Tough Wall Street Enforcement Lost in 'Revolving Door': Study

Is the Securities and Exchange Commission too cozy with Wall Street?

A new report by a non-profit government watchdog group said former SEC employees, hired away from the commission by the private sector, "routinely" help their new employers to influence the agency and blunt SEC enforcement actions.

The Project on Government Oversight called the phenomenon a "revolving door" that "blurs the lines between one of the nation's most important regulatory agencies and the interests it regulates."

POGO released a 60-page study Monday called "Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture."

The so-called revolving door is a subject of growing debate as the five-year anniversary of the 2008 financial crisis approaches and the SEC prepares to install a former prosecutor-turned-white collar defense attorney, Mary Jo White, as its next chairman.

(Read More: SEC 'Sheriff' Mary Jo White Has Worn Bank Hats.)

SEC officials hotly dispute the idea that they would go easy on the firms they regulate in order to preserve future employment prospects, and SEC Spokesman John Nester told researchers that "matters are decided on their merits."

An academic study presented to the American Accounting Association last year found enforcement officials who were more aggressive while at the SEC actually did better when they moved to the private sector.

But POGO said the study misses the point. It said the academic study focuses on SEC enforcement actions, while the former employees are much more likely to help their new firms win breaks from the SEC on the regulatory front.

For its own study, POGO said it examined ten years of disclosure letters former SEC employees must file when they seek to represent their new employer before the agency.

The documents, obtained under the Freedom of Information Act, show that from 2001 through 2010, some 400 former employees filed nearly 2,000 disclosures. And since the disclosures are only required within two years of leaving the agency, the study calls its findings "just the tip of the iceberg."

Nonetheless, POGO has created an online database of the disclosures it obtained. It shows some of the former officials wasted no time taking advantage of the revolving door. Twenty-one of them filed disclosures within a week of leaving the SEC, and two—a former examiner in the Los Angeles Regional Office and a former enforcement attorney at SEC headquarters—filed their disclosures after just two days.

SEC spokesman John Nester said the report ignores the broader context, telling CNBC in an email, "The report provides a series of anecdotes that overlooks the fact that the Commission has strong ethics rules in place that assure decisions are made on their merits according to the rules and regulations. Indeed, the report found that the outcomes were the same regardless of whether former employees were involved."

And Nester noted that despite the POGO study's suggestion that SEC employees are leaving for Wall Street in droves, there is in fact very little turnover at the agency. He said only 259 people left the 4,000 person agency last year, and half of them either retired or transferred to another government agency.

The disclosures on their own do not prove any special treatment, but POGO said a "case study" is the failed effort by former SEC chairwoman Mary Schapiro to regulate money market mutual funds, which she had said were "working without a net." Nonetheless, Schapiro dropped the effort in August following heavy opposition by the industry.

(Read More: SEC Seeks to Break From Its Troubled Past.)

Among those lobbying against the change, according to disclosures: an army of former SEC officials. They included a former counsel, Justin Daly; Karrie McMillan who worked in the SEC division that oversees money market funds, and Susan Ferris Wyderko, a former top official in the SEC's Division of Investment Management who went on to become president of the Mutual Fund Directors Forum, an industry group.

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Schapiro dropped the money market crackdown when it became clear three of the five SEC commissioners would vote against it. Among the commissioners who opposed it: Democrat Luis Aguilar, who previously worked on Wall Street at money management firm Invesco, which the report said personally lobbied Aguilar to oppose the plan.

Aguilar agreed, issuing a lengthy statement on August 23 saying, "I remain concerned that the Chairman's proposal will be a catalyst for investors moving significant dollars from the regulated, transparent money market fund market into the dark, opaque, unregulated market."

Invesco had expressed similar concerns a few months earlier, warning the SEC in a January 2012 letter that the proposed reforms risk "triggering a sudden, widespread shift of assets to less regulated vehicles that do not offer the protections" afforded by SEC rules.

Responding to POGO, SEC spokesman John Nester discounted the influence of the alleged revolving door in the matter.

"I imagine you could find alumni on all sides of this issue," Nester told researchers.

Former SEC Director of Enforcement Robert Khuzami goes further, calling the revolving door a "myth."

In an opinion piece for Reuters in August, Khuzami wrote that enforcement decisions are made my "teams of attorneys with multiple levels of review and scrutiny throughout the agency."

"Enforcement staff, having landed a highly sought-after and difficult-to-obtain job, often passing up other opportunities in the process, would not risk reputation and career and even jail by undermining an investigation for a possible future job prospect," Khuzami wrote. "(T)o put it bluntly, would you hire someone so dishonest, so without principle and held in low esteem by former colleagues … to represent you in matters of importance?"

(Read More: SEC Enforcement Chief Khuzami Departs.)

Khuzami, a former General Counsel at Deutsche Bank before joining the SEC in 2009, left the agency on Friday and plans to return to the private sector.

—By CNBC's Scott Cohn; Follow him on Twitter: @ScottCohnCNBC