The Federation of European Securities Exchanges (FESE) is delighted to announce that the winner of the FESE De la Vega Prize 2021 is Jonas Heese, the Marvin Bower Associate Professor of Business Administration at Harvard Business School, for his paper “Does industry employment of active regulators compromise oversight?”
Industry employment of active regulators is the subject of debate. The paper observes that the practice has long raised concern that it leads to “regulatory capture, whereby regulators receive financial compensation from firms in exchange for lax oversight.” In response, most public regulators have implemented policies that require regulators to resign from industry employment upon taking office, effectively prohibiting industry employment for active regulators. The paper also draws attention, however, to self-regulatory organisations (SROs) who, in contrast, often allow regulators to retain industry employment during their tenure at the SRO. Their argument, Heese writes, is that “this practice strengthens oversight, because it helps to attract individuals with strong expertise.”
To assess the broader title question, this paper examines the phenomenon of senior regulators at FREP – the German Financial Reporting Enforcement Panel - simultaneously holding board directorships and its impact on regulatory oversight. The paper finds that firms are less likely to face enforcement actions after appointing a FREP executive to their board. Further, such firms are then also less likely to receive an unqualified audit opinion, more likely to have an above normal risk of accounting manipulation as measured by an F-Score greater than 1, and exhibit higher abnormal accruals. Heese also identifies that director compensation increases for these regulators after their FREP appointment. Taken together, the paper argues, these findings “show that industry employment of active regulators can result in conflicts of interest that facilitate regulatory capture.”
The Prize was awarded by Rainer Riess, FESE Director General, on Tuesday 1st June 2021 at the FESE virtual Convention.
In recognition of its substantial merit, the Jury agreed also to accord a ‘Special Mention’ to the paper “Liquid speed: A micro-burst fee for low-latency exchanges” co-authored by Michael Brolley, of the Wilfrid Laurier University, and Marius Zoican, of the University of Toronto.
