S.E.C.’s Revolving Door Hurts Its Effectiveness, Report Says

Robert S. Khuzami took a step through Washington’s revolving door on Friday, departing his post as one of Wall Street’s top enforcers en route to the private sector, where he is expected to reap millions.

A new report suggests that Mr. Khuzami, like other Securities and Exchange Commission officials who pass between Washington and Wall Street, will be well worth the pay.

The Project on Government Oversight, or POGO, a nonprofit watchdog group long critical of the revolving door, is set to release a study on Monday highlighting a pattern of S.E.C. alumni going to bat for Wall Street firms — and winning. The report, similarly skeptical of Wall Street lawyers joining the S.E.C., cites recent enforcement cases and scuttled money market regulations to underscore its concerns.

“Former employees of the Securities and Exchange Commission routinely help corporations try to influence S.E.C. rule-making, counter the agency’s investigations of suspected wrongdoing, soften the blow of S.E.C. enforcement actions, block shareholder proposals and win exemptions from federal law,” the report says.

By way of example, it says that in three cases against UBS, after enforcement actions threatened to limit the giant Swiss bank’s ability to issue new securities, the bank hired former S.E.C. lawyers. Each time, the report says, the agency granted relief. (The S.E.C. has defended such decisions as being in the best interest of investors, who might suffer if an otherwise stable bank was suddenly unable to sell securities.)

The watchdog report provides only anecdotal evidence of bias and does concede that the S.E.C. adopted checks on influence peddling. Nonetheless, it raises questions about the rising consequences of the revolving door.

Even as Mr. Khuzami is leaving as the S.E.C.’s enforcement chief, President Obama recently named Mary Jo White as his choice to run the agency. Ms. White is a former federal prosecutor who built a lucrative legal practice defending Wall Street executives.

The POGO report’s findings were based on interviews with current and former S.E.C. officials and thousands of federal records obtained through the Freedom of Information Act. It is the second major report the group has issued on the topic, and it comes on the heels of other research yielding mixed conclusions about the importance of the revolving door.

The Government Accountability Office issued a report in 2011 chastising the S.E.C. for failing to keep track of ethics advice the agency gives past and current employees, which the report argued could minimize postemployment conflicts of interest. The study, which described the S.E.C.’s policies as being consistent with those of other agencies, did go on to note that the financial system might benefit from the agency hiring outsiders well versed in Wall Street minutiae.

In a study last year, a group of accounting experts concluded that, contrary to public concerns, the revolving door actually toughened enforcement results. S.E.C. lawyers enforce a hard line at the agency, that study said, partly to showcase their investigative prowess to future employers.

The accounting professors’ study lent support to the S.E.C.’s argument that it goes to great lengths to prevent conflicts of interest. Mr. Khuzami, who has not announced his next job, will face at least a one-year “cooling off” period preventing him from lobbying the S.E.C. on behalf of a client. For an additional year, he must file certain documentation with the S.E.C. before facing off with the agency.

S.E.C. officials have also argued that despite Mr. Khuzami’s Wall Street résumé — he served as a top lawyer for Deutsche Bank — he oversaw one of the most aggressive periods of prosecution in the agency’s history. A former terrorism prosecutor, he revamped the agency’s enforcement unit in the wake of the financial crisis and took aim at Wall Street giants like Goldman Sachs.

“We follow governmentwide regulations and laws that deter conflicts and ensure impartiality,” John Nester, the agency’s spokesman, said in an e-mail. “We decide issues on their merits according to the rules and regulations governing the securities industry regardless of whether the requesters have an S.E.C. background or not.”

For decades, lawyers have passed through the revolving door on their way to government posts and back again.

The POGO report found that from 2001 through 2010, 419 alumni of the S.E.C. filed almost 2,000 disclosure forms saying they planned to represent an employer or client before the agency. William R. Baker III, a former associate director of enforcement and now a lawyer at Latham & Watkins, was the top filer, submitting 46 notices.

The report also found that former employees had helped companies avoid certain penalties and thwart regulatory initiatives, including an effort by Mary L. Schapiro, then its chairwoman, to reform money market funds, a sector central to the financial crisis. The report noted that former S.E.C. employees had lobbied to block the plan, and added that Luis Aguilar, an S.E.C. commissioner who previously was an executive at Invesco, a money management firm, played a role in “derailing” Ms. Schapiro’s effort.

The watchdog group was also critical of last year’s study by accounting researchers who found that S.E.C. actions were not harmed but strengthened by the revolving door.

That study, POGO said in its report, looked at “only a sliver” of the S.E.C.’s work. “They did not examine, for instance, how the revolving door affects the S.E.C.’s regulation of Wall Street, its granting of relief to specific companies, its handling of cases related to the financial crisis or its decisions to drop investigations without bringing charges.”

Shivaram Rajgopal of Emory University, the lead author of the accounting group’s study, defended its findings, saying it spanned 17 years. He added that while it did not include the financial crisis, it did look at investigations like the one into Enron, the energy company that filed for bankruptcy in 2001 amid an accounting scandal.

“Studies by definition are limited,” he added.

The new report from the watchdog group may be a topic at a New York City Bar Association panel on the revolving door scheduled for Tuesday in New York, a debate for which Mr. Khuzami was initially scheduled. On Friday, Mr. Khuzami caused a stir among some fellow panelists when he withdrew, citing a “conflict.”

Mr. Khuzami later clarified it was a scheduling conflict, not a conflict of interest.