The scourge of the so-called "revolving door" between the SEC and the private sector is always a favorite topic of critics of the agency. To recap, the revolving door refers to SEC officials leaving the agency to go work in lucrative positions in private law practice or for Wall Street firms. This practice is presumed to be nefarious by some on the theory that the prospect of a high-paying job down the road will cause SEC officials to go easy on their hypothetical future employers in an investigation.

 

Although I have followed the revolving door issue closely for many years, I have never seen any actual evidence that the "SEC lawyers will go easy on firms to get a future job" theory is, in fact, true. Not only is it contradicted by my own personal experience as an SEC attorney (as I discussed here back in 2009), but it is, more importantly, contradicted by no fewer than three academic studies completed in the past two years.

 

I discussed the first two studies in this post (see “Does the Revolving Door Affect the SEC's Enforcement Outcomes?,” American Accounting Association, August 2012); and “Against Being Against the Revolving Door”, Professor David Zaring of the Wharton School of the University of Pennsylvania, March 2013 paper). The latest study (via ValueWalk) comes from four professors from Stanford, Nanyang Technological University, Emory and Rutgers, and is called "Does the Revolving Door Affect the SEC’s Enforcement Outcomes? Initial Evidence from Civil Litigation.”

 

The authors of the latest study specifically set out to investigate whether "revolving doors are associated with 

compromised regulatory oversight by the SEC," i.e., the theory mentioned above that the SEC lawyers will go easy on firms because they are influenced by future job prospects at such firms. The authors call this the “rent-seeking hypothesis.” The methodology of the study is laid out in detail here, but it involved collecting data on the career paths of SEC lawyers and outcomes of civil litigation of accounting cases while these lawyers work for the SEC. Overall, the authors concluded, 

the evidence suggests that, on average, revolving door incentives do not appear to undermine the prosecution of civil cases against accounting misrepresentations. On the contrary, the data are consistent with future career prospects motivating SEC prosecutors to be more aggressive during their time at the SEC.

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