Support Learning and Insight

It’s more important than ever to understand the challenges facing financial executives. Support the Financial Education & Research Foundation today.

Inside the SEC With An SEC Insider: Q&A With Norm Champ

The SEC, responsible for regulating the securities industry, needed some regulation itself.


While at the U.S. Securities & Exchange Commission (SEC), Norm Champ played a key role in the Commission’s completion of landmark reforms in 2014 to strengthen the $3 trillion money market fund industry. Champ, Former SEC Director of the Division of Investment Management, recently published “Going Public: My Adventures Inside the SEC and How to Prevent the Next Devastating Crisis,” giving readers a behind-the-scenes view of the agency in the aftermath of the 2008 global financial crisis. FEI Daily spoke with Champ on the Dodd-Frank overhaul and misconceptions about the Commission.

FEI Daily: Let’s start off with your time at the SEC. How did you end up there?

Norm Champ:  Before going to the SEC, I'd been in the hedge fund business for a long time. In the spring of '09 after the crisis, our business was fine and it was clear that there was going to be some legislative activity on the Hill because there always is after one of these crises. The SEC took the reputational tumble of all time and I dealt with the SEC a lot in my time as a lawyer and as a hedge fund person and had briefed SEC staff on fund issues.

In the spring of '09 I had lunch with a friend of mine who was at the SEC and I said, "I'm thinking maybe I'll go back to public service." And he said, "Well that's convenient because I'm going to leave my job and you can take it." I started in January of '10 and left at the end of January '15.

The first two and a half years I was Deputy Director of the Exam program of the SEC and that really was trying to turn the Exam program around after the Madoff and Stanford failures. The biggest thing we did was to get policies and procedures in place and automate the exam reports so they can be seen all across the country. I think I was the first person who'd ever been hired who was a partner at a hedge fund. We brought in a lot more people from funds, and brokers, and we tried to get much more expertise in the door.

Being in the Division of Investment Management was pretty similar: lack of policies and procedures. But different problems as well, problems around silos and small offices. The big things there was consolidating a lot of the offices and prioritizing rule making. We needed to come up with a system to think about what rules to pursue, not just what I thought or what someone else thought. We also established a risk and exam office in Investment Management to try and analyze all the data because there's a ton of data flying at the SEC about investment management.

All of that came in handy because the main policy fights that I was involved with as head of IM, were the Money Market Fund Reforms that we got passed in the summer of 2014 and the Volcker Rule that passed in December of 2013. Those were the two big policies that I was involved in. These issues ended up involving dialogue with the Financial Stability Oversight Council, which was the Dodd-Frank creation.

I left the SEC after five years. I took the year of 2015 off, wrote the book, taught my class at Harvard Law School that I teach every year, and then I came back to private practice in February of 2016.

FEI Daily: Can you describe the culture at the SEC when you started?

Champ: There are a lot of challenges in trying to change these federal agencies. There are no carrots because you can't pay people for good performance because the Union and the SEC have never been able to agree on a pay-for-performance system. Similarly, you can’t ever fire anyone because of the civil service rules plus Union rules on top of them, so people have lifetime employment.

People mostly go to the SEC because they want to do public service, they want to do the right thing and help investors. The problem is that a lot of the processes and a lot of the ways that the commission worked didn't really support them in doing a good job. People couldn't stand that there were no rewards for working any harder. It was hard managing within that culture.

The lack of good procedures and good tools really hurt the examiners. Examiners were blamed for a lot. On the flip side, they didn't really have a good playbook to go off of. Training was always in short supply. I'm a big believer in ‘very few bad people, mostly bad systems.’ I do feel like the policies and procedures we put into place are a lasting accomplishment.

FEI Daily: What are some misconceptions about the SEC?

Champ: To an individual firm or a lawyer, the SEC has a lot of power over you. But, once you get there, you realize the SEC is buffeted by all sorts of demands and forces and it doesn’t have strict control of its own destiny. Maybe I was a little naive not realizing that. You've got all sorts of constituents. You have chairmen, commissioners, people on the Hill, people in the Executive Branch, people in the press. The SEC has power but people probably think it has more freedom of movement than it actually does.

FEI Daily: What are your thoughts on Trump’s two-for-one regulation order?

Champ: I think it's a great idea. I will just give you a really simple example from my neck of the woods. In the mutual fund world, when it comes to an issue where they can't agree on path A, B, or C, the issue gets resolved by saying, "Have the board of directors supervise." Consequently, the duties of the boards of mutual funds just go up, and up, and up. A board, by definition, is not on site every day, so how can a board monitor all of those things? In those cases, I would suggest finding two things that boards are required to do that could be taken off the list at the same time if you are adding another rule. And I would suggest the same thing in corporation finance. In corporation finance you always add disclosure. There's never any taking away.

Take Dodd-Frank. People on the Hill that I know were involved will say pretty plainly that certain things were political, not about actual disclosure. And I'm hoping they will get rid of some of those. Pay ratio was meant to make people look bad because their pay is so much higher than the front line person, but all these things have had the effect of discouraging companies from going public in the U.S.

I look at the president and I look at Jay Clayton and I believe they are trying to get more companies to go public here because our financial markets are one of our shining stars in this country. We don't have a ton left. We do movies, software, and financial services really well. You could reduce some of these political disclosure requirements and help encourage companies to get back here and go public.

We've got to get back to making these rules and making policies based on evidence. Not based on what sounds good. Prior to 2008, the U.S. government did everything it could to encourage home ownership, including home ownership by people who had not owned homes before. That was the goal. Well, if you went and interviewed all the people that got foreclosed on in 2009 and '10, don't think they would report to you on the great benefits of home ownership.

Consequently, the U.S. government in the immediate wake of the crisis raised the minimum down payment for a home with a guaranteed mortgage to 20 percent of the home’s value. Only six years after the crisis the Obama administration moved that guaranteed down payment number back to 3 percent again. If you buy a house and you do a 3 percent down payment all you need is for the value to drop 3.5 percent and now you're underwater. I'd like us to move away from what sounds like good policy making and try to determine what the right thing to do is. The SEC committed to an economic analysis regime in 2012. I'd like to see it even strengthened but I think the main thing would be trying to make policy based on factual analysis and the evidence as opposed to what sounds good.