First we have a couple of articles discussing a study, “Political connections and SEC enforcement,” in the forthcoming Journal of Accounting and Economics, that purports to show that “[l]ong-term PAC contributions are effective at deterring SEC enforcement.” Then there is an, shall we say “unflattering,” appraisal in the NYT of Mary Jo White’s tenure at the SEC. The title of the piece tells it all: “Once Powerful, Mary Jo White’s S.E.C. Is Seen as Sluggish and Ineffective.” Not a good hair week for the SEC.
The study looked at over 4.000 financial restatements between 1996 and 2006, which the study viewed to be a likely trigger event for SEC enforcement actions. The study found a correlation between the amounts of money contributed and the probability of enforcement action. According to an LAT article, a “$1-million increase in contributions by a corporation to a political action committee in the five years before a violation of SEC rules, [the study found], can reduce the probability of an enforcement action from the SEC by more than half (from 8.58% to 3.43% in [the] sample)…..Furthermore, [the study] finds that higher PAC contributions are associated with lower enforcement penalties and a lower chance that the SEC will cite officers or directors. An increase of $100,000 in PAC money in the five pre-violation years is linked to an 11% decrease in monetary penalties and a 12.9% decrease in the probability that the SEC will bar an officer or director from the business.” The most effective contributions are to Senate or House members sitting on committees with SEC oversight or budget responsibilities or otherwise of high rank in the majority party, the study concluded.
According to the International Business Times, the study “theorizes that the correlation between campaign contributions and a lack of prosecution has to do with the SEC’s perception of political consequences for itself and its budget in choosing targets. As the theory goes, the more political donations a particular firm makes to key lawmakers and the higher profile a firm’s relationship is with those lawmakers, the more likely it may be that those lawmakers pressure the SEC to avoid prosecuting those firms — and the more likely those lawmakers are to try to reduce the SEC’s budget if a prosecution goes forward. ‘The presence of an established, public relationship between the firm and key politicians could be sufficient because the SEC might be aware of the increased costs of initiating an investigation against such a firm,’” the study speculated.
The LAT concludes that “Congress has far greater power to intimidate the SEC, whether openly or covertly. A certain amount of self-censorship may be involved: SEC officials and staffers seldom need to be told which friends of which Congress member might be gored by a potential enforcement case. They can direct, or redirect, their resources accordingly.” The LAT suggests that the ability to pressure the SEC may be the reason that Congress has been unwilling to allow the SEC to use fees paid by issuers to self-fund its operations. Commentators speculated that the SEC’s reputation and effectiveness have suffered as a consequence.
And speaking of suffering reputations, in the NYT DealBook article, the author registers a range of disappointment in the SEC Chair’s performance, contending that she “has made some unnecessary foes while her agency has bungled several significant rules,” citing contention among the Commissioners (including one of the Democratic appointees) and disputes with the White House, the Treasury, the PCAOB, the Financial Stability Oversight Council as well as some powerful Democrats in Congress. The article cites complaints from Congress about delays in mandated rule-making, while other commentators express disappointment with the weakness of the rules that have been adopted, particularly those promulgated under Dodd-Frank. The author acknowledges — but gives scant attention to the notion — that White’s job is not easy; she faces “a House of Representatives that is hostile to financial overhaul and is perennially wielding budget cuts. She has also had to deal with a divided and contentious commission, an enormous workload to put into effect Dodd-Frank and other rules and the constant threat of lawsuits challenging any rule that encroaches on Wall Street’s prerogatives.” Whether or not some of the author’s criticisms may be meritorious, he, unfortunately, seems not to fully appreciate the difficult challenge arising out of these dynamics.