Is the SEC Captured? Evidence from Comment Letter Reviews

In this post, we look at a recent academic paper titled “Is the SEC Captured? Evidence from Comment-Letter Reviews”. Using Audit Analytics’ SEC Comment Letter database, the authors, Jonas Heese, Mozaffar Khan, and Karthik Ramanna, research if having political connections (PC) creates a bias in SEC enforcement through SEC Comment Letters. The popular assumption is that firms with political connections would receive less comment letters and less enforcement from the SEC, as politicians can interfere with SEC investigations, budget allocations, and hinder the career of SEC officials. Furthermore, they note that prior literature has questioned the lack of subsequent enforcement actions when politically connected firms are reviewed, further questioning the role political connections play in SEC review and enforcement.

For the purposes of their report, politically connected firms were identified through contributions to Political Action Committees, or through various lobbying expenditures. Heese, et al. then compared the survey group of PC firms to matched non PC firms in order to better analyze the rate to which both survey groups received SEC involvement.

What they found actually contradicted popular assumptions. Based off their research, they concluded that while PC firms were 38.5% likely to receive comment letters, non PC firms were only 33.7% likely to receive a comment letter, indicating that PC firms were roughly 5% more likely to receive letters.

Their methodology for examining comment letters was to classify topics of letters for a given year into core topics such as those that affect revenue, costs of goods, selling, and general administrative expenses. Then they used the elapsed time in days from when a firm first received a comment letter, to when they received their final “no further comment” letter indicating that the conversation was complete.  From there they organized the total number of letters in a given year for each firm, and identified whether or not a supervisor of the SEC review staff was involved in a given firm’s review.  The authors state that these procedures would judge if the SEC allocates more time and resources to reviews of PC firms over non PC firms.

Through this analysis they found that comment letters to PC firms addressed more core and non-core issues. Furthermore, conversations took a longer time to complete, and were more likely to involve SEC supervisors. These results directly contradict popular assumptions, showing that PC firms actually receive more substantial reviews than their non PC counterparts.

Heese, et al. conclude their report by reaffirming the connection between the SEC and PC firms. They contradict the more commonly held belief that political connections would result in fewer SEC reviews for such firms, and instead offer up a more nuanced relationship between the SEC  and PC firms. They find that PC firms receive more substantial reviews along all core topics of review, hypothesizing that PC firms may be a distinct risk indicator. This would explain the lower likelihood of subsequent enforcement actions against PC firms documented in prior literature, as the higher percentage of SEC review during the comment letter stage would make for more remediation of potential issues.

During their research, the authors challenged prior literature and common assumptions that politically connected firms receive positively biased reviews from SEC reviewers. They discovered, instead, a more nuanced relationship between SEC reviewers and PC firms, indicating that PC firms actually review more comment letters than non PC firms and that their comment letters are more substantive as well.