By MICHAEL SMALLBERG
The Financial Industry Regulatory Authority (FINRA), the self-regulatory group for the securities industry, has proposed a one-year revolving door rule for senior officers who leave the organization, as reported this week by Bloomberg. But will the new post-employment restrictions have any serious impact at an organization that is inherently cozy with the industry it oversees?
According to the proposed rule, former FINRA officers—including VPs, senior VPs, and other high-ranking executives—will face a one-year cooling off period during which they can’t represent or testify as an expert witness on behalf of a FINRA-regulated entity in disciplinary and other proceedings that take place before FINRA adjudicators.
The purpose of the rule, according to FINRA, is to “uphold a high degree of fairness” in disciplinary proceedings and to “safeguard against former FINRA officers potentially exerting undue influence.” Yet it appears they’re in no rush to put the rule in place—it isn’t scheduled to be implemented until July 2, 2012, assuming it isn’t suspended or disapproved by the Securities and Exchange Commission (SEC), which oversees FINRA.
FINRA claims that its proposed rule would restrict the activities of former officers “in a manner that is consistent with restrictions currently imposed on other regulators in the securities industry.” There are some key differences, however, between the proposed rule at FINRA—a private non-governmental self-regulatory organization—and the post-employment restrictions that apply to most executive branch employees.
For instance, FINRA’s rule would impose only a one-year cooling off period on former officers. There is a similar one-year cooling off period for “senior” or “very senior” government employees during which they cannot represent another entity in an attempt to influence their former agency. Yet former government employees at all levels face a lifetime ban on representing someone else before the government on matters in which: the government holds a substantial interest; the employee participated personally and substantially; and the participation involved specific parties. And for two years after their employment ends, former government employees cannot represent another entity on matters that were “actually pending” under their responsibility during their last year of employment.
FINRA’s rule does not address employees below the level of vice president, nor does it take into account their level of involvement on particular matters. This raises questions about mid-level FINRA staff who might have participated substantially in an examination, investigation, or prosecution related to a disciplinary proceeding against an entity overseen by FINRA. Wouldn’t these employees also have the ability to exert “undue influence” on FINRA proceedings shortly after leaving the organization, given their direct involvement with FINRA disciplinary actions?
There’s also a question of enforcement and penalties. FINRA states that its proposed rule “is designed to create restrictions that are precisely defined and straightforward to enforce,” since former FINRA officers, along with other attorneys, are required to file a notice when appearing before a FINRA adjudicator, and the adjudicator could simply ban the former FINRA officer from the proceeding. Compare this to the civil and criminal penalties that former government employees face for violating the government-wide post-employment restrictions. Without the possibility of stricter penalties, will FINRA’s rule actually deter former employees from seeking to circumvent the cooling off period?
There are even differences between FINRA’s proposed rule and comparable rules at similar organizations. For instance, at the Public Company Accounting Oversight Board (PCAOB)—another private-sector organization overseen by the SEC—former Board members and professional staff are generally restricted from appearing before the Board and the SEC in the year after their employment ends. FINRA’s rule would do nothing to restrict former officers from appearing before the SEC on behalf of an outside party that’s overseen by the SEC and FINRA.
Other observers have also raised concerns about FINRA’s proposed rule. Suzanne Barlyn at Dow Jones first reported on the new rule when it was reviewed and approved by FINRA’s board a few months ago. At the time, Seth Lipner, a securities attorney for Deutsch & Lipner, remarked that “one year is a joke” as a cooling off period for former FINRA officers. He pointed out that law firms “pay big bucks to get these free agents” and that “one year on the sidelines is chicken feed to them.”
There have been several recent examples of the revolving door at FINRA. Barlyn pointed to a recent $2.5 million settlement between FINRA and UBS in which UBS was represented by Barry Goldsmith, a former executive VP/head of enforcement at FINRA’s predecessor, the National Association of Securities Dealers (NASD). And in its recent $154 million settlement with the SEC, JPMorgan was represented by Susan Merrill, another former executive VP/head of enforcement at FINRA. It’s worth pointing out that both of these representations occurred more than one year after the officials left FINRA/NASD, so it appears they would not have been affected by FINRA’s proposed rule.
Earlier this week, the Government Accountability Office (GAO) raised several concerns about assigning FINRA or another self-regulatory group to help oversee private funds, including hedge funds and private equity funds. As Congress and the SEC consider this possibility, they should also keep in mind that employees at FINRA and other self-regulatory organizations are not bound by the same post-employment regulations that were put in place to protect the public’s interest at government agencies.
Michael Smallberg is a POGO Investigator.
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