From Wall Street Lawyer to Wall Street Watchdog

The financial scandals of the past decade or so—the subprime-mortgage crisis, the Bernie Madoff Ponzi scheme, ENRON—make it easy to wonder whether the Securities and Exchange Commission, which is responsible for regulating stock markets, could be doing a better job. The agency, after all, is tasked with protecting investors and ensuring that major catastrophes don’t happen—and that when they do, bad actors are held accountable.

It’s not hard to see how agencies such as the SEC struggle to keep up with the cash and capabilities of the financial industry. But are there other things holding regulators back?

In the aftermath of 2008’s financial meltdown, Norm Champ, then a lawyer for a Wall Street hedge fund, found himself wondering how the agency had failed to see it coming. “After the crisis hit, I found it difficult to fathom what happened at the SEC, which was so embarrassed by its failures and savaged by critics in politics and the media that I had to avert my eyes,” he writes in a memoir released last month, Going Public: My Adventures Inside the SEC and How to Prevent the Next Devastating Crisis. As the title indicates, Champ was so swayed by the impact of the Great Recession, and the failures of the SEC, that he switched teams, joining the regulators in hopes of helping the agency become more successful in its quest to protect American consumers and investors. (When asked about the claims Champ makes in his book, the SEC declined to comment.)

Mary Schapiro, the chair of the SEC from 2009 to 2012, made a point of bringing in experts like Champ early on in her tenure. But before that, Champ says, few supervisors had much experience in the financial industry. And it showed.

The agency, as Champ describes it, was disjointed and disorganized. In his first role, Champ worked in the SEC’s examinations division, a group tasked with carrying out investigations (or “exams”) of investment firms to ensure that they were complying with federal regulations and acting in the best interest of investors. Champ expected to find an agency bogged down by red tape—one in need of some private-sector efficiency. But instead of complex bureaucracy, he found an agency that was sorely lacking in structure. “I soon learned that the SEC wasn’t a typically dysfunctional bureaucracy that needed to fix what had been broken. Rather, there were parts of it that had never been built,” he writes.  

Champ’s division was responsible for conducting exams, a critical and intricate part of the SEC’s monitoring of financial institutions. But he says that despite the importance of the exams, there wasn’t much structure around how, where, or when they were conducted. “I was surprised to learn that Exam [the examinations division] operated with no cohesive set of written policies and procedures on how to conduct examinations and carry out other critical functions,” he writes. “It wasn’t an oversight on my first day that I wasn’t given a manual for operation of New York exams: It didn’t exist!” The two major units in the agency, examinations and enforcement, he writes, struggled to communicate and collaborate. For example, examiners didn’t have access to the tips that lawyers in enforcement had received about the actions of Bernie Madoff.  

Champ portrays an agency that’s filled with talented, smart people, but often hamstrung by internal shortcomings and inefficiencies. When promoted to the role of director of investment management in the agency’s headquarters in Washington, D.C., Champ describes arriving at the office to find that his key doesn’t work and his computer hasn’t been set up.

During his tenure at the agency, Champ worked on numerous projects undertaken in response to the Great Recession. He assisted in overhauling examination practices and also helped preside over the SEC’s oversight of credit-ratings agencies, a new effort mandated by 2010’s Dodd-Frank Act. These agencies, including Standard & Poor’s and Moody’s, came under the SEC’s scrutiny after their deeply intertwined relationship with banks was revealed by the subprime mortgage crisis. These ratings agencies were, in theory, the bodies that could have alerted investors and the public to just how toxic the subprime debt that was bundled up and sold (and resold) was.  

But even as he tried to tighten up these initiatives, Champ says he faced resistance—from managers who didn’t want to manage and from supervisors who seemingly believed that the failures leading up to the financial crisis, and afterward, didn’t merit changing the agency’s operations. “The staff perceived the failure as an isolated, once-in-a-century event, not a systemic problem with the way the SEC did its business,” he writes.

Champ has some other ideas about what’s behind the agency’s shortcomings as well. He is deeply critical of the unions to which workers at the agency belong, blaming the power of collective-bargaining agreements for salaries that climbed ever higher, untethered to performance. He says that, in his experience, this made it difficult to motivate employees to perform better, and to get rid of them when they didn’t. “The combination of civil-service protection and public-employee union contracts over the decades had wired the wrong incentives into the management of the agency,” Champ writes. “People followed their narrow self-interests because they were encouraged to, and that changed their priorities and ultimately the SEC’s culture.”

Similarly, he decries the SEC’s procedures for letting employees voice anonymous complaints, which he says allow people to proffer sometimes baseless and petty accusations against coworkers, at best using up vital investigatory resources and at worst ruining careers—all without any accountability for the accuser. Lastly, Champ laments inefficient work policies (he spends a great deal of time questioning the wisdom of letting government employees work remotely) for slowing down the critical work of the agency without any proven benefit to workers or the public.  

Champ’s experience working at a financial regulatory agency have led him to some conclusions about how financial regulation can be improved. His preferred prescription is usually to streamline regulation. He wants to reduce the number of financial regulators by merging the SEC and the U.S. Commodity Futures Trading Commission, and folding the Office of the Comptroller of the Currency into the Federal Reserve. And he wants the Financial Stability Oversight Council downgraded to a coordinating board that would only act in the event of an economic crisis. He also advocates for the regulators to be more cautious before taking action, in order to “reduce government interference in the economy.”

Government agencies have long been accused of being archaic and inefficient—of being reactive instead of proactive. But if Champ’s solution to flawed regulation is less regulation, his ideas might have their best shot under the current administration.