Newspaper article International Herald Tribune

'Revolving Door' Effect May Surprise S.E.C. Critics

Newspaper article International Herald Tribune

'Revolving Door' Effect May Surprise S.E.C. Critics

Article excerpt

A group of accounting professors has produced a study showing that the hiring from the financial industry actually toughens enforcement results at the Securities and Exchange Commission.

The revolving door has long been the focus of government regulators, a symbolic portal that business executives and lawyers pass through on their way to government posts and back again to the private sector. There, the thinking goes, they use their influence with former colleagues to reap benefits for themselves and their companies.

But despite plenty of anecdotal accusations of influence- peddling, there has been relatively little empirical evidence of how the practice truly affects government regulation and law enforcement.

Now, a group of accounting professors has produced a study showing that the revolving door actually toughens enforcement results at the Securities and Exchange Commission -- the opposite of what government critics have long maintained.

The study, by researchers at Emory University in Atlanta, Rutgers University in New Jersey, the University of Washington and Nanyang Technological University in Singapore, found that S.E.C. enforcement lawyers who left to join private law firms that specialized in commission matters actually produced tougher enforcement results than their peers while at the agency.

The study also found no evidence that law firms that had hired large numbers of S.E.C. alumni were able to extract more lenient enforcement outcomes from the agency. Results from the research are scheduled to be presented Monday in Washington at the annual meeting of the American Accounting Association.

As financial markets and investment techniques have become more complicated, the S.E.C. has tried to hire more specialists with experience at Wall Street firms. To the degree that those new S.E.C. employees favor Wall Street interests, the concept of rigorous oversight would be undermined.

That is more than a theoretical concern. In May, the S.E.C. barred a former investigator, Spencer C. Barasch, from representing clients before the commission for one year after finding that he had left the agency and worked for Stanford Financial, which he had investigated while at the S.E.C.

The company later was determined to be a running a $7 billion fraud scheme.

Shivaram Rajgopal, an accounting professor at Emory and one of the authors of the new study, said that in most cases, the opposite occurs -- S.E.C. enforcement officials who want to work as defense lawyers are more likely to follow aggressive enforcement practices that signal their competence to prospective employers.

"There is nothing inherently evil or wrong about the revolving door," Dr. Rajgopal concluded. Like any rigorous study, the exact conclusions are limited to the particular group studied, he noted, "but it suggests that legislation against this could be counterproductive. …

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