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Revolving door at the SEC is not the problem it is widely thought to be, new research suggests

Findings ought to "alleviate concerns expressed by the press, policy-makers, and Congress"

The revolving door phenomenon -- the flow of personnel between federal agencies and private-sector companies they regulate or deal with -- has long been a sore point for good-government activists, perhaps most conspicuously recently with regard to the Securities and Exchange Commission. Criticisms of the SEC on this score have come lately from all directions, at greatest length from the non-profit Project on Government Oversight, which in a 31-page report last year, cited "cases in which the revolving door appeared to be a factor in staving off SEC enforcement actions" and recommended that the agency strengthen its post-employment restrictions.

Yet, for all the heat the revolving-door issue has generated, a new study, to be presented at the forthcoming meeting of the American Accounting Association (Washington, Aug. 3-8), observes that there has been "surprisingly little systematic evidence on the topic." Then the study goes on to find that, "if anything, future job prospects make SEC lawyers increase their enforcement efforts while they are at the SEC."

"Our evidence is thus inconsistent with popular concerns," concede the study's authors, Shivaram Rajgopal of Emory University, Ed deHaan of the University of Washington, Simi Kedia of Rutgers Business School, and Kevin Koh of Nanyang Technological University, Singapore. They are at pains, also, to acknowledge that "our results can only speak to the average enforcement outcomes of revolver lawyers -- there may indeed exist idiosyncratic cases of revolver lawyers favoring potential future employers." And they add that, "due to data limitation we are not able to study the reverse revolving-door phenomenon -- i.e., the impact of SEC hiring from industry."

Still, they affirm not only that their study is "among the first to empirically examine the impact of revolving doors on the SEC's regulatory effort," but that its findings ought to "alleviate concerns expressed by the press, policy-makers and Congress that revolving doors are detrimental to the SEC regulatory effort."

In sum, "the results simply suggest that the current implementation of revolving doors is not associated with observable compromise in enforcement effort."

To reach this conclusion, the researchers ask a simple question: What drives industry to hire regulators -- their technical and regulatory expertise, or their potential to lobby the agencies that currently employ them? If the former is the case, they reason, it would be reflected in a record of aggressive enforcement during their SEC tenure by "revolvers," agency personnel who subsequently left the agency. If the latter is the case, it would be reflected in records of lax enforcement, as revolvers sought to curry favor with potential private-sector employers.

They probe the matter by analyzing the records of 336 SEC lawyers in a database of civil litigations by the agency from 1990 through 2007, focusing on lawyers because case dockets permit matching individual employees with specific SEC enforcement in a way that cannot be done with other personnel, such as accountants or consultants. For each lawyer the researchers consider four enforcement outcomes that together provide a picture of aggressiveness or laxness -- 1) the amount of damages collected by the SEC, measured as monetary penalties imposed on companies scaled by declines in shareholder value at the time SEC actions were announced; 2) whether the SEC won the case; 3) whether the case was referred to the U.S. Department of Justice for criminal action; and 4) whether the CEO is named as a defendant, an action that tends to lead firms to fight harder than they would otherwise do.

Fifty-eight percent of the lawyers in the sample continued working for the agency by the end of the sample period; about 11% (37) left to work for employers other than law firms; and 31% (61) quit to join private law firms. The researchers classified this last group as "revolvers," since, in the study's words, they "potentially work for law firms that represent clients before the SEC and hence [are] most likely to face conflicts of interest."

Controlling for factors likely to make a difference in enforcement outcomes, such as the size of defendant firms and the length of violation periods, the study reveals little or no difference between revolvers and other lawyers on any of the four enforcement measures, which suggests that revolvers were no less aggressive than other lawyers in pursuing cases during their SEC tenure.

Moreover, revolvers who later joined law firms that defended against the SEC with some frequency tended to be considerably more aggressive than SEC colleagues in terms of referrals to the Department of Justice and naming CEOs as defendants. As the study points out, "revolver lawyers that join SEC specialist law firms that defend twice against the SEC relative to law firms that defend only once...are associated with an increase of 15.9% in damages, an increase of 4.2% in the likelihood of criminal proceedings, and an increase of 4.4% in the likelihood of naming the CEO as a defendant."

The study also investigates the number of SEC lawyers hired by defendant law firms and whether larger numbers of such alumni are associated with milder enforcement outcomes for clients. It finds no evidence associating increased numbers of SEC alumni with such influence, providing further support for the "inference that revolving doors are not associated with law enforcement outcomes."

The study, entitled "Does the Revolving Door Affect the SEC's Enforcement Outcomes?" will be among hundreds of scholarly presentations at the American Accounting Association meeting, which is expected to draw more than 3,000 scholars and practitioners to Washington, D.C., from August 3 to 8. The AAA is a worldwide organization devoted to excellence in accounting education, research, and practice. Journals published by the AAA and its specialty sections include The Accounting Review, Accounting Horizons, Issues in Accounting Education, Behavioral Research in Accounting, Journal of Management Accounting Research, Auditing: A Journal of Practice & Theory, and The Journal of the American Taxation Association.

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