Firm insists it followed SEC's ethics rules

Getco, a market-making firm that specializes in global high-frequency electronic trading, insists that it followed SEC ethics rules in recruiting and hiring a top SEC official as its associate general counsel. A Senate panel last week asked the inspector general of the Securities and Exchange Commission to examine the recent exit of a top commission staff member to Getco LLC. The official, Elizabeth King, worked in the commission's Division of Trading and Markets, which monitors, among other things, high-frequency trades. “Consistent with SEC policies, she recused herself from matters affecting our business beginning in March and will also adhere to all other ethics policies applicable to former government staff,” Sophie Sohn, Getco's director of communications, said in a statement. Ms. King's career move brings up questions what critics call the “revolving door” at the SEC, in which officials leave to work for companies they once regulated. In a June 14 letter to David Kotz, the SEC inspector general, Sen. Charles Grassley, R-Iowa, requested that he “conduct a review of the circumstances surrounding Ms. King's departure from the SEC and disclose the results so that Congress and the public can more accurately assess the integrity of the SEC's operations.”

FLASH CRASH REVIEW

Specifically Mr. Grassley wants to know whether she was involved in the SEC's review of the “flash crash” while in job discussions with Getco. The practice of high-speed trading has come under increased scrutiny since May 6, when $1 trillion in stock market capitalization was wiped out in about 15 minutes of frantic trading. Although the market made up most of those losses the same day, the SEC has been examining whether high-speed trading on traditional exchanges — as well as dark pools — contributed to the flash crash or other market gyrations. Mr. Grassley, the ranking Republican on the Senate Finance Committee, has been prodding the inspector general for months to review of the revolving-door phenomenon. Indeed, in his letter to the inspector general, Mr. Grassley asked for a summary of the other public to private-sector job moves Mr. Kotz is investigating.

SEC'S RESPONSE

In a June 15 letter responding to Mr. Grassley, Mr. Kotz said that he has already opened an investigation into the circumstances surrounding Ms. King's departure. Mr. Kotz also said that he is reviewing improper disclosures about The Bear Stearns Cos. Inc. to JPMorgan Chase & Co. before the latter took over the now-defunct investment bank. The inspector general also said that he is looking into whether a Bear Stearns investigation was curtailed by the SEC's Miami office. “The Office of Inspector General has been vigilant in investigating allegations of violations of the criminal statutes and ethical standards pertaining to conflicts of interest, as well as improper attempts to influence SEC proceedings or actions by former SEC staffers,” Mr. Kotz wrote. Law firms and consulting firms in Washington often recruit prospective employees based on expertise built at a federal agency. Those who leave senior SEC positions for jobs in the private sector are subject to some legal restrictions — most notably, they are barred from representing clients before the SEC for one year. Lower-level staff members who leave the SEC must, for two years, notify the commission of cases that they are working on. The SEC then decides whether a conflict of interest exits.

EXIT RESTRICTIONS

A lawyer who formerly worked at the SEC thinks that the commission's exit restrictions do limit problems arising from revolving-door career moves. “I think in general, these rules work very well,” said Russell Duncan, a partner at Orrick Herrington & Sutcliffe, who served as SEC assistant chief litigation counsel from 2003-06. “I've never felt that anyone [at the SEC] gives me any more access or influence than what I've earned by the experience I've had and the arguments I make.” E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com.