The Project On Government Oversight (POGO) Blog

GAO Highlights Inadequate Oversight of Financial Sector's Self-Regulatory Organization

Congress's investigative arm says Wall Street's self-regulatory organization only has limited oversight from the SEC.

By MICHAEL SMALLBERG and ANDREW WYNER

As the House Financial Services Committee considers legislation to create a private self-regulatory organization (SRO) for investment advisers, a recent Government Accountability Office (GAO) report has raised serious concerns about the inadequate oversight of the Financial Industry Regulatory Authority (FINRA), the largest existing SRO for the securities industry.

The GAO’s report falls in line with POGO’s view that FINRA and other SROs, which operate with significant authority, have not been subject to the same level of oversight that applies to government agencies.

FINRA has argued that it is “subject to comprehensive oversight” by the Securities and Exchange Commission (SEC). But the GAO’s report found that the SEC’s oversight of FINRA is “varied, with some programs and operations receiving regular oversight and others receiving limited or no oversight.”

For instance, the GAO found that the SEC has never reviewed the lucrative compensation packages provided to FINRA’s executives (POGO recently noted that FINRA’s top ten executives received nearly $13 million in pay and benefits in 2010). And the SEC has only been able to provide occasional oversight of FINRA’s finances and governance.

POGO Opposes Bill to Shift Oversight of Investment Advisors to Industry

By ANDREW WYNER

POGO sent a letter today to the House Committee on Financial Services stating opposition to the Investment Oversight Act of 2012 (H.R. 4624), which would, as we argued in the letter, "delegate governmental authority for the oversight of investment advisers to one or more industry-funded self-regulatory organizations (SROs)."

The Committee is scheduled to examine the legislation at a hearing next Wednesday.

POGO’s disapproval of H.R. 4624 stems largely from the high costs associated with shifting governmental authority to SROs—including the Financial Industry Regulatory Authority (FINRA), the largest SRO—to regulate investment advisers. POGO is also concerned by FINRA’s conflicts of interest, lack of transparency and accountability, lobbying expenditures, and its executive compensation packages. Based on FINRA’s flaws, POGO believes Congress should reduce the authority of FINRA and other SROs instead of handing them more authority to oversee investment advisers.

According to a December 2011 analysis conducted by the Boston Consulting Group (BCG), authorizing an SRO to oversee investment advisers will cost taxpayers anywhere from $550 million to $670 million each year.

Former Congressional, SEC Officials Take a Spin through JPMorgan's Revolving Door

By MICHAEL SMALLBERG

At the height of the bailout, Goldman Sachs earned the nickname "Government Sachs" thanks to the legions of former Goldman executives who landed jobs at the Federal Reserve and Treasury Department.

Now it looks like JPMorgan is giving Goldman a run for its money.

Lee Fang at Republic Report noted this week that the staff director of the Senate Banking Committee—which is preparing a series of hearings to investigate JPMorgan’s $3 billion trading loss—is none other than Dwight Fettig, a former lobbyist who represented JPMorgan before Congress as recently as 2010. Fettig has also lobbied on behalf of Freddie Mac and the American Bankers Association, among other financial industry clients.

Before he became a lobbyist, Fettig was a legislative director for Senator Tim Johnson (D-SD), the current Chairman of the Senate Banking Committee. According to his bio, Fettig had a “particular focus” on legislation such as the Gramm-Leach-Bliley Act, which repealed many of the Glass-Steagall provisions that had required a separation of commercial banks, investment banks, and insurance companies. (The final report by the Financial Crisis Inquiry Commission cited several regulatory officials who noted that Gramm-Leach-Bliley created an “obstacle that prevented each [regulator] from obtaining a complete understanding of the risks assumed by large financial firms.”)

Will Congress Spare $100 Million to Oversee $300 TRILLION Swaps Market?

By MICHAEL SMALLBERG

It's been widely recognized that the federal government did a woefully inadequate job of regulating swaps and over-the-counter derivatives in the years leading up to the financial crisis.

The good news is that the Dodd-Frank financial reform law expanded the authority of the Commodity Futures Trading Commission (CFTC) to oversee the $300 trillion U.S. swaps market. The bad news is that the CFTC’s budget has been frozen at just over $200 million for several years.

CFTC Chairman Gary Gensler has repeatedly told Congress that the agency’s funding simply hasn’t kept up with its mission:

In FY 2012, the Commission expects to utilize 710 staff-years. At this size, we are but 10 percent larger than our peak in the 1990s. Since then, though, the futures market has grown fivefold, and Congress added oversight of the swaps market, which is far more complex and eight times the size of the futures market the agency currently oversees.

The CFTC is requesting $308 million for fiscal year (FY) 2013—an increase of just over $100 million compared to its FY 2012 appropriation.

Earlier this week, POGO and its allies sent a letter urging Congress to provide full funding for the CFTC. We argued that a failure to fund the CFTC would create unacceptable risks at a time when the nation is still struggling to recover from the last financial crisis:

Here We Go Again: SEC Reveals Whistleblower's Identity to Company under Investigation

By MICHAEL SMALLBERG

UPDATE: The SEC has responded to this post below.

In an apparent case of history repeating itself, the Securities and Exchange Commission (SEC) has failed once again to protect the identity of a key whistleblower, even as the agency tries to encourage more whistleblowers to come forward with tips about financial industry misconduct.

The Wall Street Journal reported yesterday morning that an SEC attorney “inadvertently revealed the identity” of a whistleblower to his former employer during an investigation of Pipeline Trading Systems LLC.

The whistleblower, Peter Earle, worked at Milstream Strategy Group LLC, a Pipeline-affiliated trading entity. Pipeline recently paid $1 million to settle SEC charges alleging that the company failed to disclose to customers of its “dark pool” trading platform that Milstream was filling most of the orders.

Earle provided the SEC with a notebook in early 2010 after he had left the company that helped guide the agency's investigation. Later that year, Daniel Walfish—an attorney at the SEC’s New York Regional Office—provided Earle’s notebook to Gordon Henderson, who headed up Milstream. Henderson—who already had suspicions about Earle—was easily able to recognize Earle’s handwriting, according to the Journal.

Treasury Department Has Not Implemented Two Thirds of Bailout Watchdog's Recommendations

By MICHAEL SMALLBERG

The Treasury Department has failed to fully implement two thirds of the recommendations made by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) during the course of the Wall Street bailout, according to a new SIGTARP report released this morning.

When Congress approved the bailout in 2008, it also created the SIGTARP to protect against the abuse of taxpayer funds. Since then, the SIGTARP has issued nearly 100 recommendations aimed at preventing waste, fraud, and abuse across a wide range of bailout programs. But like all IGs, the SIGTARP cannot compel an agency to take action based on its findings. 

Treasury has put many of the SIGTARP’s recommendations in place, which “resulted in important protections for taxpayers” according to the SIGTARP’s report. But in other cases, for reasons that are not always clear, Treasury has decided not to adopt the recommendations, raising concerns about the ongoing potential for abuse.

For instance, the SIGTARP made several recommendations concerning a bailout program in which the government partnered with private firms to invest in the troubled assets that remained on the balance sheets of many banks, preventing them from raising capital and increasing lending. (POGO and others had raised concerns about potential conflicts of interest arising from the private interests of the fund managers selected by the government.)

Why Doesn't the Federal Reserve Disclose Waivers Granted to Senior Officials?

By MICHAEL SMALLBERG

The Federal Reserve has made headlines recently for its efforts to be more transparent, as illustrated by its recent decision to start publishing the predictions of senior officials regarding short-term interest rates.

As the Fed tries to be more open about its decision-making, it should also consider providing more information to the public about its policies for handling potential conflicts of interest.

In September 2008, for example, as the country faced a severe economic crisis, two members of the Fed's Board of Governors received waivers so they could work on the central bank's emergency bailout programs, despite their ongoing financial stake in firms that would go on to receive substantial assistance from the Fed.

The waivers, signed by Fed Chairman Ben Bernanke, were granted to Board members Kevin M. Warsh and Elizabeth A. Duke, who had previously worked at Morgan Stanley and Wachovia, respectively. POGO obtained the waivers in response to a Freedom of Information Act (FOIA) request.

Senate Sends STOCK Act to President Obama

By SUZANNE DERSHOWITZ

Yesterday, the Senate passed the House version of the STOCK Act by a vote of 96 to 3, sending the bill to President Obama for his expected signature. POGO is deeply disappointed that Senate Majority Leader Harry Reid (D-NV) moved to force a vote without convening a conference committee to hash out the differences between the House and Senate bills. Along with Senate Judiciary Committee Chairman Patrick Leahy (D-VT) and Ranking Member Chuck Grassley (R-IA), POGO had called for an open, transparent House-Senate conference to ensure that the best of both anti-corruption bills would be included in the law.

Unfortunately, critical provisions on political intelligence reporting requirements and public corruption prosecution improvements were scrapped from the final bill. A vocal supporter of political intelligence industry regulation, Sen. Grassley was one of the three “no” votes on the weakened bill. The New York Times reports that Grassley said rejection of the proposal was “a victory for Wall Street and a defeat for the American people — a victory for the hedge funds and big banks that like the secrecy of the status quo.”  

However, POGO is pleased that the House version’s stronger executive branch coverage was included in the final text. The bill heading to President Obama strikes the right balance for more transparency in the executive branch by mandating the online posting of financial disclosure reports already required to be public under law. 

SUNSHINE WEEK: Revolving Regulators at the CFTC

By ANDREW WYNER and MICHAEL SMALLBERG

Click here to join POGO's Un-Do Influence Campaign: a movement to reclaim Washington

As part of Sunshine Week, a national initiative to highlight the importance of open government and freedom of information, POGO is releasing a host records obtained by the Freedom of Information Act (FOIA). Read more about POGO's plans for Sunshine Week here.

Since 2006, at least seven former employees of the Commodity Futures Trading Commission (CFTC) have disclosed their intent to appear before the CFTC on behalf of a client shortly after leaving the Commission, according to CFTC post-employment statements provided to POGO in response to a Freedom of Information Act (FOIA) request. Because the revolving door potentially engenders serious conflicts of interest, POGO believes that the CFTC and similar agencies should readily disclose post-employment records to the public.

Like other executive branch employees, CFTC staffers face certain restrictions on their post-employment activities. For instance, former employees can never appear in a representative capacity before the CFTC on a particular issue if they worked closely on that issue during their time at the Commission. In addition, according to federal statute, former CFTC commissioners and certain senior employees must wait a year before they attempt to influence the Commission on any issue.

Checking In with the Heads of the New SEC and CFTC Whistleblower Offices

Sean McKessy (top) and Vincente Martinez.

By MICHAEL SMALLBERG

On Wednesday, Securities Docket hosted a webcast with the heads of the new whistleblower offices at the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

These offices are now offering awards and anti-retaliation protection to whistleblowers who provide the SEC and CFTC with original tips that lead to successful enforcement actions. POGO strongly supported provisions in the Dodd-Frank financial reform law that established the new whistleblower programs at these agencies, and we’ve been fighting against legislation introduced by Rep. Michael Grimm (R-NY) that would effectively wipe out the incentives and protections afforded to whistleblowers under Dodd-Frank.

The following are edited excerpts from Wednesday’s webcast, hosted by Bruce Carton at Securities Docket, with Sean McKessy, head of the SEC’s Whistleblower Office, and Vincente Martinez, head of the CFTC’s Whistleblower Office.

On the quantity and quality of whistleblower tips…

Sean McKessy, Chief, Office of the Whistleblower, Securities and Exchange Commission: …[Our recent report to Congress] covers the period from August 12^th, when our rules went effective, through the end of the fiscal year, September 30^th of 2011. In that approximate seven-week period, we received 334 whistleblower complaints from people who actually filled out the form, both in hard copy and online. That averages out to about seven per calendar day…

Drug Busts, Hurricanes, and Torture, Oh My! 10 Key Inspector General Investigations

By DANA LIEBELSON

With the release of POGO's new Inspector General (IG) vacancy tracker, we've sparked discussion about the important role IGs play in government oversight. We've also encouraged President Obama to appoint IGs in a timely manner, and asked the Senate to consider nominees promptly.

But let’s get real—the work of federal watchdogs isn’t exactly sexy. I’d wager you could walk from one end of the National Mall to the other and not pass a single person who could identify an Inspector General by name. However, recently, IGs are behind some of the biggest headlines and savings in U.S. government. Ever heard of the numerous scandals involving Solyndra? Bernie Madoff? Hurricane Katrina? Then you’ve probably run across a case that your trusty federal IG helped shed light on. Read on to learn more about ten of these important cases.    

>> >> Click Here to See 10 Key Inspector General Investigations << <<

TORTURE	DEEPWATER	HURRICANES	PATRIOT ACT	HUMVEES
DRUGS AND OIL	BERNIE MADOFF	$6.6 BILLION	SOLYNDRA	FOOD SAFETY

 

Dana Liebelson is POGO's Beth Daley Impact Fellow.

Follow @dliebelson

Booz News: Top Contractor Booz Allen Making Headlines for the Wrong Reasons

By SCOTT AMEY

The Securities and Exchange Commission (SEC), the agency responsible for protecting investors and economic markets, has awarded millions of dollars to top 100 federal contractor Booz Allen Hamilton for management support services. According to Reuters, some lawmakers and SEC insiders are questioning the fiscal wisdom of the SEC's decision.

"If they're not careful, agencies can spend billions of taxpayer dollars on outside studies and contractors and have nothing to show for it," Senator Charles Grassley (R-IA) told Reuters, adding that "The SEC appears to be headed down this path in hiring a consultant to implement another consultant's work."

As Reuters reports, Booz Allen consultants are costing the SEC anywhere from $100 an hour to over $300 an hour and are being paid an average of $140 per hour as compared to $93 per hour for SEC staff. That’s a differential of over 50 percent, which over a year is a cost premium of nearly $100,000 to have Booz perform those jobs.