In theory, the SEC is supposed to be independent of politics. In practice, however, the SEC depends on the political process quite heavily. Appointment of the 5 commissioners requires a presidential nomination and Senate approval, both of which take political vetting. Selection of the Chairman is a Presidential perogative. And, of course, the SEC depends on Congress for its budget. One thus might expect that SEC Commissioners and top staff from time to time get signals--subtle or otherwise--from members of Congress or the incumbent administration that they would prefer that the SEC go easy on some favored constiuent.
And now we have evidence in the form of a study by April Knill and Sarah Fulmer of FSU:
Using data on political action committee (PAC) and chief executive officer (CEO) contributions combined with data on SEC enforcement actions from 1999 through 2010, we analyze how contributions to political campaigns affect the severity of SEC enforcement outcomes. We find that contributions made by either party have a significant impact on reducing the severity of SEC enforcement outcomes, both in terms of each outcome and across outcomes. Specifically, accused executives whose firms have contributed to political campaigns via a PAC are banned as an officer for three fewer years, serve probation for four fewer years, prison for five fewer years and are 78% less likely to be given both prison time and a monetary penalty. An analysis of the effect of campaign contributions on an index that accounts for the severity of the SEC enforcement outcome suggests that contributions lessen the severity of the enforcement verdict by the SEC. Executives from firms whose CEOs have contributed see similar effects. Results suggest that the amount contributed seems to be less important than the fact that they contributed, suggesting that perhaps there are other factors at play such as soft money contributions (i.e., before 2002) or other interactions correlated with campaign contributions that are not legally required to be disclosed.
One issue I have with their analysis is the decision to include criminal sanctions. The SEC has no power to undertake criminal prosecutions. Instead, that's purely a decision for the Justice Department and the relevant US Attorney's office. See Section 20(b) of the Securities Act of 1933, which provides that:
Whenever it shall appear to the Commission that any person is engaged or about to engage in any acts or practices which constitute or will constitute a violation of the provisions of this title, or of any rule or regulation prescribed under authority thereof, the Commission may, in its discretion, bring an action in any district court of the United States, or United States court of any Territory, to enjoin such acts or practices, and upon a proper showing, a permanent or temporary injunction or restraining order shall be granted without bond. The Commission may transmit such evidence as may be available concerning such acts or practices to the Attorney General who may, in his discretion, institute the necessary criminal proceedings under this title. Any such criminal proceeding may be brought either in the district wherein the transmittal of the prospectus or security complained of begins, or in the district wherein such prospectus or security is received.
Accordingly, the SEC has no power to conduct a criminal case, but rather only the power to refer a case to the DOJ, which then has discretion to bring a criminal case or not.
In any case, assuming their data does reflect a real enforcement impact of political contributions, what's the mechanism by which contributions have that effect? The SEC presumably doesn't check Opensecrets. org to see which defendants have contributed. Instead, the most logical inference is that the SEC gets a signal from the Hill or the White House that this is a favored constituent. But how does the signal get sent?
