Does the Financial Experience of SEC Regional Directors Impact SEC Investigations?

Abstract

The SEC’s Division of Enforcement is frequently criticized for its ineffective oversight, and certain vocal critics attribute this to a lack of financial experience within the SEC. Using novel hand-collected data on SEC regional directors, I find that most of these senior SEC officials lack practical financial experience. I then use a staggered difference-in-differences research design and find that directors with financial experience open 62 percent more investigations (i.e., four to five additional investigations per office-year). This result is consistent with their financial experience impacting investigations. Additional analyses reveal that this effect is stronger when financial acumen likely matters more and that financial directors conduct more efficient and consequential investigations. Importantly, these results do not appear to be explained by the experience of other directors or by financial regional directors handling more cases. This study answers recent calls for more research on individual regulators and presents timely evidence as the SEC seeks to improve its investigation process. More generally, these findings provide new insights into the SEC’s oversight process and should be of interest to regulators and market participants concerned with the SEC’s policing of financial misreporting. 

Keywords: SEC regional directors, SEC investigations, Enforcement, Financial experience.

JEL Classification: G18, M41, M48.