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.