Most of our focus here at Sunlight on the revolving door relates to former government officials and lawmakers who leave office and become lobbyists, or non-lobbyist lobbyists. There is another problem that I think skirts the boundaries of reasonable regulation, but still raises serious policy concerns. That is lawyers who work on a particular issue and then return to represent clients, in a strictly legal, non-lobbying, fashion afterwords.

Take for example this press release put out by Hogan Lovells yesterday:

Hogan Lovells US LLP announced today that Daniel S. Meade has rejoined the Corporate practice as a partner in Washington, D.C., having completed his work as Senior Counsel to the U.S. House Committee on Financial Services.

As Senior Counsel to the U.S. House Committee on Financial Services, Meade served as an advisor to the Committee's Chairman, and was a principal draftsperson of substantial portions of the Dodd-Frank Wall Street Reform and Consumer Protections Act, and the Small Business Jobs Act of 2010. He also actively drafted and analyzed legislation and coordinated oversight functions within the Committee's jurisdiction, particularly with regard to bank, thrift and holding company safety and soundness, capital requirements, transactions with affiliates, industrial loan companies, deposit insurance, consumer protection, and the Community Reinvestment Act.

At Hogan Lovells, Meade will resume his practice representing financial services entities and other entities impacted by the regulation of those entities in connection with a broad range of regulatory and transactional matters, including issues related to the Dodd-Frank Act and all other financial regulatory matters, as well as mergers and acquisitions, anti-money laundering, financial privacy, and enforcement matters.

Here we have a lawyer who previously worked in the Hogan Lovells corporate practice go to work for the Financial Services Committee, help write the biggest rewrite of financial regulation in a decades, and then leave immediately to represent corporate clients and advise on those very regulations.

Regulation of the revolving door is designed to protect the legislative process from undue influence. Studies show that former staffers turned lobbyists have special influence while their former boss is still in office. What about using knowledge of a bill one helped to draft to help clients navigate the process?

I doubt that there is any behavior to regulate here, unless the former government employee uses their connections in a way that mimics lobbying. People should have the right to use their expertise to their career advantage, so long as they are not using their special access to influence the public realm. Are there any policy suggestions out there for lawyers revolving to firms when they don't become lobbyists?

The Commodity Futures Trading Commission (CFTC) has been tasked, along with the Securities and Exchange Commission (SEC), with setting new rules governing the transparent trading of derivatives for the first time.

On July 26, 2010, five days after President Barack Obama signed the most sweeping reform of the financial sector into law, the CFTC was already meeting with industry groups to hash out new rules for the trading of the complex financial instruments known as over-the-counter derivatives.

Disclosures made available under the CFTC's new policy of disclosing contacts made by outside organizations regarding the implementation of the Dodd-Frank financial reform bill show that the CFTC has held 192 meetings or discussions with outside groups since the bill was signed. The large proportion of these groups are those who will be most affected by new rules governing the trading of over-the-counter derivatives including major derivatives traders, clearinghouses and the industry groups that represent them. (View the database of contacts by clicking here or scroll to the bottom of this post.)

The market in derivatives, particularly those known as over-the-counter derivatives, is murky at best and the best source of information for the new regulators may be the very industry they are seeking to reign in. Two of the biggest banks to emerge from the 2008 financial meltdown were tied as the most frequent visitors to CFTC meetings as of October 6, 2010.

Morgan Stanley representatives attended sixteen meetings, according to the disclosures. Morgan Stanley recently decided to move parts of its derivatives trading desk from the outside broker-dealer where it is currently housed to the larger umbrella of the bank itself. The bank is also viewed as the bank least hurt by any new regulation of derivatives trading.

The other bank which is expected to feel little pain from new regulation is Goldman Sachs. Goldman representatives also attended sixteen different meetings with the CFTC. Among all bank holding companies, Goldman Sachs is the most dependent upon trading for revenue with estimates that $11.3 billion to $15.8 billion of their 2009 revenue—$45.2 billion—came from derivatives trading alone. Goldman's representatives were often accompanied by Peter Malyshev, a former CTFC staffer-turned-lobbyist.

Prior to the passage of new rules in the Dodd-Frank financial reform bill, derivatives trading relied on a self-regulatory set of trading rules that were established and maintained by the National Futures Association (NFA). Organization representatives are currently in talks with the CFTC—with whom they have met ten times—as to whether the government regulator will cede regulation of electronic trading systems, known as Swap Execution Facilities (SEF), to the NFA.

The CFTC must also determine what defines an SEF and which organizations will be required to register as one. It is highly likely that the major banks, including Morgan Stanley and Goldman Sachs, along with other major companies will become SEFs. In competition with the large banks in the SEF market will be the clearinghouse that has held the banks as clients in the derivatives trading world.

Intercontinental Exchange (ICE) announced that it would seek to become a registered SEF putting it in direct competition with the banks that it has serviced for clearing millions of dollars worth in trades. ICE has met with CFTC officials on ten different occasions. These ten meetings have, unlike meetings held by Morgan Stanley, Goldman Sachs and the National Futures Association, been meetings solely reserved for ICE employees and lobbyists and did not include representatives meeting for other purposes.

Another major issue of discussion meetings with outside groups is which entities will be required to registered as swap dealers. CFTC Chairman Gary Gensler recently stated, “Initial estimates are that there could in excess of 200 entities that will seek to register as swap dealers.”

Many business groups are concerned over the possible regulation of the trading of derivatives by end-users. “End users” are usually companies that are purchasing derivatives contracts to hedge against risks in their market place. This could include an airline hedging against oil price spikes or a large farm hedging against volatility due to weather or energy prices.

Business groups have pushed for an exemption from regulation for these types of derivatives traders. The U.S. Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers have aligned to form the Coalition for Derivatives End Users to advocate for a broad end-user exemption. Coalition members have met with the commission three times according to disclosures.

During debate over the Dodd-Frank bill in Congress Gensler stated his opposition to an end-user exemption, “we should ensure that every transaction between Wall Street banks and their financial customers, such as hedge funds, insurance companies or leasing companies, be subject to a clearing requirement.”

While most of the meetings held by the CFTC were with industry representatives staffers also met a few times with consumer and labor groups. This included meeting with representatives from Americans for Financial Reform, the American Federation of State, County & Municipality Employees, the Teamsters, SEIU, AFL-CIO, Public Citizen and the Consumer Federation of America. The CFTC held five meetings with these groups – accounting for less the 3 percent of the meetings held by the commission.

I’ve been reading about a brewing controversy over whether language in the new Financial Regulations Act -- officially the Dodd-Frank Wall Street Reform and Consumer Protection Act, aka HR 4173 -- weakens public oversight over banks and investment companies. The alarm was publicly raised by Fox Business News last week  over section 929I of the legislation.

Fox's complaint: SEC is guarding the henhouse

Fox is suing the SEC for information “related to the agency’s response to complaints, tips and inquiries” stemming from the Bernie Madoff scandal. The SEC denied the FOIA request, citing the new provision.

To explain why this is important, Fox Business’s Dunstan Prial quotes SEC “whistleblower” and former SEC attorney Gary Aguirre as saying the law “permits the SEC to promulgate its own rules and regulations regarding the disclosure of records without getting the approval of the Office of Management and Budget, which typically applies to all federal agencies.”

The Washington Post’s Zach Goldfarb noted on July 28th that the SEC complies with “substantially fewer” FOIA requests than other agencies. Fox’s lawyer said the law’s purpose was to “keep the SEC’s failures secret.” The media giant's concern, no pun intended, is that the fox is guarding the henhouse. Equally plausible is the argument that the agency has been "captured" by those it regulates -- or that it's doing the will of Congress.

It seems to me that there are two anti-transparency concerns: why were the new FOIA exemptions created?, and why should the SEC be able to shrug off court subpoenas for information stemming from private lawsuits?

Goldfarb provides additional context and a caveat:

While, as Fox notes, the law exempts the SEC from disclosing records derived from ‘surveillance, risk assessments, or other regulatory and oversight activities’ this only concerns documents obtained through examinations of broker-dealers and investment advisers -- periodic or targeted reviews of financial firms.

People and organizations can still use FOIA to obtain a range of SEC information, such as inspector general reports; communications with Congress and the business community; and officials' calendar, salary and conflict-of-interest information.

SEC: These rules will improve enforcement

SEC Chairman Mary Schipiro reportedly responded to Fox’s allegations via letters to Senator Dodd and Representative Franks (which is not available on the SEC’s website, but is available from news outlets like the Washington Post.) She calls “false” the assertion that the legislation “'exempts’ the SEC from the Freedom of Information Act (FOIA).”

Out of fairness to Fox, the Chairman's characterization of its position is off base: the news conglomerate asserts that the SEC can set its own rules regarding how to comply with FOIA -- which means in practice that the SEC will only comply with FOIA requests to the extent it wants to -- but Fox does not claim the agency is exempted from FOIA entirely. Her characterization of Fox’s assertion seems to be a strawman.

The nub of Chairman Schapiro’s argument is that “[i]n order for our efforts [to protect investors, including those in hedge funds, private equity funds, and venture capital funds] to be successful, it is important that registered entities be able to provide us with access to confidential information without concern that the information will later be made public.”

She adds:

Prior to the Dodd-Frank Act, regulated entities not infrequently refused to provide Commission examiners with sensitive information due to their fears that it ultimately would be disclosed publicly. Existing FOIA exemptions were insufficient to allay concerns due in part to limitations in FOIA (including that certain existing exemptions may not apply to all registrants) (FN 1) and the fact that FOIA exemptions are not applicable when the SEC must respond to a subpoena (as either a party or non-party) (FN 2). The Commission's resulting inability to obtain this information hindered our capacity to enforce the securities laws and protect investors.

The first argument about “allaying concerns” is interesting because of the lack of a subject in the sentence. Whose concerns were not being allayed? Apparently the financial institutions the SEC oversees. Based upon the Commissioner’s letter, perhaps the problem from a regulatory point of view is that the SEC is relying (and perhaps must rely) on voluntary compliance from financial institutions for it to engage in regulatory oversight; FOIA (and public disclosure in general) is a side issue as to whether the SEC is empowered to do its job, and a fig leaf for financial institutions who do not wish to comply with a voluntary regulatory regime.

The second argument concerning subpoenas is not a FOIA argument, but one rather of regulated institution’s concerns that courts would be able to use information gathered by the SEC to help resolve litigation, potentially against a company’s interests. (Who knows -- they may be disclosing one set of books in court and another to the SEC.)

The good stuff is in the footnotes to her letter, which are not shown in the Washington Post’s reprint of the letter, but are available in the PDF the Post links to.

Footnote 1 explains that the FOIA exemptions do not apply to all registrants.

1 For example, FOIA exemption (b)(8) protects matters that are "contained in or related to examination, operating or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions (emphasis added).

Footnote 2 discusses the SEC’s response to subpoenas, which is unrelated to FOIA but does concern a person’s ability to have his or her day in court.

2 With respect to subpoenas, the staff is forced to contest them on grounds such as relevance and common law privileges. Depending on how a judge resolves the issues, the SEC may be ordered to produce sensitive records received from a registered entity to the firm's competitors. In some cases, the firms whose records could be disclosed have not even been parties to the proceeding in which the subpoena had been issued. Such disclosures obviously may cause significant harm to the businesses whose records and information are disclosed, and to the integrity of our examination program.

As a gesture towards the public, the Commissioner says that she is “asking the Commission to issue and publish on our website guidance to our staff that ensures the provision is used only as it was intended.” Congress didn't provide much guidance to aid the SEC, as the committee report that accompanied the legislation (House Report 111-517) does not provide any context as to legislative intent or explanation for this change in these provisions.

FOIA law prior to passage of the financial regulation bills (5 USC 552) seems to address the SEC’s concerns. FOIA exemption 4 excludes from disclosure “a trade secret or privileged or confidential commercial or financial information obtained from a person.” FOIA exemption 8 excludes information “contained in or related to examination, operating, or condition reports about financial institutions that the SEC regulates or supervises.”

Three Exemptions to FOIA and Court Subpoenas

Looking at the legislation itself, it appears that three exemptions have been inserted, all of which exempt the SEC from certain FOIA requests and court subpoenas arising from civil matters.

Exemption #1

First, a new provision was added to the rules regarding “public availability of information” for security exchanges, 15 USC 78x. Note that the SEC no longer needs to comply with court subpoenas or FOIA requests. Here's the language (with emphasis added in bold, and notes in square brackets):

‘‘(e) RECORDS OBTAINED FROM REGISTERED PERSONS.—

‘‘(1) IN GENERAL.—Except as provided in subsection (f), the Commission shall not be compelled to disclose records or information obtained pursuant to section 17(b), or records or information based upon or derived from such records or information, if such records or information have been obtained by the Commission for use in furtherance of the purposes of this title, including surveillance, risk assessments, or other regulatory and oversight activities.

‘‘(2) TREATMENT OF INFORMATION.—For purposes of section 552 of title 5 [FOIA laws, in other words], United States Code, this subsection shall be considered a statute described in subsection (b)(3)(B) of such section 552 [and thus be exempt from FOIA]. Collection of information pursuant to section 17 shall be an administrative action involving an agency against specific individuals or agencies pursuant to section 3518(c)(1) of title 44, United States Code [the section that establishes Office of Information and Regulatory Affairs within the Office of Management and Budget].’’.

I am not clear what provision 17(b) refers to, although I would guess that it is section 17(b) of the Securities and Exchange Commission Act of 1934 concerning “automated quotation systems for penny stocks,” codified at 15 USC 78-q2. If I'm right, this provision concerns the making publicly available of information regarding trading activity. (Note that subsection (f), not reproduced here, contains examples of when the agency must respond to subpoenas, e.g., in lawsuits brought by the government.)

Exemption #2

Second, a provision was modified that requires investment companies to maintain records, (15 U.S.C. 80a-30), which now allows the SEC to shrug off court subpoenas demanding information for the resolution of civil suits, as well as ignore FOIA requests. Inserted text is in caps; deleted text is struck through and in brackets; text I am emphasizing is in bold.

(b) Investment Company Act of 1940.—Section 31 of the Investment Company Act of 1940 (15 U.S.C. 80a-30) is amended—

(1) by striking subsection (c) and inserting the following:

‘‘(c) Limitations on Disclosure by the Commission.—Notwithstanding any other provision of law, the Commission shall not be compelled to disclose ANY RECORDS OR INFORMATION [internal compliance or audit records], or information contained therein provided to the Commission under this section, OR RECORDS OR INFORMATION BASED UPON OR DERIVED FROM SUCH RECORDS OR INFORMATION, IF SUCH RECORDS OR INFORMATION HAVE BEEN OBTAINED BY THE COMMISSION FOR USE IN FURTHERANCE OF THE PURPOSES OF THIS TITLE, INCLUDING SURVEILLANCE, RISK ASSESSMENTS, OR OTHER REGULATORY AND OVERSIGHT ACTIVITIES. Nothing in this subsection authorizes the Commission to withhold information from the Congress or prevent the Commission from complying with a request for information from any other Federal department or agency requesting the information for purposes within the scope of jurisdiction of that department or agency, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this section shall be considered a statute described in subsection (b)(3)(B) of such section 552. COLLECTION OF INFORMATION PURSUANT TO SECTION 31 SHALL BE AN ADMINISTRATIVE ACTION INVOLVING AN AGENCY AGAINST SPECIFIC INDIVIDUALS OR AGENCIES PURSUANT TO SECTION 3518(C)(1) OF TITLE 44, UNITED STATES CODE.’’;

(2) by striking subsection (d); and

(3) by redesignating subsections (e) and (f) as subsections(d) and (e), respectively.

As you can see, the pendulum has swung away from broader disclosure. Instead of excluding “internal compliance or audit records,” now no entity can compel the SEC to disclose any records or information, or anything derived from them, except for the reasons identified above. Again, this isn’t just a FOIA exemption, but also allows the SEC to decline to provide materials subpoenaed by a court by a lawsuit brought by anyone except the federal government.

I do not know what it meant here by an “administrative action.”

Exemption #3

A third provision was added, which provides FOIA and subpoena exemptions regarding disclosure of information by investment advisers (15 USC 80b-10). Here's the text, with my emphasis in bold.

c) INVESTMENT ADVISERS ACT OF 1940.—Section 210 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-10) is amended by adding at the end the following:

‘‘(d) LIMITATIONS ON DISCLOSURE BY THE COMMISSION.—Notwithstanding any other provision of law, the Commission shall not be compelled to disclose any records or information provided to the Commission under section 204, or records or information based upon or derived from such records or information, if such records or information have been obtained by the Commission for use in furtherance of the purposes of this title, including surveillance, risk assessments, or other regulatory and oversight activities. Nothing in this subsection authorizes the Commission to withhold information from the Congress or prevent the Commission from complying with a request for information from any other Federal department or agency requesting the information for purposes within the scope of jurisdiction of that department or agency, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this subsection shall be considered a statute described in subsection (b)(3)(B) of such section 552. Collection of information pursuant to section 204 shall be an administrative action involving an agency against specific individuals or agencies pursuant to section 3518(c)(1) of title 44, United States Code.’’.

I am conjecturing that section 204 is codified at 15 USC 80b-4, which requires investment advisers to keep records and make reports to the SEC. In addition to creating an exemption from FOIA, this is another get-out-of-court-free provision, where courts are prohibited from compelling the SEC from provide records from investment advisers. In other words, it’s again up to the SEC’s sole discretion.

What does this say about transparency?

What does this all mean? I don’t really know. It appears that less information will be available to the public or to resolve lawsuits. The SEC is granted a freer hand to help shield corporate information from public view, and apparently the agency is unafraid to wield that power. Based on the Commissioner’s letter, these provisions have shown up in legislation before -- thus demonstrating how omnibus legislation allows a pre-existing laundry list to be enacted into law.

This also shows how difficult it can be to figure out what’s going on. With the move into the regulatory implementation phrase -- and a request for public comments on the implementation of these regulations already issued by the SEC -- it is likely that those who are in the know will work very hard to keep the rest of us from figuring out what’s going  on ... until it’s too late.

• Disclosure: I was a law clerk for Fox Television Stations Incorporated and had no dealings with Fox News.

Bank lobbyists are really laying it out there. The New York Times reported over the weekend that lobbyists presented their case against an amendment that could reduce debit card fees, the existence of which increase the price of pretty much everything you and I purchase, by threatening to withhold campaign contributions.

The Senate approved a series of amendments unfavorable to the banking industry over the last week, but this one was widely regarded as the most surprising. Meddling in dealings between businesses generally is anathema to Republicans and a relatively low priority for Democrats.

And this was not an easy vote. Lobbyists for the wounded but formidable banking industry made clear to some senators that this decision would affect future campaign donations, according to people who participated in those conversations.

And this is just over an amendment that would allow the Federal Reserve to create rules governing debit card fees. It doesn't even directly create rules, but allows a body that is often greatly favorable to the big banks to set rules, providing another opportunity for the banks to lobby. Not the toughest amendment, but on a subject so sensitive that banks are willing to use the quid pro quo argument.

These lobbyists continue to make the argument for lobbyist contact disclosure that much more salient. Shouldn't we know who's directly trying to bribe members of Congress?

Last week, Ezra Klein wrote a post on how members of both parties are still running around raising money from Wall Street for their campaigns. This despite the obvious loathing that the public has for everything finance-related. Klein wrote:

Both parties, in fact, know the risks and are choosing to take the hit rather than forgo the cash. This isn't because they love being attacked or even think that the toxicity of Wall Street is overstated. It's because, to use a metaphor that's in vogue right now, our system of campaign finance turns politicians into vampire squids wrapped around the wallets of the rich, relentlessly jamming their blood funnels into anything that smells like money.

And for the past twenty years there's been no better smell of money than the one eminating from Wall Street. As my colleague Larry Makinson pointed out back in 2008, "the finance, insurance and real estate (FIRE) industries that collectively are at the center of the current crisis are the single largest sector–by far–of all the major economic and interest groupings that give campaign contributions to federal politicians."

If you needed any confirmation of this, see the graphic that was put together for Larry's nearly two year old post:

Lawmakers can't avoid raising money from the finance sector. It's where the majority of campaign contributions come from.

Amazingly, despite the fundraising and the lobbying and the sheer volume of contributions, the financial sector is not getting what they want. In fact, they may be facing much more severe reforms after the bill goes through the amendment process.

The Washington Post offers this sometimes hilarious article loaded with anonymous statements from angst-ridden finance sector lobbyists unhappy that their puppet strings have been severed.

Lawmakers from both parties have been eager to excoriate Wall Street. But industry lobbyists warn that populist proposals to shrink, break up or otherwise shackle some of the giants of the financial world could do more harm than good to the economy. These advocates say that stiff regulation could stifle the flow of credit, undermine American competitiveness in global markets and cost jobs.

Among the terms that lobbyists used to describe elements of the legislation: "Draconian." "Crazy." "Insanely unproductive."

They had expected the most vexing provisions in the bill sponsored by Sen. Christopher J. Dodd (D-Conn.), chairman of the banking committee, to be scratched by now, or at least scaled back.

These lobbyists had hoped that Dodd and Sen. Richard C. Shelby of Alabama, the committee's ranking Republican, would have privately hammered out a bipartisan deal months ago. It didn't happen. Then Dodd and Sen. Bob Corker (R-Tenn.) gave it a whirl. No dice.

Of course, the lobbyists don't like the open process that an actual Senate floor debate provides. Instead, they pine for the behind the scenes deal-making that Americans know and really don't love:

Looking past the Senate debate, industry lobbyists say they hope Frank and the Obama administration can help remove some of the most objectionable provisions that survive the Senate.

"They've got to get this thing off the [Senate] floor and into a reasonable, behind the scenes" discussion, said one lobbyist. "Let's have a few wise fathers sit around the table in some quiet room" and work out the details.

Yes, "'a reasonable, behind the scenes' discussion." The American people loved that when it happened during the health care debate. This time they'll enjoy it even more.

Despite the fall-out from the Cornhusker Kickback in the health care reform debate, Sen. Ben Nelson is, at best, creating the perception that he is seeking another parochial deal or, at worst, acting on behalf of the richest man in the United States to help protect his bottom line. News reports detail that Nebraska-based Berkshire Hathaway Chairman and CEO Warren Buffett--richest man in America--lobbied Nelson to include an exemption for previously written derivatives contracts from the derivatives regulation legislation crafted in the Senate Agriculture Committee. The committee did not include the provision despite Nelson's support for it.

According to the Center for Responsive Politics, Nelson has received $75,550 in campaign contributions from Berkshire Hathaway, Warren Buffett and Berkshire employees. Nelson also owns between $500,000 and $1,000,001 in Berkshire Hathaway stock, according to his most recently filed personal financial disclosure. The provision sought by Buffett would have saved Berkshire Hathaway between $6 and $8 billion.

One would think that, after the embarrassment of the Cornhusker Kickback, Nelson would consider that bartering his vote, or appearing to barter his vote, for parochial interests, especially when said interest is the richest man in America, not only will not work, but makes the senator appear rather petty.

[caption id="attachment_14073" align="aligncenter" width="580" caption="Derivatives trading as featured in the 1983 movie "Trading Places.""][/caption]

The final piece of the financial regulatory reform puzzle is about to come into place as Sen. Blanche Lincoln released language last Friday that would impose rules on the unregulated world of over-the-counter derivatives trading. Lincoln's bill, the Wall Street Transparency and Accountability Act, is more far reaching than proposals from both the Obama administration and the House of Representatives. This comes as somewhat of a surprise from the moderate and previously bank-friendly senator who has benefited from finance industry contributions in her post as chair of the Senate Agriculture Committee.

The Agriculture Committee occupies a unique place in the oversight of the nation's financial markets. With legislative jurisdiction over the Commodity Futures Trading Commission (CFTC)--historically futures trading began as a trading mechanism for farmers--the committee maintains jurisdiction over futures and derivatives trading. This unique arrangement provides committee members the ability to pull campaign contributions from the most prolific giver of contributions, the financial sector.

What are derivatives?

Examples from the financial meltdown

How did some derivatives escape regulation?

In 2009, Lincoln raised $693,500 from the finance, insurance and real estate sector, according to data obtained from the Center for Responsive Politics. Those with a specific stake in derivatives reform did not begin contributing to her campaign until she ascended to the chairmanship of the committee after the death of Sen. Edward Kennedy caused a a shuffling of committee seats. Since ascending to the Agriculture Committee chair Lincoln raised $256,900 from the finance, insurance and real estate sector. She also raised over $44,000 from financial companies with a major stake in derivatives reform--almost twice as much as she raised in the previous eight months from similar companies.

In total these major derivatives players contributed approximately $70,000 to Lincoln's reelection campaign. These companies include fifteen members of the International Swaps and Derivatives Association (ISDA), an international trade association that writes the rules for derivatives trading that remains unregulated. Some of these contributors include  JPMorgan Chase, Goldman Sachs, Bank of America, Credit Suisse, Deutsche Bank and UBS.

Despite all of the money and lobbying power—Credit Suisse employs Lincoln's former chief of staff as a lobbyist—expended to deflect new regulations, Lincoln has unveiled unexpectedly tough regulations. (Click here to see Lincoln's reforms.) While these tougher rules will set up a fight in the Senate, they will assuredly create a massive industry showdown if they pass the Senate and move to conference with the House to reconcile the two bills.

Finance influence in the House

Unlike Lincoln's bill, which goes against the wishes of her financial sector fundraisers, the House bill is a reflection of the finance sector's enduring influence in Washington. Throughout the process, the derivatives section of the House bill was consistently amended in favor to the finance industry as efforts to toughen the bill were defeated.

The Obama administration has argued that the majority of over-the-counter derivatives be traded out in the open on exchanges or cleared through clearinghouses. The banks and others have argued for broad exemptions for which over-the-counter derivatives would be required to be traded in the open. The House bill, however, wound up riddled with exemptions.

The bill began under the control of Rep. Barney Frank, the chairman of the House Financial Services Committee. The Financial Services Committee is a cherished post for congressmen to raise money and for staffers to gain knowledge for a future lobbying job. Since 2000, nearly half of the 126 committee staff who left the committee became lobbyists, according to a report by The Huffington Post. The committee is also the chief conduit for financial sector campaign contributions with the 71 committee members, or 16% of the 435 member body of Congress, accounting for 33% of all financial sector campaign contributions to members of the House in 2009.

In October 2009, Bloomberg reported on the crucial role that members of the New Democrat caucus played in helping add exemptions and loosening regulations on over-the-counter derivatives. Many of these members, along with their ideological counterparts, the Blue Dog Democrats, received inordinate amounts of campaign contributions from the financial sector.

Financial Services Committee member Gregory Meeks pulled in over 50% of his 2009 campaign contributions from the financial sector. Rep. Melissa Bean, another committee New Dem, raked in over 47% of her contributions from the financial sector, as did Rep. Dennis Moore. Committee members Jime Himes and David Scott pulled in over 30% of their campaign haul from finance companies and Rep. Charlie Wilson and Ron Klein pulled in over 25% of their total contributions from finance.

A major point of contention is what kinds of exemptions should exist for the over-the-counter derivatives that will be pushed onto exchanges and into clearinghouses. Both the Financial Services Committee and the House Agriculture Committee carved out large exemptions for “end-users”--a wide-swath of companies that may include mutual funds, insurance companies, hedge funds and private-equity capital. The exemptions also aid the top five banks in the United States—Citi, JPMorgan Chase, Bank of America, Morgan Stanley and Goldman Sachs—which hold approximately 95% of the over-the-counter derivatives exposure among the top 25 banks, according to the Comptroller of the Currency.

CFTC Chairman Gary Gensler, speaking on behalf of the Obama administration, declared the exemptions in the House bill unacceptable, adding, “we should ensure that every transaction between Wall Street banks and their financial customers, such as hedge funds, insurance companies or leasing companies, be subject to a clearing requirement.”

The loosening of the derivatives language continued when the bill hit the floor. An amendment widening the “end-user” exemption offered by Rep. Scott Murphy, a recipient of $525,015 in campaign contributions from the financial sector in 2009, passed by a wide margin with 131 Democrats in support—87 of them were New Dems or Blue Dogs. The House also voted down three amendments that would have placed tougher regulations on derivatives trading. The regulations that would have been imposed by these three defeated amendments mirror regulations proposed by Sen. Lincoln in her derivatives reform bill.

A lot of industry players came away from the House debate moderately contented. The coming showdown between the House and Senate over derivatives will reignite their engines and push them to pressure their allies in the House. One industry, specifically one company, will emerge from this debate with a windfall in profits, no matter which version of the bill passes.

Clearing and exchange trading requirements

Intercontinental Exchange, Inc. (ICE) operates derivatives exchanges and owns the biggest over-the-counter derivatives clearinghouses in the country. (See here for an explanation of exchanges and clearinghouses.) Both the House bill and Lincoln's bill would increase the number and type of derivatives that would be required to be cleared by a clearinghouse like the one ICE operates. The House bill has a series of exemptions and loopholes governing clearing and reporting, while the Lincoln proposal contains a strict requirement for clearing. Either way, this will pump up ICE's bottom line. It also would be a boon for the big banks as well.

In 2008, ICE purchased The Clearing Corporation, an over-the-counter derivatives clearinghouse from its owners. The owners included a who's who of major banks including JPMorgan Chase, Goldman Sachs, Bank of America, Citi and Morgan Stanley. ICE turned The Clearing Corporation into ICE Trust, which in March of 2009 became the first clearinghouse approved by the Securities and Exchange Commission (SEC) to begin clearing over-the-counter derivatives. If over-the-counter derivatives have to go onto an exchange, there is little option outside of ICE Trust.

When ICE purchased The Clearing Corporation they entered into a detailed profit sharing agreement with their partners, the big banks. The banks and ICE have a 50-50 profit sharing agreement for all profits that come from trades that are cleared by ICE Trust. As previously mentioned, these big banks account for over 90% of the over-the-counter derivatives market. A requirement, especially with a series of exemptions that the banks can take advantage of themselves, would increase profits for both ICE and the big banks. In the nine months that ICE Trust was open for business it processed $3.1 billion in trades and received $30 million in fees.

In testimony before Sen. Lincoln's committee in December, ICE general counsel Johnathan Short stated ICE's support for an increase in transparency in the market, but also voiced opposition to a requirement that all over-the-counter derivatives trades be cleared or be made over an exchange, much in line with the position of the big banks.

The big banks have an incentive to create as many exemptions in the clearing and exchange trading requirement as possible.This may seem counter-intuitive as ICE would benefit handsomely if all trades had to be processed by their clearinghouse for a fee. But it would not benefit the big banks who are partners with ICE in ICE Trust. The big banks have an incentive to create as many exemptions in the clearing and exchange trading requirement as possible. Previously, if an airline or a manufacturer wanted to purchase a derivatives contract they had to do it through a big bank, as the big banks had good credit ratings and were seen as a safe place to make these trades. This allowed the big banks to charge both the user and the trader fees for making the contract. If all derivatives contracts are required to be traded on exchanges or cleared then the users and traders could simply make contracts with each other rather than relying on a bank as a go-between. With a wide-range of exemptions to clearing and exchange trading, derivatives contracts could still be made within the big banks and then contracts made by big banks could cleared through a clearinghouse like ICE Trust.

Over the past three years, ICE increased its lobbying operation in Washington. Last year, ICE spent nearly $700,000 to lobby Congress and the executive branch. In their pursuit of lobbying talent, ICE poached a top member of the House Financial Services Committee staff, Peter Roberson. ICE picked well. Roberson had a hand in crafting the House bill's derivatives language, including its many exemptions. Roberson's job switch infuriated his former boss Barney Frank, who subsequently banned committee staff from talking to Roberson while he remains chairman of the committee.

ICE's campaign contributions increased as well. Sen. Lincoln was the recipient of $12,300 in campaign contributions from ICE's employees and political action committee. The only member of Congress to receive more in 2009 is Banking Committee Chairman Chris Dodd, who is no longer running for reelection.

Roll Call reports that House Republican leadership met with approximately 100 lobbyists to hash out strategy to defeat financial regulatory reform:

In a call to arms, House Republican leaders met with more than 100 lobbyists at the Capitol Visitors Center on Tuesday afternoon to try to fight back against financial regulatory overhaul legislation.

...

“The message was [House Financial Services Chairman Barney] Frank and the Democratic majority are ruining America, ruining capitalism, and stand up for yourselves,” said a lobbyist who attended the meeting. “They said, ‘Look, you all oppose this bill, but only a few of you have come out publicly.’”

Does anyone on Capitol Hill have any interest in releasing these types of visitor logs? Over 100 lobbyists go to meet with House Republicans. House Republicans number one-hundred ninety-eight. Not all of them were likely in this meeting, so in all likelihood we had a 1:1 or greater ratio of lobbyists to lawmakers. Who knows who these lobbyists are?

Of course, this doesn't just apply to this particular meeting between Republicans and their allies, but also to Democratic lawmakers and their lobbyist sit-downs. The White House has a policy of releasing their visitor logs to the public. Congress should consider letting the public know what lobbyists and industry executives they are sitting down with when they discuss legislation.

Rep. John Campbell is offering an amendment to legislation creating a Consumer Financial Protection Agency that would provide a "special interest carve out" for auto dealers. The amendment would strip the the newly proposed agency of its ability to oversee financing by car dealers. Campbell is a former car dealer who currently rents out seven properties to car dealers or car repair shops. (Six car dealerships and one repair shop.)

The 2008 personal financial disclosure filed by Campbell earlier this year shows that the total value of the these properties is between $6,500,007 and $31,000,000 and his total income from the properties to be between $700,000 and $7,000,000. According to a release by Public Campaign and Common Cause, Campbell has received over $170,000 in campaign contributions from auto dealers over his career.

In December of 2008, Campbell stated that he would recuse himself from voting on any automotive bailout plans considering how close his personal finances are tied to the industry. When the Auto Industry Financing and Restructuring Act (H.R. 7321) did come to a vote, Campbell voted "present," fulfilling his promise to avoid a conflict of interest. Now in the fall of 2009, Campbell has inserted himself directly into a conflict of interest situation by offering an amendment that could potentially affect his bottom line and those of his campaign contributors.

Maybe he should have kept the principled stance he had last year. Are you listening, man?