Revolving Elites : The Unexplored Risk of Capturing the SEC

Fears have abounded for years that the sweet spot for capture of regulatory agencies is the “revolving door” whereby civil servants migrate from their roles as regulators to private industry. Recent scholarship on this topic has examined whether America's watchdog for securities markets, the Securities and Exchange Commission (“SEC”), is hobbled by the long-standing practices of its enforcement staff exiting their jobs at the Commission and migrating to lucrative private sector employment where they represent those they once regulated. The research to date has been inconclusive whether staff revolving door practices have weakened the SEC's verve. In this paper, we offer a very different perspective on the source of risks of the SEC's capture as a consequence of revolving door practices. We focus on all the key divisions of the SEC, not just its Division of Enforcement and we examine the individuals who lead the staff and set its agenda. We find that the SEC's day-to-day work is highly collaborative and staff output is subject to review at multiple levels. These characteristics greatly reduce the likelihood of staff rent seeking. On the other hand, agenda setting and the shaping of the discourse around regulatory and enforcement objectives is very much subject to individual action by SEC officials that lead the five main operations of the SEC. We therefore focus our discussion of revolving door concerns on SEC directors. Here we show a disquieting departure in the last thirty years from practices that prevailed at the SEC during its first half century of existence: whereas SEC division heads through the early 1980's were, with very few exceptions, regularly internally promoted from the staff, this practice sharply ended in the early 1980s when division directors began to be recruited with increasing frequency from the private sector. In addition to documenting this development, we explore the likely causes for this sharp change in selecting senior leadership at the SEC as well as exploring the benefits, costs and fears of this significant change in practice as well as strategies that could be pursued to moderate any such risk of capture