Securities and Exchange Commission: Existing Post-Employment Controls Could Be Further Strengthened
Published: 2011-07-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Many Securities and Exchange Commission (SEC) employees leave the SEC each year, and some of these former employees go to work for firms regulated by SEC or the law or consulting firms that represent them. This practice raises questions about the potential impact on SEC's ability to effectively carry out its mission, including the potential for undue influence by former SEC employees on SEC matters or cases. The Dodd-Frank Wall Street Reform and Consumer Protection Act required GAO to examine the movement of former SEC employees to regulated firms and the associated concerns. Among other things, this report examines (1) the extent to which employees leave SEC to work for or represent regulated entities and the potential issues associated with such movements and (2) internal controls SEC has in place to manage potential conflicts of interest and how these controls compare across other agencies. To address these objectives, GAO analyzed data on former SEC employees, reviewed SEC's and other agencies' internal controls, and interviewed current and former SEC officials.
section_title: What GAO Found
paragraphs: Because SEC historically has not collected future employer information from separating employees on an agencywide basis, complete information on where former SEC officials obtained employment is not currently available. Based on available SEC attrition data, about 37 percent of the more than 2,000 employees who separated from SEC between October 2005 and September 2010 were in occupation categories that included examiners, accountants, economists, or attorneys--occupations particularly relevant to SEC examinations and investigations. GAO analyzed notice of appearance requests--which are required when former SEC employees wish to appear before SEC, within 2 years of their separation, for purposes of representing their firm or client--submitted between October 2005 and October 2010. Sixteen entities, consisting primarily of law and consulting firms, accounted for approximately 35 percent of the individuals filing these notices. GAO also selected a nongeneralizable sample of 150 former employees from occupation categories relevant to SEC's examination and investigative efforts and searched publicly available sources for information about their post-SEC employment. These individuals frequently obtained positions with financial, consulting, or law firms that represent firms regulated by SEC. According to SEC officials, representatives from law and financial firms, and academic researchers with whom GAO spoke, the potential benefits of employees moving between SEC and the private sector include bolstering SEC's ability to attract experts to help fulfill its mission and increasing understanding of SEC rules and regulations among industry participants. Academic researchers and citizen advocacy groups described potential challenges of such movements, such as the appearance of potential conflicts of interest when former SEC staff work for or represent regulated firms. SEC has a number of controls for managing post-employment and conflict-of-interest issues, and many of SEC's controls are similar to those of other agencies. For example, the SEC Ethics Office provides information to employees about ethics rules and regulations as well as agency-specific conflict-of-interest and post-employment restrictions. Also, some SEC divisions and offices take steps through staffing and work processes to manage potential conflicts of interest and have multiple levels of review and systems for documenting key decisions, such as closing SEC investigations. As previously recommended by GAO, SEC also recently began collecting future employer information from separating employees. This information can be used as part of SEC's mandatory exit interviews to advise departing staff about potential conflicts of interest they might encounter in their new positions related to their SEC experience. While SEC ethics officials routinely advise current and former employees on post-employment and conflict-of-interest issues, SEC has not consistently documented this advice. The agency's lack of documentation standards could limit SEC's and employees' ability to demonstrate that appropriate consultation occurred and could contribute to questions about the movement of employees between SEC and the private sector.
section_title: What GAO Recommends
paragraphs: GAO recommends that SEC establish standards for documentation of ethics advice on current and post-employment issues associated with the movement of employees between SEC and other employers. SEC generally agreed with GAO's recommendation and stated that it has begun drafting standards.

section_title: Letter
paragraphs: 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  certain activities, such as representing certain clients on particular  matters before their former agency, for a specified period of time after  leaving federal service. SEC also has established agency-specific  policies to address post-employment and conflict-of-interest issues.  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.
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.” 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  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. 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.
subsections: section_title: Background
paragraphs: 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. 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.    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.    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.
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. 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. 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  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. 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.
Four SEC IG reports issued during 2009 through 2011 have highlighted  concerns regarding the appearance of conflicts of interest at SEC.  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.    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.
section_title: While Employee Movement between SEC and the Private Sector Offers Potential Benefits to Each Side, It Also Raises Questions
subsections: section_title: SEC Only Recently Has Begun to Collect Future Employer Information from Departing Employees
paragraphs: SEC only recently began asking separating employees—on an  agencywide basis—for future employer information. As a result,  comprehensive data to determine where former employees obtained  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. In response, the Office of Compliance Inspections and  Examinations (OCIE) began conducting exit interviews with departing  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. 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. 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  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.
Using sources such as letters from former employees requesting to  appear before SEC, Web-based search results, and interviews with those  knowledgeable about SEC, we found that former SEC employees  frequently obtained employment with financial entities or law or consulting  firms that represent them. We reviewed 825 notice of appearance  requests (also referred to as 8b letters) that the agency received from  October 2005 through October 2010 that were submitted by former SEC  employees that the SEC subsequently approved. We found that SEC  received these notices from 224 individuals employed at 136 separate  entities ranging from financial companies to legal and consulting firms.  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. 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. We also spoke with the Association of SEC  Alumni, which collects information on current employer information as  part of its membership application. Association representatives indicated  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.
section_title: SEC Officials and Others Cited Both Benefits and Challenges of Movement between SEC and Regulated Entities or Firms That Represent Them
paragraphs: Collectively, SEC officials, academic researchers, citizen advocacy  groups, and representatives from financial firms and law firms with whom  we spoke said that there are a number of benefits and challenges of  employee movement between SEC and the private sector. SEC officials,  academic researchers, and representatives from financial firms and law  firms cited the following benefits:    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  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.
section_title: Although SEC Has Multiple Controls Related to Conflicts of Interest, Documentation of Ethics Issues Varies
subsections: section_title: SEC Provides Information to Employees on Post- Employment Requirements and Restrictions but Has Not Consistently Documented Ethics Advice
paragraphs: SEC has a number of controls for managing post-employment and  conflict-of-interest issues. These include training and information for  employees, staffing decisions, work process controls, ethics advice, exit  requirements for departing employees, and supplemental post- employment rules for certain employees.
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. 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. 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.
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  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.
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. 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  document referrals it receives from other SEC divisions and offices. 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.
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.
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. 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. 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. 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  of inadequate documentation, which could raise questions about the  appearance of conflicts of interest and might harm SEC’s reputation.
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.
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. 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.    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.
section_title: While Select Agencies Have Controls Similar to SEC’s to Help Manage Post-Employment and Conflict-of-Interest Issues, Differences Exist
paragraphs: SEC’s controls to help manage post-employment and conflict-of-interest  issues are similar to the controls of the other agencies we reviewed. We  spoke with representatives of seven agencies and found that the  agencies shared several types of controls similar to those of SEC, such  as training and exit requirements for departing employees (see fig. 2).  Much like SEC, all the agencies train and educate employees about post- 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.
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. 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. 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.
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.
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.
section_title: While Stakeholders Identified Additional Options for Managing Potential Conflicts of Interest, Each Involves Advantages and Disadvantages
paragraphs: Stakeholders with whom we spoke identified additional options for  managing potential conflicts of interest, and existing controls at the other  agencies provide examples of other options. These options include  improving documentation of employee recusals, developing a database to  identify potential conflicts, tracking employees’ participation in SEC  matters, and the extension or expansion of cooling-off periods. Each of  these options has advantages and disadvantages.
Better documentation of recusals. Establishing better documentation of  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  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.
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. 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. Including behind-the-scenes assistance  as part of the post-employment restrictions would help manage situations,  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. 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.
section_title: Conclusions
paragraphs: 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  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.
section_title: Recommendation for Executive Action
paragraphs: To promote transparency and help strengthen SEC’s procedures for  documenting events related to potential current and post-employment  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.
section_title: Agency Comments
paragraphs: 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 clowersa@gao.gov. 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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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. 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:  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  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. 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  based on an employee’s pay plan and grade at the time of his or her  separation. 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.
We interviewed SEC employees in three of the divisions and offices we  selected. 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  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).
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. 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.
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.
section_title: Appendix II: Comments from the Securities and Exchange Commission
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Andrew Pauline (Assistant  Director), Heather Chartier, Chase Cook, James Lager, Tarek  Mahmassani, Marc Molino, Luann Moy, Linda Rego, and Jennifer  Schwartz made key contributions to this report.