The Revolving Door and the SEC's Enforcement Outcomes: Initial Evidence from Civil Litigation

We investigate the consequences of the “revolving door” for trial lawyers at the SEC’s enforcement division. If future job opportunities motivate SEC lawyers to develop and/or showcase their enforcement 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 develop networking skills and/or curry favor with prospective employers at private law firms (the “rent seeking” hypothesis”). We collect data on the career paths of 336 SEC lawyers that span 284 SEC civil cases against accounting misrepresentation over the period 1990–2007. Our overall evidence is consistent with the “human capital” hypothesis. However, we find some evidence of “rent seeking” when SEC lawyers are based in Washington DC and when defense firms employ more former SEC lawyers. The revolving door likely impacts numerous aspects of SEC regulation setting and enforcement. This study examines accounting-related civil cases and is not able to study administrative or non-accounting enforcement cases. Further, the study does not address the choice of which cases to pursue, the incentives of employees other than trial lawyers, or how the revolving door affects rule making. Subject to these caveats, our study provides an important first look into the effects of revolving door incentives on the SEC’s enforcement process and lays the groundwork for future research.

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