Individual Lawyers, the SEC Revolving Door, and Comment Letters

Abstract

Government officials, advocacy groups, and the business press have raised concerns that former SEC employees may continue to influence the SEC after leaving the agency. Using hand-collected data on the characteristics of lawyers who represent firms in responding to SEC comment letters, we examine the impact of post-revolving SEC employees on the SEC comment letter process. We find that older and larger firms with a history of restatements and poorer shareholder rights are more likely to hire former SEC lawyers over non-SEC lawyers. Relative to firms that involve only non-SEC lawyers, we find that firms that involve former SEC lawyers in responding to SEC comment letters have lower compliance costs in the short run, but have more adverse accounting and shareholder outcomes in the long run, after matching on lawyer, law firm, comment letter, and firm characteristics. We find in cross-sectional analyses that our main results are driven largely by former SEC lawyers who had left the SEC more recently, who have had more experience with the SEC comment letter process, or who had formerly worked at the Division of Corporation Finance.