The revolving door between the Securities and Exchange Commission and private industry is not as big a problem as it is seems to outside observers, according to a new study.

Criticisms of the SEC on this score have come from all directions, including from the nonprofit 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. The SEC was also widely criticized in 2008 for not pursuing charges against Bernard Madoff when it was revealed that his niece, Shana Madoff, was married to Eric Swanson, a senior inspection and examination official at the SEC.

Yet, for all the controversy generated by the revolving-door issue, a new study, to be presented at a meeting next month of the American Accounting Association found that there has been "surprisingly little systematic evidence on the topic." The study noted, "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," said 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 in Singapore. The researchers acknowledged, however, that their results only apply to the average enforcement outcomes of revolver lawyers, those attorneys leave the agency and join private firms.

“There may indeed exist idiosyncratic cases of revolver lawyers favoring potential future employers," they added. They also admitted, "Due to data limitation we are not able to study the reverse revolving-door phenomenon—i.e., the impact of SEC hiring from industry."

Nevertheless, the researchers claimed their study is "among the first to empirically examine the impact of revolving doors on the SEC's regulatory effort," and 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."

They concluded, "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 asked the 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 reasoned, 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.

The researchers probed 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 considered four enforcement outcomes that together provided 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 Justice Department for criminal action; and 4) whether the CEO was named as a defendant, an action that tends to lead firms to fight harder than they otherwise would.

Fifty-eight percent of the lawyers in the sample continued working for the agency by the end of the sample period. Approximately 11 percent (37) left to work for employers other than law firms, while 31 percent (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 revealed little or no difference between revolvers and other lawyers on any of the four enforcement measures, suggesting that revolvers were no less aggressive than other lawyers in pursuing cases during their SEC tenure.

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 Justice Department and naming CEOs as defendants.

The study pointed 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 percent in damages, an increase of 4.2 percent in the likelihood of criminal proceedings, and an increase of 4.4 percent in the likelihood of naming the CEO as a defendant."

The study also investigated 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, "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.

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