Is the SEC captured? Evidence from comment-letter reviews

Jonas Heese,Mozaffar Khan,Karthik Ramanna

doi:10.1016/j.jacceco.2017.06.002

Jonas Heese, Mozaffar Khan + Show 1 more

Open Access

https://doi.org/10.1016/j.jacceco.2017.06.002

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Abstract

SEC oversight of publicly listed firms ranges from comment letter (CL) reviews of firms’ reporting compliance to pursuing enforcement actions against violators. Prior literature finds that firm political connections (PC) negatively predict enforcement actions, inferring SEC capture. We present new evidence that firm PC positively predict CL reviews and substantive characteristics of such reviews, including the number of issues evaluated and the seniority of SEC staff involved. These results, robust to identification concerns, are inconsistent with SEC capture and indicate a more nuanced relation between firm PC and SEC oversight than previously suggested.

Highlights

The Securities and Exchange Commission (SEC) oversight process involves a range of activities, from advice and monitoring to enforcement actions
By focusing on how firm political connections (PC) affects the likelihood of receiving comment letters (CLs), we extend the economic analysis of CL activity into the political domain
We find a positive and significant coefficient on both Log_Lobby_Amount and Log_PAC_Amount, indicating that PC firms are more likely to receive a comment letter

Summary

Introduction

The Securities and Exchange Commission (SEC) oversight process involves a range of activities, from advice and monitoring to enforcement actions. Interpreting the results in the prior literature as evidence of lax SEC oversight of PC firms is complicated by the fact that SEC oversight involves more than enforcement actions. The SEC is composed of several divisions, including the Division of Enforcement (DOE) and the Division of Corporation Finance (DCF) The former handles investigations of possible violations of federal securities laws, including violations of requirements for U.S listed companies to provide financial reports in accordance with U.S GAAP. The latter provides interpretive assistance to listed companies with regards to SEC rules, which includes reviewing firm financial reporting in real time to monitor and enhance compliance (SEC 2015b). Some reviews appear to be largely conducted by junior-level staff of the rank of staff accountant, while other reviews appear to involve senior staff of the rank of branch chief or assistant director

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