August 21, 2012
Rethinking the Revolving Door: SEC enforcement
Posted by Erik Gerding

One of the main concerns in the literature on regulatory capture and the "revolving door" has been that regulators will go easy on regulated firms in order to curry favor and win private sector employment.  A new study of SEC lawyers involved in enforcement actions provides evidence for the opposite conclusion: more aggressive SEC lawyers are more likely to find plum opportunities when they leave for the private sector.  Here is the abstract for DeHaan et al.:

We provide empirical evidence on the consequences of the “revolving door” phenomenon at the SEC. If future job opportunities make SEC lawyers exert more enforcement effort to showcase their expertise, then the revolving door phenomenon will promote more aggressive regulatory activity (the “human capital” hypothesis). In contrast, SEC lawyers can relax enforcement efforts in order to curry favor with prospective employers in the private sector (the “rent seeking” hypothesis”). We collect data on the career paths of 336 SEC lawyers that span 284 SEC enforcement actions against fraudulent financial reporting over the period 1990-2007. We find evidence consistent with the human capital hypothesis. Specifically, the intensity of enforcement efforts, proxied by the fraction of losses collected as damages, the likelihood of criminal proceedings and the likelihood of naming the CEO as a defendant, are higher when the SEC lawyer leaves to join law firms that defend clients charged by the SEC. Our evidence is thus inconsistent with popular concerns that revolving doors undermine the SEC’s enforcement efforts.

The study has attracted some high profile press too.

This work provides good reason to avoid the more simpler version of capture theory and return to some of the more nuanced work on the subtler ways regulators can be captured. 

Administrative Law, Securities | Bookmark

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