERS
These rules apply to the Bank President and other senior Bank officials who have responsibilities relating to supervision or regulation of financial institutions, all non-credentialed professional staff, including officers and managers, who participate substantially in supervisory matters (e.g., attorneys and certain economists), and all professional staff, including officers and managers, who participate in the discount window function. These persons are referred to as a "covered employee(s)". Supervisory matter does not include participating in an examination. See the introduction to this Appendix for examples of what this term does cover.
1. Prohibition Against Seeking Credit if Handling Supervisory Matter
A. General Prohibition. A covered employee is generally not restricted from borrowing from any entity, including one for which the System is the primary supervisor. However, a covered employee may not, on his or her own behalf, or on behalf of anyone else, seek or accept a loan from, or renew or renegotiate a loan with, an institution or any affiliate if the covered employee is working on or knows he or she will be assigned a supervisory matter which involves the institution or any affiliate.
Furthermore, a covered employee must disqualify himself or herself from handling a supervisory matter involving an institution or any affiliate if the covered employee learns that his or her spouse or dependent child or a related entity is seeking or has sought or accepted a loan from, or has renewed or renegotiated a loan with the institution or any affiliate while the matter is pending before the Bank or the Board.
The foregoing prohibitions continue for three months after the covered employee's participation in the matter ends.
B. Exceptions. These prohibitions do not apply to a line of credit extended through a credit card, an overdraft protection plan, or a loan against the cash value of a life insurance policy that was obtained on terms not more favorable than those available to the public (i.e., the terms were not offered or enhanced because of the covered employee's position at the Bank).
C. Waiver. A written waiver from the prohibitions of this paragraph may, in some limited circumstances, be obtained from the covered employee's supervising officer, in consultation with the Bank's Ethics Officer.
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2. Recusal from Supervisory Matter Based Upon Borrowing Relationship
A. Recusal Requirement. A covered employee may not participate in any supervisory matter involving an institution or any affiliate if the employee, his or her spouse or dependent child or a related entity8 is indebted to the institution or any affiliate.
B. Exceptions.
1. Recusal is not required if the debt was not extended on terms more favorable than those available to the public, payment on the debt is current, and the debt is:
i) A line of credit extended through a credit card. ii) An amortizing consumer loan (including a first or second mortgage on a personal residence) or a home equity line of credit. iii) An overdraft protection line. iv) A student loan. v) A car lease. vi) A loan against the cash value of an insurance policy.
2. Recusal is not required with respect to any debt of the covered employee's spouse or dependent child, or a related entity of the spouse or child if: i) The debt is the sole responsibility of the spouse, child or related entity, and is not derived from the covered employee's income, assets or activities. ii) The covered employee has no knowledge of the identity of the lender.
C. Waiver. A written waiver from the prohibitions of this paragraph may, in some limited circumstances, be obtained from the covered employee's supervising officer, in consultation with the Bank's Ethics Officer.
8 A “related entity” is an entity in which the covered employee, the covered employee’s spouse or dependent child owns or controls more than ten percent of its equity, or a partnership in which the covered employee or his or her spouse is a general partner.
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3. Recusal Based Upon Past Employment, Family Relationships or Financial Interests
A. Past Employment. A covered employee may not participate in a supervisory matter involving an institution or any affiliate if the covered employee was employed by the institution within the preceding 12 months. The covered employee's supervising officer, in consultation with the Bank's Ethics Officer, may determine that recusal should be required for a longer period.
B. Continuing Participation in Pension/Retirement Plan. If a covered employee continues to participate in a pension or retirement plan obtained through prior employment at an institution or any affiliate, the covered employee may not participate in a supervisory matter involving the institution or any affiliate unless the covered employee receives a written opinion from the Bank's General Counsel authorizing such participation.
C. Family Relationships. A covered employee may not participate in a supervisory matter involving an institution or any affiliate if the covered employee's spouse, child, parent or sibling is employed by the institution or any affiliate. The covered employee's supervising officer, in consultation with the Bank's Ethics Officer, may require recusal in other situations that might give rise to an appearance of a conflict of interest -- for example, if the covered employee's parent is a principal shareholder of the institution.
D. Financial Interests. Under Section 5.2 of the Code and federal criminal law (18 U.S.C. §208), a Bank employee is prohibited from participating personally and substantially in an official capacity in any particular matter in which, to the employee's knowledge, the employee has a financial interest if the particular matter will have a direct and predictable effect on that interest. Participation in a particular matter may include making a decision or recommendation, providing advice, or taking part in an investigation. See, Section 5.2 and Appendix A of the Code for more information.
E. Waiver. In certain cases, the prohibitions contained in paragraphs 3 (A) and 3 (C) may be waived by the covered employee's supervising officer, in consultation with the Bank's Ethics Officer.
-46 - APPENDIX C
Responsibilities of the Ethics Officer
1. The Ethics Officer, a senior officer of the Bank reporting to the President and First Vice President, is responsible for implementing the Bank’s program for maintaining the highest standards of honesty, integrity, and impartiality in the conduct of the Bank’s activities. The Ethics Officer is available to employees and officers alike.
2. The Ethics Officer annually distributes the Code to all officers and employees.
3. The Ethics Officer annually distributes a financial disclosure form to all officers and to employees with supervisory, procurement, or policymaking responsibilities.
4. An employee or officer may consult, orally or in writing, with the Ethics Officer about the application of the Code in a particular situation. The Ethics Officer provides counsel and guidance to the employee or officer about the conduct that the Ethics Officer considers appropriate under the Code. An officer or employee may also raise questions with his or her supervising officer, a Human Resources officer, the General Counsel, the First Vice President, or the President.
5. The Ethics Officer shall consult with the Bank’s General Counsel, as appropriate, about matters involving interpretations of the Code or the application of statutes and regulations to Bank staff.
6. The Ethics Officer may file in the confidential files of the Ethics Office a succinct report on guidance given to an employee or officer. From time-to-time the Ethics Officer may release to the entire Bank staff compilations of guidance given to employees of officers after deleting all information identifying the particular employee or officer.
7. The Ethics Officer may from time-to-time prepare educational material about the Bank’s ethics program and distribute it to the entire Bank staff or to areas that would find that information helpful.
8. The Ethics Officer consults with the President and First Vice President about broad issues concerning the Bank’s ethics program and may recommend revisions to policies or new areas to be covered by policies.
9. The Ethics Officer has such additional responsibilities with regard to the Bank’s ethics program as the President or First Vice President may specify.
10. The President or First Vice President may appoint Deputies to the Ethics Officer as appropriate.
-47 - U.S. Office of Government Ethics - Before Leaving Government Page 1 of 3
Before Leaving Government
In general, an executive branch employee is free to seek post-Government employment, but the employee may need to be disqualified from working on some Government matters while doing so.
Disqualification While “Seeking Employment” A criminal conflict of interest statute, 18 U.S.C. § 208, prohibits an employee from participating personally and substantially, in an official capacity, in any “particular matter” that would have a direct and predictable effect on the employee’s financial interests or on the financial interests of a person or organization with whom the employee is negotiating or has an arrangement concerning prospective employment. A related executive branch-wide regulation, Subpart F of 5 C.F.R. part 2635, prohibits an employee from working on a particular matter if the employee is “seeking employment” with a person or organization affected by that matter, even though the employee’s job search has not progressed to actual negotiations. An employee who complies with the disqualification requirements in Subpart F will ensure compliance with the conflict of interest statute.
An employee is “seeking employment” as defined in Subpart F, and the disqualification (“recusal”) requirement applies, if:
the employee is engaged in actual negotiations for employment;
a prospective employer has contacted the employee about possible employment and the employee makes a response other than rejection; or
the employee has contacted a prospective employer about possible employment, unless the sole purpose of the contact is to request a job application. (An employee is seeking employment with any person to whom he sends an unsolicited resume, regardless of how many resumes the employee sends to other employers at the same time.)
If a search firm or other intermediary is involved, disqualification is not triggered unless the intermediary identifies the prospective employer to the employee.
If the disqualification requirement applies, it extends to any particular matter (virtually any Government matter) that would have a direct and predictable effect on the financial interests of the prospective employer. However, if an employee has thus far acted only unilaterally, a narrow exception permits the employee to work on particular matters that affect the prospective employer only “as part of an industry or other discrete class.” Under the exception, work on this category of matters is permissible until the employee receives an expression of interest from the employer.
An employee is no longer seeking employment if:
Two months have elapsed since the employee’s dispatch of an unsolicited resume and the employee has received no expression of interest from the prospective employer; or U.S. Office of Government Ethics - Before Leaving Government Page 2 of 3
Either the employee or the prospective employer rejects the possibility of employment and all discussions of possible employment have ended. A response that merely defers discussion until the foreseeable future does not constitute rejection.
Example: Ted has met with representatives of several companies while working on a rulemaking that will affect the financial interests of those companies. One of the representatives asks Ted if he would be interested in discussing a job opening. If Ted responds that he “would like to discuss the opening, but not until the rulemaking is final,” he has not rejected the possibility of employment.
Notification and Documentation of Disqualification When an employee becomes aware of the need to be disqualified from a particular matter, the employee should notify the person responsible for his or her assignments, and may choose to document the disqualification in writing. Notification permits a supervisor to minimize any disruption of the agency’s mission by arranging assignments accordingly. Moreover, as a practical matter, an employee may need to explain the lack of progress on an assignment.
Any employee who is a public financial disclosure report filer must file a signed notification statement with his or her agency ethics official within three business days after commencing negotiations or entering into an agreement with a non-Federal entity to accept post-Government employment or compensation. The statement must identify the entity and specify the date the negotiations or agreement commenced. A public filer must also document his or her disqualification from any particular matter that would have a direct and predictable effect on the financial interests of the entity and submit that signed disqualification document to his or her agency ethics official. The notification statement and written disqualification may be combined in a single submission.
Some agencies may have established additional requirements concerning notification or the documentation of disqualifications (and see below concerning additional requirements for some procurement officials).
Interview Expenses If disqualified as necessary in accordance with Subpart F, an employee may accept gifts of meals, lodging, transportation, and other benefits customarily provided by a prospective employer in connection with bona fide employment discussions. This gift provision is published at 5 C.F.R. § 2635.204(e)(3).
Possible Disqualification After Employment Search If an employee accepts an offer of post-Government employment, the period of disqualification must continue until the end of Government service. If an employee’s search for other employment proves unsuccessful, the disqualification requirement ends, unless the agency imposes an additional period of disqualification.
Additional Requirements for Some Procurement Officials If an employee is working “personally and substantially” on a procurement for a contract worth more than the simplified acquisition threshold, 41 U.S.C. § 2103 (formerly 41 U.S.C. § 423) requires that the employee provide written notice of a contact with an offeror about prospective employment, even if the employee or contractor immediately rejects the possibility of employment. This “procurement integrity” provision also requires the employee to file a written disqualification memorandum if the employee commences to seek employment. Guidance concerning the particular requirements of this provision is published in the Federal Acquisition Regulation (FAR), at 48 C.F.R. part 3. U.S. Office of Government Ethics - Before Leaving Government Page 3 of 3
The information on this page is not a substitute for individual advice. Agency ethics officials should be consulted about specific situations.
U.S. Office of Government Ethics 1201 New York Avenue, NW. Suite 500 Washington, DC 20005 U.S. Office of Government Ethics - After Leaving Government Page 1 of 2
After Leaving Government
An executive branch employee may be affected by conflict of interest restrictions after leaving Government service (or after leaving certain high-level positions). As highlighted in the bullet points below, there are several legal authorities that address post-Government employment, and certain authorities contain more than one restriction. A particular former employee can be affected by more than one post-Government restriction.
Caveat: The bullet points are not comprehensive. Ethics officials and others should consult the legal authorities, regulatory guidance, and relevant legal opinions. In general, former executive branch employees should seek advice from the Designated Agency Ethics Official or another ethics official at the agency in which the individual formerly served.
Restrictions on Contacts with the Government on Behalf of Others
A former employee may be prohibited from having contact with an employee of any Federal agency or court, on behalf of another person or entity, concerning an official matter with which the former employee was involved as a Government employee. 18 U.S.C. § 207.
A former high-level employee or former political appointee may be prohibited from having contact with an employee of his or her former Federal agency (and perhaps certain officials at other agencies), on behalf of another person or entity, concerning any official matter. 18 U.S.C. § 207; Executive Order 13490 (the Ethics Pledge).
A former political appointee may be prohibited from lobbying a Government official on behalf of a client for whom he is registered as a lobbyist. Executive Order 13490 (the Ethics Pledge).
Restrictions on Providing Assistance to Others
A former employee may be prohibited from providing certain assistance to another person or entity concerning an ongoing trade or treaty negotiation (even though the assistance does not involve contact with a Government employee). 18 U.S.C. § 207.
A former high-level employee may be prohibited from providing certain assistance to a foreign government or foreign political party (even though the assistance does not involve contact with a Government employee). 18 U.S.C. § 207.
Restrictions on Accepting Compensation or Employment
A former employee may be prohibited from sharing in profits earned by others if the money was earned from having contact with the Government on behalf of third parties (e.g., clients) while the former employee was still in Government. 18 U.S.C. § 203.
A former employee may be prohibited from accepting compensation from a contractor if the former U.S. Office of Government Ethics - After Leaving Government Page 2 of 2
employee served in a Government position or made a Government decision involving more than $10,000,000 given to that contractor. 41 U.S.C. § 2104 (formerly 41 U.S.C. § 423).
A retired member of the uniformed services may not accept employment (or compensation for that employment) from a foreign government unless he or she first obtains approval from the Department of State. The Emoluments Clause of the U.S. Constitution.
Other Restrictions A former executive branch employee may be subject to additional restrictions imposed by agency-specific laws. Also, every former employee must ensure that his or her post-Government activities are in compliance with other requirements that may apply without regard to the individual’s employment by the Government. For example, if a former employee will serve as the agent of a foreign principal, the individual must comply with the Foreign Agents Registration Act.
The information on this page is not a substitute for individual advice. Agency ethics officials should be consulted about specific situations.
U.S. Office of Government Ethics 1201 New York Avenue, NW. Suite 500 Washington, DC 20005 18 USC § 207 Restrictions on former officers, employees, and elected officials of the executive and legislative branches
(a) Restrictions on All Officers and Employees of the Executive Branch and Certain Other Agencies.— (1) Permanent restrictions on representation on particular matters.— Any person who is an officer or employee (including any special Government employee) of the executive branch of the United States (including any independent agency of the United States), or of the District of Columbia, and who, after the termination of his or her service or employment with the United States or the District of Columbia, knowingly makes, with the intent to influence, any communication to or appearance before any officer or employee of any department, agency, court, or court-martial of the United States or the District of Columbia, on behalf of any other person (except the United States or the District of Columbia) in connection with a particular matter— (A) in which the United States or the District of Columbia is a party or has a direct and substantial interest, (B) in which the person participated personally and substantially as such officer or employee, and (C) which involved a specific party or specific parties at the time of such participation, shall be punished as provided in section 216 of this title. (2) Two-year restrictions concerning particular matters under official responsibility.— Any person subject to the restrictions contained in paragraph (1) who, within 2 years after the termination of his or her service or employment with the United States or the District of Columbia, knowingly makes, with the intent to influence, any communication to or appearance before any officer or employee of any department, agency, court, or court-martial of the United States or the District of Columbia, on behalf of any other person (except the United States or the District of Columbia), in connection with a particular matter— (A) in which the United States or the District of Columbia is a party or has a direct and substantial interest, (B) which such person knows or reasonably should know was actually pending under his or her official responsibility as such officer or employee within a period of 1 year before the termination of his or her service or employment with the United States or the District of Columbia, and (C) which involved a specific party or specific parties at the time it was so pending, shall be punished as provided in section 216 of this title. (3) Clarification of restrictions.— The restrictions contained in paragraphs (1) and (2) shall apply— (A) in the case of an officer or employee of the executive branch of the United States (including any independent agency), only with respect to communications to or appearances before any officer or employee of any department, agency, court, or court-martial of the United States on behalf of any other person (except the United States), and only with respect to a matter in which the United States is a party or has a direct and substantial interest; and (B) in the case of an officer or employee of the District of Columbia, only with respect to communications to or appearances before any officer or employee of any department, agency, or court of the District of Columbia on behalf of any other person (except the District of Columbia), and only with respect to a matter in which the District of Columbia is a party or has a direct and substantial interest. (b) One-Year Restrictions on Aiding or Advising.— (1) In general.— Any person who is a former officer or employee of the executive branch of the United States (including any independent agency) and is subject to the restrictions contained in subsection (a)(1), or any person who is a former officer or employee of the legislative branch or a former Member of Congress, who personally and substantially participated in any ongoing trade or treaty negotiation on behalf of the United States within the 1-year period preceding the date on which his or her service or employment with the United States terminated, and who had access to information concerning such trade or treaty negotiation which is exempt from disclosure under section 552 of title 5, which is so designated by the appropriate department or agency, and which the person knew or should have known was so designated, shall not, on the basis of that information, knowingly represent, aid, or advise any other person (except the United States) concerning such ongoing trade or treaty negotiation for a period of 1 year after his or her service or employment with the United States terminates. Any person who violates this subsection shall be punished as provided in section 216 of this title. (2) Definition.— For purposes of this paragraph— (A) the term “trade negotiation” means negotiations which the President determines to undertake to enter into a trade agreement pursuant to section 1102 of the Omnibus Trade and Competitiveness Act of 1988, and does not include any action taken before that determination is made; and (B) the term “treaty” means an international agreement made by the President that requires the advice and consent of the Senate. (c) One-Year Restrictions on Certain Senior Personnel of the Executive Branch and Independent Agencies.— (1) Restrictions.— In addition to the restrictions set forth in subsections (a) and (b), any person who is an officer or employee (including any special Government employee) of the executive branch of the United States (including an independent agency), who is referred to in paragraph (2), and who, within 1 year after the termination of his or her service or employment as such officer or employee, knowingly makes, with the intent to influence, any communication to or appearance before any officer or employee of the department or agency in which such person served within 1 year before such termination, on behalf of any other person (except the United States), in connection with any matter on which such person seeks official action by any officer or employee of such department or agency, shall be punished as provided in section 216 of this title. (2) Persons to whom restrictions apply.— (A) Paragraph (1) shall apply to a person (other than a person subject to the restrictions of subsection (d))— (i) employed at a rate of pay specified in or fixed according to subchapter II of chapter 53 of title 5, (ii) employed in a position which is not referred to in clause (i) and for which that person is paid at a rate of basic pay which is equal to or greater than 86.5 percent of the rate of basic pay for level II of the Executive Schedule, or, for a period of 2 years following the enactment of the National Defense Authorization Act for Fiscal Year 2004, a person who, on the day prior to the enactment of that Act, was employed in a position which is not referred to in clause (i) and for which the rate of basic pay, exclusive of any locality-based pay adjustment under section 5304 orsection 5304a of title 5, was equal to or greater than the rate of basic pay payable for level 5 of the Senior Executive Service on the day prior to the enactment of that Act, (iii) appointed by the President to a position under section 105 (a)(2)(B) of title 3 or by the Vice President to a position under section 106 (a)(1)(B) of title 3, (iv) employed in a position which is held by an active duty commissioned officer of the uniformed services who is serving in a grade or rank for which the pay grade (as specified in section 201 of title 37) is pay grade O–7 or above; or (v) assigned from a private sector organization to an agency under chapter 37 of title 5. (B) Paragraph (1) shall not apply to a special Government employee who serves less than 60 days in the 1-year period before his or her service or employment as such employee terminates. (C) At the request of a department or agency, the Director of the Office of Government Ethics may waive the restrictions contained in paragraph (1) with respect to any position, or category of positions, referred to in clause (ii) or (iv) of subparagraph (A), in such department or agency if the Director determines that— (i) the imposition of the restrictions with respect to such position or positions would create an undue hardship on the department or agency in obtaining qualified personnel to fill such position or positions, and (ii) granting the waiver would not create the potential for use of undue influence or unfair advantage. (3) Members of the independent payment advisory board.— (A) In general.— Paragraph (1) shall apply to a member of the Independent Payment Advisory Board under section 1899A. (B) Agencies and congress.— For purposes of paragraph (1), the agency in which the individual described in subparagraph (A) served shall be considered to be the Independent Payment Advisory Board, the Department of Health and Human Services, and the relevant committees of jurisdiction of Congress, including the Committee on Ways and Means and the Committee on Energy and Commerce of the House of Representatives and the Committee on Finance of the Senate. (d) Restrictions on Very Senior Personnel of the Executive Branch and Independent Agencies.— (1) Restrictions.— In addition to the restrictions set forth in subsections (a) and (b), any person who— (A) serves in the position of Vice President of the United States, (B) is employed in a position in the executive branch of the United States (including any independent agency) at a rate of pay payable for level I of the Executive Schedule or employed in a position in the Executive Office of the President at a rate of pay payable for level II of the Executive Schedule, or (C) is appointed by the President to a position under section 105 (a)(2)(A) of title 3 or by the Vice President to a position under section 106 (a)(1)(A) of title 3, and who, within 2 years after the termination of that person’s service in that position, knowingly makes, with the intent to influence, any communication to or appearance before any person described in paragraph (2), on behalf of any other person (except the United States), in connection with any matter on which such person seeks official action by any officer or employee of the executive branch of the United States, shall be punished as provided in section 216 of this title. (2) Persons who may not be contacted.— The persons referred to in paragraph (1) with respect to appearances or communications by a person in a position described in subparagraph (A), (B), or (C) of paragraph (1) are— (A) any officer or employee of any department or agency in which such person served in such position within a period of 1 year before such person’s service or employment with the United States Government terminated, and (B) any person appointed to a position in the executive branch which is listed in section 5312, 5313, 5314, 5315, or 5316 of title 5. (e) Restrictions on Members of Congress and Officers and Employees of the Legislative Branch.— (1) Members of congress and elected officers of the house.— (A) Senators.— Any person who is a Senator and who, within 2 years after that person leaves office, knowingly makes, with the intent to influence, any communication to or appearance before any Member, officer, or employee of either House of Congress or any employee of any other legislative office of the Congress, on behalf of any other person (except the United States) in connection with any matter on which such former Senator seeks action by a Member, officer, or employee of either House of Congress, in his or her official capacity, shall be punished as provided in section 216 of this title. (B) Members and officers of the house of representatives.— (i) Any person who is a Member of the House of Representatives or an elected officer of the House of Representatives and who, within 1 year after that person leaves office, knowingly makes, with the intent to influence, any communication to or appearance before any of the persons described in clause (ii) or (iii), on behalf of any other person (except the United States) in connection with any matter on which such former Member of Congress or elected officer seeks action by a Member, officer, or employee of either House of Congress, in his or her official capacity, shall be punished as provided in section 216 of this title. (ii) The persons referred to in clause (i) with respect to appearances or communications by a former Member of the House of Representatives are any Member, officer, or employee of either House of Congress and any employee of any other legislative office of the Congress. (iii) The persons referred to in clause (i) with respect to appearances or communications by a former elected officer are any Member, officer, or employee of the House of Representatives. (2) Officers and staff of the senate.— Any person who is an elected officer of the Senate, or an employee of the Senate to whom paragraph (7)(A) applies, and who, within 1 year after that person leaves office or employment, knowingly makes, with the intent to influence, any communication to or appearance before any Senator or any officer or employee of the Senate, on behalf of any other person (except the United States) in connection with any matter on which such former elected officer or former employee seeks action by a Senator or an officer or employee of the Senate, in his or her official capacity, shall be punished as provided in section 216 of this title. (3) Personal staff.— (A) Any person who is an employee of a Member of the House of Representatives to whom paragraph (7)(A) applies and who, within 1 year after the termination of that employment, knowingly makes, with the intent to influence, any communication to or appearance before any of the persons described in subparagraph (B), on behalf of any other person (except the United States) in connection with any matter on which such former employee seeks action by a Member, officer, or employee of either House of Congress, in his or her official capacity, shall be punished as provided in section 216 of this title. (B) The persons referred to in subparagraph (A) with respect to appearances or communications by a person who is a former employee are the following: (i) the Member of the House of Representatives for whom that person was an employee; and (ii) any employee of that Member of the House of Representatives. (4) Committee staff.— Any person who is an employee of a committee of the House of Representatives, or an employee of a joint committee of the Congress whose pay is disbursed by the Clerk of the House of Representatives, to whom paragraph (7)(A) applies and who, within 1 year after the termination of that person’s employment on such committee or joint committee (as the case may be), knowingly makes, with the intent to influence, any communication to or appearance before any person who is a Member or an employee of that committee or joint committee (as the case may be) or who was a Member of the committee or joint committee (as the case may be) in the year immediately prior to the termination of such person’s employment by the committee or joint committee (as the case may be), on behalf of any other person (except the United States) in connection with any matter on which such former employee seeks action by a Member, officer, or employee of either House of Congress, in his or her official capacity, shall be punished as provided in section 216 of this title. (5) Leadership staff.— (A) Any person who is an employee on the leadership staff of the House of Representatives to whom paragraph (7)(A) applies and who, within 1 year after the termination of that person’s employment on such staff, knowingly makes, with the intent to influence, any communication to or appearance before any of the persons described in subparagraph (B), on behalf of any other person (except the United States) in connection with any matter on which such former employee seeks action by a Member, officer, or employee of either House of Congress, in his or her official capacity, shall be punished as provided in section 216 of this title. (B) The persons referred to in subparagraph (A) with respect to appearances or communications by a former employee are any Member of the leadership of the House of Representatives and any employee on the leadership staff of the House of Representatives. (6) Other legislative offices.— (A) Any person who is an employee of any other legislative office of the Congress to whom paragraph (7)(B) applies and who, within 1 year after the termination of that person’s employment in such office, knowingly makes, with the intent to influence, any communication to or appearance before any of the persons described in subparagraph (B), on behalf of any other person (except the United States) in connection with any matter on which such former employee seeks action by any officer or employee of such office, in his or her official capacity, shall be punished as provided in section 216 of this title. (B) The persons referred to in subparagraph (A) with respect to appearances or communications by a former employee are the employees and officers of the former legislative office of the Congress of the former employee. (7) Limitation on restrictions.— (A) The restrictions contained in paragraphs (2), (3), (4), and (5) apply only to acts by a former employee who, for at least 60 days, in the aggregate, during the 1-year period before that former employee’s service as such employee terminated, was paid a rate of basic pay equal to or greater than an amount which is 75 percent of the basic rate of pay payable for a Member of the House of Congress in which such employee was employed. (B) The restrictions contained in paragraph (6) apply only to acts by a former employee who, for at least 60 days, in the aggregate, during the 1-year period before that former employee’s service as such employee terminated, was employed in a position for which the rate of basic pay, exclusive of any locality-based pay adjustment under section 5302 of title 5, is equal to or greater than the basic rate of pay payable for level IV of the Executive Schedule. (8) Exception.— This subsection shall not apply to contacts with the staff of the Secretary of the Senate or the Clerk of the House of Representatives regarding compliance with lobbying disclosure requirements under the Lobbying Disclosure Act of 1995. (9) Definitions.— As used in this subsection— (A) the term “committee of Congress” includes standing committees, joint committees, and select committees; (B) a person is an employee of a House of Congress if that person is an employee of the Senate or an employee of the House of Representatives; (C) the term “employee of the House of Representatives” means an employee of a Member of the House of Representatives, an employee of a committee of the House of Representatives, an employee of a joint committee of the Congress whose pay is disbursed by the Clerk of the House of Representatives, and an employee on the leadership staff of the House of Representatives; (D) the term “employee of the Senate” means an employee of a Senator, an employee of a committee of the Senate, an employee of a joint committee of the Congress whose pay is disbursed by the Secretary of the Senate, and an employee on the leadership staff of the Senate; (E) a person is an employee of a Member of the House of Representatives if that person is an employee of a Member of the House of Representatives under the clerk hire allowance; (F) a person is an employee of a Senator if that person is an employee in a position in the office of a Senator; (G) the term “employee of any other legislative office of the Congress” means an officer or employee of the Architect of the Capitol, the United States Botanic Garden, the Government Accountability Office, the Government Printing Office, the Library of Congress, the Office of Technology Assessment, the Congressional Budget Office, the United States Capitol Police, and any other agency, entity, or office in the legislative branch not covered by paragraph (1), (2), (3), (4), or (5) of this subsection; (H) the term “employee on the leadership staff of the House of Representatives” means an employee of the office of a Member of the leadership of the House of Representatives described in subparagraph (L), and any elected minority employee of the House of Representatives; (I) the term “employee on the leadership staff of the Senate” means an employee of the office of a Member of the leadership of the Senate described in subparagraph (M); (J) the term “Member of Congress” means a Senator or a Member of the House of Representatives; (K) the term “Member of the House of Representatives” means a Representative in, or a Delegate or Resident Commissioner to, the Congress; (L) the term “Member of the leadership of the House of Representatives” means the Speaker, majority leader, minority leader, majority whip, minority whip, chief deputy majority whip, chief deputy minority whip, chairman of the Democratic Steering Committee, chairman and vice chairman of the Democratic Caucus, chairman, vice chairman, and secretary of the Republican Conference, chairman of the Republican Research Committee, and chairman of the Republican Policy Committee, of the House of Representatives (or any similar position created on or after the effective date set forth in section 102(a) of the Ethics Reform Act of 1989); (M) the term “Member of the leadership of the Senate” means the Vice President, and the President pro tempore, Deputy President pro tempore, majority leader, minority leader, majority whip, minority whip, chairman and secretary of the Conference of the Majority, chairman and secretary of the Conference of the Minority, chairman and co-chairman of the Majority Policy Committee, and chairman of the Minority Policy Committee, of the Senate (or any similar position created on or after the effective date set forth in section 102(a) of the Ethics Reform Act of 1989). (f) Restrictions Relating to Foreign Entities.— (1) Restrictions.— Any person who is subject to the restrictions contained in subsection (c), (d), or (e) and who knowingly, within 1 year after leaving the position, office, or employment referred to in such subsection— (A) represents a foreign entity before any officer or employee of any department or agency of the United States with the intent to influence a decision of such officer or employee in carrying out his or her official duties, or (B) aids or advises a foreign entity with the intent to influence a decision of any officer or employee of any department or agency of the United States, in carrying out his or her official duties, shall be punished as provided in section 216 of this title. (2) Special rule for trade representative.— With respect to a person who is the United States Trade Representative or Deputy United States Trade Representative, the restrictions described in paragraph (1) shall apply to representing, aiding, or advising foreign entities at any time after the termination of that person’s service as the United States Trade Representative. (3) Definition.— For purposes of this subsection, the term “foreign entity” means the government of a foreign country as defined in section 1(e) of the Foreign Agents Registration Act of 1938, as amended, or a foreign political party as defined in section 1(f) of that Act. (g) Special Rules for Detailees.— For purposes of this section, a person who is detailed from one department, agency, or other entity to another department, agency, or other entity shall, during the period such person is detailed, be deemed to be an officer or employee of both departments, agencies, or such entities. (h) Designations of Separate Statutory Agencies and Bureaus.— (1) Designations.— For purposes of subsection (c) and except as provided in paragraph (2), whenever the Director of the Office of Government Ethics determines that an agency or bureau within a department or agency in the executive branch exercises functions which are distinct and separate from the remaining functions of the department or agency and that there exists no potential for use of undue influence or unfair advantage based on past Government service, the Director shall by rule designate such agency or bureau as a separate department or agency. On an annual basis the Director of the Office of Government Ethics shall review the designations and determinations made under this subparagraph and, in consultation with the department or agency concerned, make such additions and deletions as are necessary. Departments and agencies shall cooperate to the fullest extent with the Director of the Office of Government Ethics in the exercise of his or her responsibilities under this paragraph. (2) Inapplicability of designations.— No agency or bureau within the Executive Office of the President may be designated under paragraph (1) as a separate department or agency. No designation under paragraph (1) shall apply to persons referred to in subsection (c)(2)(A)(i) or (iii). (i) Definitions.— For purposes of this section— (1) the term “officer or employee”, when used to describe the person to whom a communication is made or before whom an appearance is made, with the intent to influence, shall include— (A) in subsections (a), (c), and (d), the President and the Vice President; and (B) in subsection (f), the President, the Vice President, and Members of Congress; (2) the term “participated” means an action taken as an officer or employee through decision, approval, disapproval, recommendation, the rendering of advice, investigation, or other such action; and (3) the term “particular matter” includes any investigation, application, request for a ruling or determination, rulemaking, contract, controversy, claim, charge, accusation, arrest, or judicial or other proceeding. (j) Exceptions.— (1) Official government duties.— (A) In general.— The restrictions contained in this section shall not apply to acts done in carrying out official duties on behalf of the United States or the District of Columbia or as an elected official of a State or local government. (B) Tribal organizations and inter-tribal consortiums.— The restrictions contained in this section shall not apply to acts authorized by section 104(j) of the Indian Self-Determination and Education Assistance Act (25 U.S.C. 450i (j)). (2) State and local governments and institutions, hospitals, and organizations.— The restrictions contained in subsections (c), (d), and (e) shall not apply to acts done in carrying out official duties as an employee of— (A) an agency or instrumentality of a State or local government if the appearance, communication, or representation is on behalf of such government, or (B) an accredited, degree-granting institution of higher education, as defined in section 101 of the Higher Education Act of 1965, or a hospital or medical research organization, exempted and defined under section 501(c)(3) of the Internal Revenue Code of 1986, if the appearance, communication, or representation is on behalf of such institution, hospital, or organization. (3) International organizations.— The restrictions contained in this section shall not apply to an appearance or communication on behalf of, or advice or aid to, an international organization in which the United States participates, if the Secretary of State certifies in advance that such activity is in the interests of the United States. (4) Special knowledge.— The restrictions contained in subsections (c), (d), and (e) shall not prevent an individual from making or providing a statement, which is based on the individual’s own special knowledge in the particular area that is the subject of the statement, if no compensation is thereby received. (5) Exception for scientific or technological information.— The restrictions contained in subsections (a), (c), and (d) shall not apply with respect to the making of communications solely for the purpose of furnishing scientific or technological information, if such communications are made under procedures acceptable to the department or agency concerned or if the head of the department or agency concerned with the particular matter, in consultation with the Director of the Office of Government Ethics, makes a certification, published in the Federal Register, that the former officer or employee has outstanding qualifications in a scientific, technological, or other technical discipline, and is acting with respect to a particular matter which requires such qualifications, and that the national interest would be served by the participation of the former officer or employee. For purposes of this paragraph, the term “officer or employee” includes the Vice President. (6) Exception for testimony.— Nothing in this section shall prevent an individual from giving testimony under oath, or from making statements required to be made under penalty of perjury. Notwithstanding the preceding sentence— (A) a former officer or employee of the executive branch of the United States (including any independent agency) who is subject to the restrictions contained in subsection (a)(1) with respect to a particular matter may not, except pursuant to court order, serve as an expert witness for any other person (except the United States) in that matter; and (B) a former officer or employee of the District of Columbia who is subject to the restrictions contained in subsection (a)(1) with respect to a particular matter may not, except pursuant to court order, serve as an expert witness for any other person (except the District of Columbia) in that matter. (7) Political parties and campaign committees.— (A) Except as provided in subparagraph (B), the restrictions contained in subsections (c), (d), and (e) shall not apply to a communication or appearance made solely on behalf of a candidate in his or her capacity as a candidate, an authorized committee, a national committee, a national Federal campaign committee, a State committee, or a political party. (B) Subparagraph (A) shall not apply to— (i) any communication to, or appearance before, the Federal Election Commission by a former officer or employee of the Federal Election Commission; or (ii) a communication or appearance made by a person who is subject to the restrictions contained in subsections (c), (d), or (e) if, at the time of the communication or appearance, the person is employed by a person or entity other than— (I) a candidate, an authorized committee, a national committee, a national Federal campaign committee, a State committee, or a political party; or (II) a person or entity who represents, aids, or advises only persons or entities described in subclause (I). (C) For purposes of this paragraph— (i) the term “candidate” means any person who seeks nomination for election, or election, to Federal or State office or who has authorized others to explore on his or her behalf the possibility of seeking nomination for election, or election, to Federal or State office; (ii) the term “authorized committee” means any political committee designated in writing by a candidate as authorized to receive contributions or make expenditures to promote the nomination for election, or the election, of such candidate, or to explore the possibility of seeking nomination for election, or the election, of such candidate, except that a political committee that receives contributions or makes expenditures to promote more than 1 candidate may not be designated as an authorized committee for purposes of subparagraph (A); (iii) the term “national committee” means the organization which, by virtue of the bylaws of a political party, is responsible for the day-to-day operation of such political party at the national level; (iv) the term “national Federal campaign committee” means an organization that, by virtue of the bylaws of a political party, is established primarily for the purpose of providing assistance, at the national level, to candidates nominated by that party for election to the office of Senator or Representative in, or Delegate or Resident Commissioner to, the Congress; (v) the term “State committee” means the organization which, by virtue of the bylaws of a political party, is responsible for the day-to-day operation of such political party at the State level; (vi) the term “political party” means an association, committee, or organization that nominates a candidate for election to any Federal or State elected office whose name appears on the election ballot as the candidate of such association, committee, or organization; and (vii) the term “State” means a State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession of the United States. (k) (1) (A) The President may grant a waiver of a restriction imposed by this section to any officer or employee described in paragraph (2) if the President determines and certifies in writing that it is in the public interest to grant the waiver and that the services of the officer or employee are critically needed for the benefit of the Federal Government. Not more than 25 officers and employees currently employed by the Federal Government at any one time may have been granted waivers under this paragraph. (B) (i) A waiver granted under this paragraph to any person shall apply only with respect to activities engaged in by that person after that person’s Federal Government employment is terminated and only to that person’s employment at a Government-owned, contractor operated entity with which the person served as an officer or employee immediately before the person’s Federal Government employment began. (ii) Notwithstanding clause (i), a waiver granted under this paragraph to any person who was an officer or employee of Lawrence Livermore National Laboratory, Los Alamos National Laboratory, or Sandia National Laboratory immediately before the person’s Federal Government employment began shall apply to that person’s employment by any such national laboratory after the person’s employment by the Federal Government is terminated. (2) Waivers under paragraph (1) may be granted only to civilian officers and employees of the executive branch, other than officers and employees in the Executive Office of the President. (3) A certification under paragraph (1) shall take effect upon its publication in the Federal Register and shall identify— (A) the officer or employee covered by the waiver by name and by position, and (B) the reasons for granting the waiver. A copy of the certification shall also be provided to the Director of the Office of Government Ethics. (4) The President may not delegate the authority provided by this subsection. (5) (A) Each person granted a waiver under this subsection shall prepare reports, in accordance with subparagraph (B), stating whether the person has engaged in activities otherwise prohibited by this section for each six-month period described in subparagraph (B), and if so, what those activities were. (B) A report under subparagraph (A) shall cover each six-month period beginning on the date of the termination of the person’s Federal Government employment (with respect to which the waiver under this subsection was granted) and ending two years after that date. Such report shall be filed with the President and the Director of the Office of Government Ethics not later than 60 days after the end of the six-month period covered by the report. All reports filed with the Director under this paragraph shall be made available for public inspection and copying. (C) If a person fails to file any report in accordance with subparagraphs (A) and (B), the President shall revoke the waiver and shall notify the person of the revocation. The revocation shall take effect upon the person’s receipt of the notification and shall remain in effect until the report is filed. (D) Any person who is granted a waiver under this subsection shall be ineligible for appointment in the civil service unless all reports required of such person by subparagraphs (A) and (B) have been filed. (E) As used in this subsection, the term “civil service” has the meaning given that term in section 2101 of title 5. (l) Contract Advice by Former Details.— Whoever, being an employee of a private sector organization assigned to an agency under chapter 37 of title 5, within one year after the end of that assignment, knowingly represents or aids, counsels, or assists in representing any other person (except the United States) in connection with any contract with that agency shall be punished as provided in section 216 of this title.
U.S. Office of Government Ethics - 18 U.S.C. § 207: Restrictions on former officers, emp... Page 1 of 1
18 U.S.C. § 207: Restrictions on former officers, employees, and elected officials of the executive and legislative branches
Text of Statute
Since its enactment in 1962, 18 U.S.C. § 207 has remained the primary source of restrictions that may limit the activities of individuals after they leave Government service (or after they leave certain high-level positions). None of the statute’s seven restrictions bar any individual from accepting employment with any private or public employer. Instead, they prohibit individuals from engaging in certain activities on behalf of persons or entities.
Two of the restrictions may affect any former “employee,” regardless of rank or position. The restrictions bar a former employee from representing another person or entity by making a communication to or appearance before a Federal department, agency, or court concerning the same “particular matter involving specific parties” (e.g., the same contract or grant) with which the former employee was involved while serving the Government. If the matter was pending under the employee’s official responsibility during the employee’s last year of Government service, the bar lasts for two years. If the employee participated in the matter “personally and substantially,” the bar is permanent.
In addition, certain high-level officials are subject to a so-called “cooling-off” period. For a period of one year after leaving a “senior” position, a former senior employee may not represent another person or entity by making a communication to or appearing before the former employee’s former agency to seek official action on any matter. A former “very senior” employee is subject to a similar prohibition, except that the bar lasts for two years and extends to contacts with specified high-level officials at any department or agency. Separately, both former senior and very senior employees are prohibited for one year from representing, aiding, or advising a foreign government or foreign political party with the intent to influence certain Government officials.
The two other section 207 restrictions may affect only those individuals who performed specified duties for the Government. A former employee who participated personally and substantially in an ongoing trade or treaty negotiation covered by the statute, during his or her last year of Government service, is prohibited for one year from providing certain assistance concerning the negotiation. A former assignee under the Information Technology Exchange Program may not represent another person or entity, for one year, in connection with a contract with the agency to which the former assignee was assigned.
OGE has published guidance, at 5 C.F.R. part 2641, concerning all of the prohibitions in section 207, as well as all of the exceptions in the statute. In addition, OGE issues a legal advisory every year that specifies a dollar threshold for purposes of the definition of “senior employee” at 5 C.F.R. § 2641.104. (Agency ethics officials and others should consult 5 C.F.R. part 2637 in lieu of 5 C.F.R. part 2641 in relation to former employees who terminated service from July 1, 1979 through December 31, 1990.)
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5 C.F.R. Part 2635: Standards of ethical conduct for employees of the executive branch
Text of Regulation
In 1989, the President’s Commission on Federal Ethics Law Reform recommended that individual agency standards of conduct be replaced with a single regulation applicable to all employees of the executive branch. Acting upon that recommendation, President Bush signed Executive Order 12674 on April 12, 1989. That Executive Order (as modified by Executive Order 12731) set out fourteen basic principles of ethical conduct for executive branch personnel and directed OGE to establish a single, comprehensive, and clear set of executive branch standards of ethical conduct. OGE published the Standards of Ethical Conduct for Employees of the Executive Branch on August 7, 1992. The regulation became effective on February 3, 1993, and was codified in 5 C.F.R. part 2635. Part 2635 has been amended several times. Review the rulemaking history of 5 C.F.R. part 2635.
Note: Some agencies have published agency supplemental regulations that modify or supplement 5 C.F.R. part 2635.
Brief Summary of 5 C.F.R. Part 2635
Subpart A – General Provisions Subpart A establishes the framework for the rest of the regulation. It includes definitions, provides authority for supplementation of the regulation when necessary by individual agencies, and encourages employees to seek advice from agency ethics officials. It also:
Restates the 14 principles of ethical conduct and instructs employees to apply them when considering situations not specifically addressed by the regulation; and
For situations that involve appearances of conflicts, provides that the circumstances be judged from the perspective of a reasonable person with knowledge of the relevant facts.
Subpart B – Gifts from Outside Sources Subpart B prohibits employees from soliciting or accepting gifts from prohibited sources or gifts given because of their official position. The term “prohibited source” includes anyone seeking business with or official action by an employee’s agency and anyone substantially affected by the performance of the employee’s duties. For example, a company bidding for an agency contract or a person seeking an agency grant would be a prohibited source of gifts to employees of that agency.
The term “gift” is defined to include nearly anything of market value. However, it does not include items that clearly are not gifts, such as publicly available discounts and commercial loans and it does not include certain U.S. Office of Government Ethics - 5 C.F.R. Part 2635: Standards of ethical conduct for e... Page 2 of 4
inconsequential items, such as coffee, donuts, greeting cards, and certificates.
There are several exceptions to the prohibitions against gifts from outside sources. For example, with some limitations, employees may accept:
Unsolicited gifts with a market value of $20 or less per occasion, aggregating no more than $50 in a calendar year from any single source;
Gifts motivated by a family relationship or personal friendship;
Free attendance at certain widely-attended gatherings, such as conferences and receptions, when the cost of attendance is borne by the sponsor of the event; and
Food, refreshments, and entertainment at certain meetings or events while on duty in a foreign country.
The subpart also contains guidance on returning or paying for gifts that cannot be accepted.
Subpart C – Gifts Between Employees Subpart C prohibits employees from:
Giving or soliciting for a gift to another employee who is an official superior; or
Accepting a gift from a lower-paid employee, unless the two employees are personal friends who are not in a superior-subordinate relationship.
The following are among the exceptions to these prohibitions:
On an occasional basis, employees may give and accept items aggregating $10 or less per occasion, food and refreshments shared in the office, or personal hospitality at a residence. This exception can be used for birthdays and those holidays when gifts are traditionally exchanged.
On infrequent occasions of personal significance, such as marriage, and on occasions that terminate the superior-subordinate relationship, such as retirement, employees may give and accept gifts appropriate to the occasion and they may make or solicit voluntary contributions of nominal value for group gifts.
Subpart D – Conflicting Financial Interests Subpart D contains two provisions designed to deal with financial interests that conflict with employees’ official duties.
The first provision, entitled “Disqualifying financial interests,” prohibits an employee from participating in an official government capacity in a matter in which he has a financial interest or in which his spouse, minor child, employer, or any one of several other specified persons has a financial interest. For example, an agency purchasing agent could not place an agency order for computer software with a company owned by his wife. The provision includes alternatives to nonparticipation, which may involve selling or giving up the conflicting interest or obtaining a statutory waiver that will permit the employee to continue to perform specific official duties.
The second provision, entitled “Prohibited financial interests,” contains authority by which agencies may prohibit employee from acquiring or retaining certain financial interests.
Employees required by Subpart D to sell financial interests may be eligible to defer the tax consequences of that divestiture. U.S. Office of Government Ethics - 5 C.F.R. Part 2635: Standards of ethical conduct for e... Page 3 of 4
Subpart E – Impartiality in Performing Official Duties There may be circumstances other than those covered by Subpart D in which employees should not perform official duties in order to avoid an appearance of loss of impartiality. Subpart E contains two disqualification provisions addressing those appearance issues.
The first provision, entitle “Personal and business relationships,” states that employees should obtain specific authorization before participating in certain Government matters where their impartiality is likely to be questioned. The matters specifically covered by this standard include those:
Involving specific parties, such as contracts, grants, or investigations, that are likely to affect the financial interests of members of employees’ households; or
In which persons with whom employees have specific relationships are parties or represent parties. This would include, for example, matters involving recent employers, employers of spouses or minor children, or anyone with whom the employees have or seek a business or financial relationship.
There are procedures by which employees may be authorized to participate in such matters when it serves the employing agency’s interests. The process set out in Subpart E should be used to address any matter in which an employee’s impartiality is likely to be questioned.
The second provision, entitled “Extraordinary payments from former employers,” restricts employees’ participation in certain matters involving former employers. If a former employer gave an employee an “extraordinary payment” in excess of $10,000 prior to entering Federal service, it bars the employee from participating for two years in matters in which that former employer is a party or represents a party. A $25,000 payment voted on an ad hoc basis by a board of directors would be an “extraordinary payment.” A routine severance payment made under an established employee benefit plan would not.
Subpart F – Seeking Other Employment Subpart F prohibits an employee from participating in their official capacities in particular matters that have a direct and predictable effect on the financial interests of person with whom they are “seeking employment” or with whom they have an arrangement concerning future employment.
The term “seeking employment” encompasses actual employment negotiations as well as more preliminary efforts to obtain employment, such as sending an unsolicited resume. It does not include:
Sending an unsolicited resume, for example, to someone only affected by the employee’s work on general rulemaking;
Requesting a job application or rejecting an unsolicited employment overture.
An employee generally continues to be “seeking employment” until the employee or the prospective employer rejects the possibility of employment and all discussions end. However, an employee is no longer “seeking employment” with the recipient of an unsolicited resume after two months have passed with no response.
Subpart G – Misuse of Position Subpart G contains four provisions designed to ensure that employee do not misuse their official positions. These include: U.S. Office of Government Ethics - 5 C.F.R. Part 2635: Standards of ethical conduct for e... Page 4 of 4
A prohibition against employees using public office for their own private gain for the private gain of friends, relatives, or persons with whom they are affiliated in a non-Government capacity, or for the endorsement or any product, service, or enterprise;
A prohibition against engaging in financial transactions using nonpublic information, or allowing the improper use of nonpublic information to further private interests;
An affirmative duty to protect and conserve Government property and to use Government property only for authorized purposes; and
A prohibition against using official time other than in an honest effort to perform official duties and a prohibition against encouraging or requesting a subordinate to use official time to perform unauthorized activities.
Subpart H – Outside Activities Subpart H contains provisions governing employees’ involvement in outside activities including outside employment. These provisions are in addition to the provisions set out in other parts of the regulation. The provisions in Subpart H include:
Synopses of statutes and a constitutional provision that may limit certain outside activities;
A prohibition against engaging in outside activities that conflict with employees’ official duties;
Authority by which individual agencies may require employees to obtain approval before engaging in outside activities;
An outside earned income ban applicable to certain Presidential appointees and certain noncareer employees;
A prohibition against serving as an expert witness, other than on behalf of the United States, in certain proceedings in which the United States is a party or has a direct and substantial interest;
A prohibition against receiving compensation for teaching, speaking, or writing related to their official duties;
Limitations on fundraising in a personal capacity; and
A requirement that employees satisfy their just financial obligations.
Subpart I – Related Statutory Authorities Subpart I lists references to other statutes which relate to employee conduct.
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5 C.F.R. Part 2641: Post-Employment Conflict of Interest Restrictions
Text of Regulation
18 U.S.C. § 207 sets out seven substantive prohibitions restricting the activities of individuals who leave Government service or who leave certain high-level positions in the executive branch. Section 207 was substantially revised in 1989, and several subsequent amendments have been enacted since that time. Prior to the 1989 amendments, OGE published interpretive guidance in 5 C.F.R. part 2637. Subsequent to the 1989 amendments, OGE published a short interim rule in 1991, at 5 C.F.R. part 2641, for the limited purpose of implementing OGE’s authority to exempt positions and designate components for purposes of the amended one-year “cooling-off” restriction of 18 U.S.C. § 207(c). In 2008, OGE published a final rule which substantially expanded Part 2641. The 2008 rulemaking revised the existing guidance concerning exemptions and component designations and added guidance concerning all of the current substantive prohibitions and exceptions in section 207. Review the rulemaking history of 5 C.F.R. part 2641.
Note: The final rule that promulgated the expanded Part 2641 also removed 5 C.F.R. part 2637 from the Code of Federal Regulations. OGE has advised agency ethics officials to retain the last published edition of Part 2637 (in the C.F.R. revised as of January 1, 2008), in order to provide advice to former employees who terminated service while the prior version of section 207 was effective (July 1, 1979 through December 31, 1990).
Brief Summary of 5 C.F.R. Part 2641
Subpart A – General Provisions Subpart A establishes the framework for the rest of the regulation. It includes definitions, addresses enforcement and penalties, and explains that the agency in which an individual formerly served has the primary responsibility to provide advice concerning post-Government activities.
Subpart B – Prohibitions Subpart B contains separate provisions explaining each of the seven restrictions in the current version of 18 U.S.C. § 207:
Section 2641.201 sets out the statutory elements of the lifetime ban on representation in connection with a particular matter involving specific parties in which a former employee participated personally and substantially, 18 U.S.C. § 207(a)(1). This section provides guidance with respect to a number of elements, such as “intent to influence,” that are common to several of the restrictions, and subsequent sections within Subpart B contain cross-references to the discussion of these common elements in section 2641.201.
Section 2641.202 sets out the statutory elements of the two-year ban on representation in connection with a U.S. Office of Government Ethics - 5 C.F.R. Part 2641: Post-Employment Conflict of Int... Page 2 of 2
particular matter involving specific parties which was pending under a former employee’s official responsibility, 18 U.S.C. § 207(a)(2).
Section 2641.203 sets out the one-year prohibition on representing, aiding, or advising – on the basis of covered information – in connection with trade agreement or treaty negotiations in which a former employee participated personally and substantially, 18 U.S.C. § 207(b). (Several of the subsections have been reserved for future guidance with respect to certain statutory elements.)
Section 2641.204 sets out the statutory elements of the one-year cooling-off restriction applicable to former senior employees, 18 U.S.C. § 207(c). (The definition of “senior employee” is found in the “definitions” section in Subpart A. This term is defined, in part, by reference to a salary threshold.)
Section 2641.205 sets out the statutory elements of the two-year cooling-off restriction applicable to former very senior employees, 18 U.S.C. § 207(d). (The definition of “very senior employee” is found in the “definitions” section in Subpart A.)
Section 2641.206 sets out the one-year restrictions, applicable to former senior and very senior employees, on representing, aiding, or advising certain foreign entities, 18 U.S.C. § 207(f). (Several of the subsections have been reserved for future guidance with respect to certain statutory elements.)
Section 2641.207 sets out the one-year restriction on representing, aiding, counseling, or assisting in representing in connection with a contract with the former agency of an assignee under the Information Technology Exchange Program, 18 U.S.C. § 207(l). (Several of the subsections have been reserved for future guidance with respect to certain statutory elements.)
Subpart C – Exceptions, Waivers and Separate Components Subpart C sets out the elements of the various exception provisions in 18 U.S.C. § 207. The subpart includes a reference chart listing all of the exceptions and specifies the restrictions to which each exception applies.
Section 2641.302 implements 18 U.S.C. § 207(h), which authorizes OGE to designate separate departmental or agency components for purposes of 18 U.S.C. § 207(c).
Appendix A – Positions Waived from 18 U.S.C. § 207(c) and (f) Appendix A lists the positions exempted by OGE from the prohibitions in 18 U.S.C. §§ 207(c) and (f).
Appendix B – Agency Components for Purposes of 18 U.S.C. § 207(c) Appendix B lists the departmental components designated by OGE for purposes of 18 U.S.C. § 207(c).
U.S. Office of Government Ethics 1201 New York Avenue, NW. Suite 500 Washington, DC 20005 17 C.F.R. § 200.735-8 Practice by former members and employees of the Commission.
(a) Members and employees and former members and employees shall comply with the requirements of 18 U.S.C. 207 and 5 CFR part 2641 (Post employment conflict of interest restrictions). Members and employees and former members and employees should be aware that, among other restrictions, 18 U.S.C. 207 generally prohibits a former member or employee from knowingly communicating to or appearing before a Federal agency with the intent to influence a particular matter involving specific parties in which that person personally and substantially participated while at the Commission. (b) (1) Any former member or employee of the Commission who, within 2 years after ceasing to be such, is employed or retained as the representative of any person outside the Government in any matter in which it is contemplated that he or she will appear before the Commission, or communicate with the Commission or its employees, shall, within ten days of such retainer or employment, or of the time when appearance before, or communication with the Commission or its employees is first contemplated, file with the Office of the Ethics Counsel a statement which includes: (i) A description of the contemplated representation; (ii) An affirmative representation that the former employee while on the Commission's staff had neither personal and substantial responsibility nor official responsibility for the matter which is the subject of the representation; and (iii) The name of the Commission Division or Office in which the person had been employed. (2) The statement required by paragraph (b)(1) of this section may be filed electronically based on instructions provided by the Office of the Ethics Counsel at www.sec.gov, or filed in paper by mailing to the U.S. Securities & Exchange Commission, Office of the Ethics Counsel, 100 F Street NE., Washington, DC 20549-9150. (3) Employment of a recurrent character may be covered by a single comprehensive statement. Each such statement should include an appropriate caption indicating that it is filed pursuant to this section. The reporting requirements of this paragraph do not apply to (i) Communications incidental to court appearances in litigation involving the Commission; and (ii) Oral communications concerning ministerial or informational matters or requests for oral advice not otherwise prohibited by paragraph (a) of this section. (c) As used in this section, the term appear before the commission means physical presence before the Commission or its employees in either a formal or informal setting or the conveyance of material in connection with a formal appearance or application to the Commission. As used in this section the term communication with intent to influence does not encompass communications which are not for the purpose of influencing the Commission or any of its employees or which, at the time of the filings, are reasonably believed not to involve any potential controversy. As used in this section, the term representative or representative capacity shall include not only the usual type of representation by an attorney, etc., but also representation of a corporation in the capacity of an officer, director or controlling stockholder thereof. (d) (1) Partners or associates of any person disqualified from appearing or practicing before the Commission in a particular matter are also disqualified. Such partners or associates (the firm) may request a waiver of this prohibition from the Commission by writing a letter to the General Counsel of the commission setting forth the facts of the proposed representation and the individual's disqualification. In appropriate situations, a firm may request a generic waiver with respect to a number of different matters. Upon the advice of the Office of the General Counsel, the Commission, or the General Counsel exercising delegated authority, will advise the requestor of the Commission's response. (2) Waivers ordinarily will be granted where the firm makes a satisfactory representation that it has adopted screening measures which will effectively isolate the individual lawyer disqualified from participating in the particular matter or matters and from sharing in any fees attributable to it. It will be considered significant for purposes of this determination that: (i) The firm had a pre-existing securities law practice prior to the arrival of the disqualified attorney; (ii) The matter was previously the subject of consideration by the firm or the client was already advised by the firm; (iii) In cases where the matter or client became the subject of consideration by the firm subsequent to the firm's employment of the lawyer individually disqualified, that the matter was not brought to the firm because of the disqualified attorney. (3) Notwithstanding the existence or non-existence of any of these factors, no waiver will be issued if the proposed representation would create a significant appearance of impropriety or would otherwise adversely affect the interests of the government. 5 All proceedings with respect to waivers shall be a matter of public record except to the extent that such public disclosure might violate attorney-client privilege or breach the attorney's obligation to preserve the confidences and secrets of this or her clients, reveal the existence of ongoing private investigations, interfere with law enforcement proceedings, or otherwise be inconsistent with the public interest.
Footnote(s): 5 For example, no waiver will be granted if, during the course of representing a client who has an interest with respect to a matter before the Commission, a firm employs, or accepts as a partner, a member of the staff or of the Commission who at any time during the course of that representation had direct and substantial responsibility for the same matter, and whose departure would result in a significant adverse impact upon that matter at the Commission.
(e) Persons in doubt as to the applicability of any portion of this section may apply for an advisory ruling of the Commission. 6
Footnote(s): 6 Attention of former members and employees is directed to Formal Opinion 342 of the Committee on Ethics of the American Bar Association, 62 A.B.A.J. 517 (1975) and to 18 U.S.C. 207.