By Sarah N. Lynch
WASHINGTON (Reuters) - A senior U.S. securities official is recusing herself from any discussions on a new capital-raising strategy known as "crowdfunding," just one week after testifying extensively on the topic.
The about-face by the Securities and Exchange Commission's Corporation Finance director, Meredith Cross, was disclosed on the same day the SEC was dealing with the fall-out from a scathing report by its inspector general into alleged conflicts of interest by former General Counsel David Becker.
Becker, the report said, should have recused himself from handling legal matters concerning convicted swindler Bernard Madoff because he had inherited money from a Madoff account. The matter was referred to the Justice Department for possible criminal investigation.
Cross' decision not to discuss crowdfunding, despite receiving clearance from the agency's ethics counsel, underscores how delicate the handling of conflicts of interest has become at the SEC.
The agency said she worked in private practice for a company that sold its notes through a "peer to peer" lending platform, which has some similar attributes to crowdfunding, where many investors contribute relatively small amounts.
Becker had also received a clearance from the agency's ethics lawyer before doing legal work on Madoff matters.
Cross is due to testify before a House Financial Services panel on Wednesday on steps the SEC is taking to help promote capital formation for small businesses.
The hearing is expected to touch on a wide range of issues, from updating stale securities rules on general solicitation for investments to crowdfunding.
But in a lengthy footnote to her testimony, the SEC said she has decided to recuse herself from discussing crowdfunding because of the work she previously did.
According to public records she advised Lending Club, an Internet-based social lending platform that started in 2007. Prior to joining the SEC in June 2009, Cross worked for the law firm Wilmer Hale.
"Although Ms. Cross has no financial interest or other interest in her former client or her prior employer, in light of the small number of participants in that market, in order to avoid any appearance concerns, she does not participate in matters involving peer-to-peer lending," the footnote said.
"Further, since there are some similarities between peer-to-peer lending and some crowdfunding concepts" she has recused herself from crowdfunding matters, the footnote said. Instead, another official in the division will be on hand to tackle it.
Proponents of crowdfunding are seeking the SEC's blessing for an exemption from federal securities registration requirements. The idea is now starting to gain bipartisan support in Washington.
In testimony last week, Cross disclosed to lawmakers she had worked for one of the two largest peer lenders prior to joining the SEC.
Peer-to-peer lending, like crowdfunding, is an attempt to try to get small amounts of money from a large group of investors to finance a project. But with peer-to-peer lending, lenders generally earn money through interest, whereas with crowdfunding, investors typically get a stake in a new enterprise or business.
(Reporting by Sarah N. Lynch; additional reporting by Alexandra Alper; Editing by Tim Dobbyn)