Politically connected companies get a break from the SEC, study says

SEC Chair Mary Jo White Addresses Economic Club of New York

SEC Chairwoman Mary Jo White's hands are tied more than she admits. (Justin Lane / European Pressphoto Agency / June 20, 2014)

The working assumption of business executives and ordinary taxpayers alike is that political donations can buy big favors from Congress.

A recent study by Maria M. Correia of the London Business School puts statistical meat on those bones. The more a company spends on political donations, she finds, the more lenient the treatment it gets from the Securities and Exchange Commission. (Hat tip to David Sirota of International Business Times, who unearthed her study.)

Correia even quantifies the value of political grease. A $1-million increase in contributions by a corporation to a political action committee in the five years before a violation of SEC rules, she finds, can reduce the probability of an enforcement action from the SEC by more than half (from 8.58% to 3.43% in her sample). Her conclusion is that "long-term PAC contributions are effective at deterring SEC enforcement."

Furthermore, she 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. 

As for where companies should put their money to get the biggest bang for the buck, Correia says contributions to "high ranking politicians from the majority party" and to those "sitting on committees involved in setting the SEC's budget or overseeing the agency" have the greatest effect.

Correia based her study on a database of more than 4,000 corporate financial restatements, which she reasoned were often triggers for SEC inquiries. (Correia appears to treat each restated year as one case, so a smaller number of companies were involved.) 

As Yves Smith of Nakedcapitalism.com observes in her own gloss on the Correia study, the SEC is dependent on congressional appropriations to do its job. That's different from banking regulators such as the Federal Reserve and FDIC, which get their budgets from fees charged to the regulated firms.

Accordingly, 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 consequence is not trivial. "The SEC, which was once a feared and respected agency, has become the least effective financial regulator," Smith writes.

For all that the agency's political independence is bruited about by SEC chairs up to and including the current incumbent, Mary Jo White, everyone at the agency knows who holds the purse strings. Some chairs have tried to get permission from Congress to self-fund from fees, but Congress isn't that dumb.

Correia bolsters her analysis with a survey of the existing literature on political influence in regulatory actions, including work by Karthik Ramanna of Harvard Business School, David Farber of McGill University and Ahmed Tahoun of the London School of Economics. Their examinations of the market for political favors are quite robust, but be warned: They're depressing in their confirmation of your worst expectations.

Keep up to date with The Economy Hub by following @hiltzikm.

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