REPORT CARD
Begin—to begin is half the work, let half still remain; again begin this, and thou wilt have finished.
On March 6, 2014, I attended a conference at the Practicing Law Institute in New York. I was sitting in the faculty room right off the main conference room at a rectangular table with pitchers of ice water, waiting in the wings for my turn to speak. As IM director I had to speak about once a month at various industry events, which I always enjoyed. Five years earlier I spoke at a PLI conference and had my fateful lunch with Tom Biolsi. Tom died in 2013 at age 57 from cancer, and I always thought of him when I found myself at PLI (although now in a different location). Then Paul Roye, an old lawyer friend and one of my predecessors who had been so helpful, walked in and joined me.
He stopped. “Norm! Great to see you. How are you?”
“Great, still with the SEC and IM, speaking in a little while.”
He noted that I had been there for years and asked if it was driving me crazy.
“Most days, but it’s still a great job; you know that firsthand. Director of IM? It’s been exciting.”
“Have you been able to change anything?”
I paused. It was a funny question you didn’t hear in the private sector. Memories of the past four-plus years fast-forwarded, a blurry newsreel in my head.
I jerked my thumb over my shoulder and then shook his hand. “I have to get inside. Stay for the speech. You’ll get some answers.”
Paul thanked me for sticking with it as long as I had.
While those of us at the SEC had to live with the grim reputation of 2008 stamped on the agency in the minds of many, by 2014 I was giving speeches with a lot of good news. Under three terrific leaders, we had started to close the SEC’s credibility gap with the media, Treasury, and the Fed. We had broomed out a lot of the bureaucratic cobwebs, put people in better jobs, got closer to industry trends, fixed the worst of the tech problems, and started turning paper files into searchable data. We now had set a more modern direction that could be sustained for more than a couple of years. As I thought further about Paul’s question, I realized that so many talented and motivated people in Exam and IM had worked hard to change the agency for the better.
PRESERVING MARKET INTEGRITY
Remember FSOC? As 2014 turned to late summer, the SEC turned back the last gasps by the bureaucrats at FSOC to control the fate of mutual funds and other bulwarks of personal investing. We successfully asserted the SEC’s leadership as the primary regulator for the asset management industry and managed to prevail against FSOC’s effort to designate any fund or broker it chose as “systemically significant”—that is, have the Fed crawling all over a business it doesn’t really understand.1 However, as recently as April 2016, FSOC continued its quest to regulate “activities” of asset managers (as opposed to designating firms) by looking at private fund leverage.2 The advent of a Trump administration seems likely to quiet down the FSOC considerably.
Many meetings with the FSOC folks left me feeling frustrated that they so cavalierly ignored the Investment Company Act and Investment Advisers Act signed into law by Franklin Roosevelt, both of which had worked exceptionally well since 1940. FDR had announced to the world his hope that the law would enable the asset management industry “to fulfill its basic purpose as a vehicle to diversify the small investors’ risk.”3 With the success of the mutual fund industry for the middle class, particularly in retirement funds, it certainly accomplished that goal. That history didn’t curb FSOC’s appetite for designating new firms.
Many of us at the SEC could relate to the classic story about FDR’s friend, Winston Churchill. Once Churchill walked into the men’s room in Parliament to find Clement Attlee, leader of the Labour Party, relieving himself at the marble trough urinals. Churchill took a position at the other end.
“Feeling standoffish today, are we, Winston?” Attlee asked.
“That’s right,” Churchill responded. “Every time you Socialists see something big, you want to nationalize it.”4
Mary Jo White was our Churchill during that year of living dangerously with the FSOC takeover. She spoke publicly about why the SEC has the authority and expertise to monitor, address, and enforce systemic risk issues posed by asset managers. Because IM had started our Risk and Exam Office led by Jon Hertzke, we backed up her arguments with credible analysis that punched holes in FSOC’s assertions. Fortunately, we had already put the Risk and Exam Office (which we referred to as “REO”) up on its feet before the FSOC takeover got much momentum. I remember talking to Ken O’Connor, now one of the REO stalwarts, about this in the fall of 2014.
“We ended up really needing the REO,” he said to me. “How did you ever have the vision to do that?”
“We needed it; that’s all I knew,” I said. “The timing was lucky. I never thought they’d come gunning for us. Thank goodness we dissuaded them.”
By upgrading data collection and analysis, we made sure the SEC had the tools that would help it keep up with the future fraudsters of America. Mary Jo White placed the capstone on these reforms in May 2015 when the SEC formally released proposed rules that required a fund to submit information on a fund’s risk profile, explanations of how it calculated fund performance, and more transparent communications. The SEC adopted these rules in October 2016 and they go into effect in 2018 and 2019.
“These recommendations will vastly improve the type and format of the information that funds provide to the Commission and to investors,” Mary Jo announced on May 20, 2015.5 “Investors will have better quality and greater access to information about their fund investments and investment advisers, and the SEC will have more and better information to monitor risks in the asset management industry.” I’d left the SEC a few months before, but the chair and the commissioners were kind enough to acknowledge my role in starting these proposals on their way while I was the director of IM,6 although the real credit goes to David Grim, Sara Cortes, Diane Blizzard, and all the talented IM rule makers.
NOT MAKING UP OUR RULES
As part of how we dragged the SEC into the twenty-first century, I also worked with the associates at IM to end our ad hoc approach to rule making. For decades, the SEC wrote and published rules because the commissioners or one of the IM directors decided it was a good idea. There needed to be more due diligence and analysis.
Early on in my tenure, IM instituted a four-factor approach to analyzing policy initiatives, and we asked leaders to vote on rules based on the following four criteria:
1. Review the risk or risks to be mitigated by the proposed rule making. The commission and division are built on the fundamental principle of protecting investors.
2. Consider the urgency associated with a particular initiative.
3. Analyze the potential impact of an initiative on investors, registrants, capital formation, efficient markets, and the division’s and the commission’s operational efficiency.
4. Review the available resources associated with a policy initiative or freed up by the initiative.7
With this process in place, IM could provide SEC leaders like the chair and commissioners with a coherent rationale for putting forth a new rule. The more the SEC made itself transparent this way, the less leverage the FSOCers had.
We memorialized how IM operated in an IM manual issued in early 2014 that laid out the division’s mission and described how IM would carry out that mission. Superstaffers like Parisa Haghshenas worked hard to document the roles and structures of the various IM offices so that all staff new or old had a place to look for guidance on how to do their jobs.
ENGAGEMENT
But for all my misgivings about the power of the Fed and FSOC, by the wrap-up of the money market fund and asset management clashes, we had gotten the bank regulators’ attention and started to consult more frequently with the Fed. Because the SEC speaks for investors, having the chance to regularly brief the Fed about market issues was great news overall for the American people.
By mid-2014 IM’s leaders—including Diane Blizzard, Jennifer McHugh, Dave Grim, me, and many others—were meeting regularly with Fed analysts and economists to compare our intelligence on market and investing trends. The first briefing covered leverage and occurred at the Fed. We even persuaded the Fed to bring its asset management experts located in Boston whom we hadn’t even met. I remember the Fed players seeming a bit stiff and formal as we showed them data on leverage used by funds to help achieve investment results for their investors. As we left, we walked a couple of blocks to a cabstand near another federal agency. As we all climbed into cabs to go back to the office, Jennifer McHugh, a longtime IM staffer and my invaluable senior advisor on policy, remarked that the SEC hadn’t ever before had that kind of contact with Fed leaders.
The next briefing took place at our shop, and we explained securities lending because some elements of FSOC worried about the incredibly routine practice. We of course could offer no coffee or tea in our conference rooms as we had no budget for it. (I once requisitioned a water pitcher for the main IM conference room, but the bureaucrats let me know that was not allowed!) Nonetheless, commission staff continued working together with the Fed and Treasury on answering questions both on technical issues relating to Volcker and on supervision and examination issues.
We also implemented our new senior engagement program of meeting with the senior management and boards of top mutual and hedge funds and large multiservice financial services firms like Goldman Sachs. Remember when my friends liked to have off-the-record visits to funds but wouldn’t share any of its insights with me, even though it couldn’t be more obvious that doing so was the letter and spirit of the law? Not only did Carlo and I start our own engagement program at Exam, but once I got to IM, we incorporated IM staff into the effort. We had 8 to 10 sit-downs a year with the likes of Lloyd Blankfein and James Gorman. We had frank, open conversations. SEC lawyers like Aaron Schlaphoff and others wrote reports on each visit and compiled our insights to be shared regularly with commissioners and SEC senior staff. This made a fantastic resource for anyone meeting with an executive from the industry or informing Congress about trends.
I was discussing this program early in 2014 with a friend from several battles at the SEC, and mentioned that part of the motivation was because the well-meaning Trading and Markets guys wouldn’t share their notes with me no matter how nicely I asked.
“Their boss told them to put these visits down in writing or discontinue the program,” I said. “And he told me he shut it down when they didn’t produce reports.”
“Hmm, not sure about that,” this person said.
Huh? What?! A familiar frustration began to burn.
I have seen their reports around the office, my friend told me. My friend believed they prepared reports but kept them confidential.
Ergh. I was so ticked off. And dismayed. Maybe there really were written reports, but no one would share them with us. You can’t have the SEC holding off-the-record meetings with the industry! Ever! Is it off the record if you write the memo but no one ever knows about it? If the tree falls in the forest and starts an avalanche that crushes you in your car, it did fall in the forest, didn’t it? Think how much more we could have accomplished by sharing data. I’m not sure what the truth is about the reports, but I certainly never saw any.
I needed to let go, though. I didn’t have any leverage. I also knew IM was better off having its senior-level engagement program, and I was proud of how well our reports were received. We used our observations in the senior-level engagements to go back to firms and learn more about issues we wanted to address with policy steps. For instance, one firm we visited did its own stress tests, so I sent the IM rule makers back afterward to talk to the people there about what they did as we thought about how to implement stress tests required by Dodd-Frank.
I was also proud of many of the good hires I made during my tenure, including more than 60 new people in IM. I’d hired two analysts for the IM Risk and Exam Office who held PhDs, one in physics and one in neuroscience. These quants turned out to be quite skilled at sorting through the large amounts of data collected by IM. We were also able to place many of our IM stars in great jobs around the commission, including Brent Fields who became secretary of the SEC. Mary Jo White promoted Drew Bowden, who replaced me as deputy director of Exam, to head of Exam. Not long after I left the SEC, Exam hired Jennifer Duggins, my old chief compliance officer at Chilton, to help with exams of private funds.
What about some of the other players from the post-2008 crisis? The courageous Stanford whistle-blower Julie Preuitt was returned to her position as assistant regional director of the Fort Worth, Texas, office. Despite testifying about the SEC before Congress, she loved her work and wanted to spend the rest of her career in service of the commission.* We got her back focused on fraudulent oil and gas partnerships sold by shady broker-dealers, where she had a real talent for finding wrongdoing.
The always-clutch Diane Blizzard continues as head of rule making at IM as of this writing, where she is ably assisted by Sarah ten Siethoff and now Sara Cortes whom we got from Chair Walter’s staff.
Erozan Kurtas, the first analytics quant we hired at Exam, left the SEC and as of 2017 works as senior vice president and head of advanced data analytics at FINRA.
My great friend Carlo di Florio now works at FINRA in 2017 as well, serving as the chief risk officer and head of strategy.
I don’t know FINRA’s CEO Richard Ketchum very well, but I’ll say this: he had a fantastic eye for talent. Ketchum retired at the end of 2016, and his replacement is Robert Cook, who headed Trading and Markets when I first became director of IM. Robert remains one of the good guys and now returns to a regulatory role.
Mary Schapiro is serving on various boards as of 2017, including as a trustee of her undergraduate alma mater, Franklin and Marshall, and giving the occasional speech.
Of the FSOC gang, Gary Gensler became CFO of Hillary Clinton’s campaign; Martin Gruenberg, Thomas Curry, and Jack Lew remained in their posts with Lew leaving at the end of the Obama administration. Under Chair Janet Yellen, Scott Alvarez brushed off a few salvos from Congress and continues to control the paper flow through the Fed.
I count many of these folks as allies and friends, but not everyone misses me, that’s for sure.
ABLATION
It wasn’t lost on me that the way I did my job meant disrupting some of my colleagues, even forcing some into new positions and taking away responsibilities from others. Some people had left the SEC on my account, and I wasn’t an enabler of the folks who used anonymous notes for revenge, wanted service time credit for coming to work 10 minutes early,* or hid behind a fictitious arbitration ruling in order not to find out what telecommuters did all day. But I’d also learned how to compromise with FSOC and the Fed, and I collaborated with the union president Greg Gilman, counsel Ralph Talarico, and steward Pat Copeland who supported our reorganizations of Exam and IM as well as other reforms. When union president Greg Gilman found out I didn’t have horns or a forked tail and I realized the same about him, we were able to find common ground. He wanted his people to be happier and better trained in their jobs, and I give him huge credit for that. I don’t agree with President Obama about most things, but I do like what he said during a 2016 commencement speech to Howard University, that “democracy requires compromise, even when you’re one hundred percent right.” I just wish he had followed that maxim occasionally.
Democracy also requires understanding Lincoln’s famous point about not making all the people happy all the time. At the end of 2013, I chose medical intervention to deal with my atrial fibrillation, a long-running condition of irregular heartbeats that was well controlled by a medication that I found difficult to tolerate. I decided on having a surgical ablation, which involves a surgeon inserting a wire in your groin and running it up your blood vessel to your heart, where the doctor applies an electric shock to burn and scar the precise area in your heart that is responsible for the A-fib (as it’s called), thereby ending my A-fib for the foreseeable future. The procedure worked for me and stabilized my heart so I was no longer in danger of a stroke or rapid heartbeat.
Sometimes an ablation is like what a manager has to do to help heal a larger organization—leaving a few scars where necessary but restoring the larger organism to health.
ANONYMOUS STRIKES BACK
By mid-2014 I had started thinking seriously about what I would do next. I figured I’m likely going to leave. On Wall Street I think I have earned a reputation as an honest and open policy maker who will listen to the industry but also protect investors. Nonetheless, I was still getting anonymous notes about other employees and spending a lot of time doing due diligence.
I look back and wonder if one of the old guard in the New York office served up one dish of revenge when a highly misleading story about my family’s farm business receiving subsidies was whipped into a froth by a blogger soon after I joined the SEC. The story included my slightly altered home address and claimed I am a billionaire (which of course is not true). It is awful to think of my family being put in jeopardy by such massive irresponsibility. The story faded away though the IG had to run the traps of an “investigation,” which revealed nothing at all to support this claim. Worst of all, this is all too typical of the anonymous leaks and smears that are used to discredit whistle-blowers, reformers, or simply effective public employees who tread on the wrong turf in the SEC and other taxpayer-funded bureaucracies.
PICNIC
By fall 2014, I’m thinking about the timing of my resignation. The year before, we revived the annual picnic IM used to hold for all the staffers in the division. I liked the picnic because it was the rare event that brought everybody—not just one favored group—together to celebrate our work and get out in the sunshine.
In 2014 my assistant Ammani Nagesh found a wonderful park in Virginia where we could reserve a cookout area and had access to a beach volleyball court and football field. Watching staff play Frisbee in the sun and eat food prepared by Janet Grossnickle, a talented and hardworking assistant director who took time from her demanding schedule to cook, was relaxing.
During the picnic, a number of IM staff thanked me for bringing more openness, flexibility, and teamwork to the agency and for encouraging them to take on new challenges and opportunities within the division. I reminded them that Dave Grim, Carolyn Grillo, Pat Copeland, and so many others were the ones who worked to improve the division on top of their day jobs. One veteran staffer asked me how we have been able to attract so much talent to the division to improve its operations, and a couple of visually impaired attorneys thanked me for getting them software that reads e-mails for them. In both cases, Denise Green unstuck the bureaucracy and got job postings up at the same time she made sure software got delivered! More than once I heard about a staffer who wasn’t so sure about me in the beginning but came to realize that I meant to put together a team that could improve the division for all employees.
10 POINTS OF PROGRESS
Yes, we’d improved the SEC’s capacity to serve the taxpayer and investor by restructuring the division to be faster and more responsive, getting important new reforms off the shelf, bringing the SEC’s expertise where it was needed to inform the Fed and FSOC, and engaging top management at the major investment banks and brokerages. In fact, by the end of 2014 the Division of Investment Management could attest to 10 points of progress that occurred on my watch:
1. Strengthened IM’s workforce to keep pace with a changing legal and regulatory landscape by hiring new quantitative experts, portfolio managers, economists, and experts in derivatives, ETFs, and money market funds.
2. Expanded IM’s collaboration across SEC divisions and with outside stakeholders.
3. Enhanced IM’s capacity to monitor and understand risk trends by creating the Risk and Examinations Office.
4. Ramped up and sharpened data gathering and analysis for use in making rules and issuing industry guidance.
5. Provided greater transparency into IM’s workings through regular guidance updates and a more user-friendly website.
6. Fostered innovation where appropriate through rule exemptions such as IM’s waiver of certain requirements for exchange-traded managed funds, a hybrid of a mutual fund and an ETF.
7. Supported and enforced fund compliance programs passed by the SEC in 2004, including the imperative for funds to hire chief compliance officers and other compliance executives and give them the authority to do their jobs. We made the SEC’s support for compliance abundantly clear, for example, when in 2013 the commission brought an enforcement action that resulted in a “portfolio manager being banned from the securities industry for five years for misleading and obstructing a chief compliance officer.”8
8. Committed to open and constructive communication between the SEC and the industry through the senior-level engagement program, analysis of public comments, and public statements.
9. Instituted an “early warning” approach to protecting U.S. investors by monitoring events—such as geopolitical, natural disaster, and market occurrences—that may impact funds and advisers. When such incidents occur, IM will focus on maintaining communication with affected asset managers and funds, reviewing disclosures to investors, and assessing the impact on the ability of investors to access funds or trade securities. I’m proud that we changed IM to get out in front of significant industry developments as a key element of our mission of investor protection.
10. Expanded employee recognition awards and incentives to acknowledge outstanding performances by IM staff. At the SEC, as with all other government agencies, management is limited in recognizing outstanding performance financially. Therefore we built on the SEC annual achievement awards by creating IM directors’ awards to recognize outstanding contributions by individuals in the division.9
MARY JO’S SPEECH
By December 2014, I decided I would give notice soon to the SEC and return to private life. We had accomplished substantial change in Exam and IM, change that many thought impossible. We turned back FSOC’s takeover attempts, but the SEC needed to demonstrate the effectiveness of its regulation of asset management. IM worked with the chair’s office to develop a set of policy proposals to do just that. With a new slate of policies to develop, I would need to either stay for a couple of more years to work on those proposals or leave and let someone else pick up the baton. I realized that if I left at the end of January 2015, I’d have completed five years at the agency, and that seemed like a logical stopping point.
Mary Jo White was scheduled for a major speech outlining these policies to be held December 11 at One World Trade Center in New York at the Dealbook Opportunities for Tomorrow Conference. I’d worked hard on the ideas for the speech and helped Mary Jo’s office with the drafting, and so I planned to meet her there and stay for the speech.
When I showed up early the morning of the speech, I saw that the high-floor conference location at One World Trade Center was still under construction. Dealbook and CNBC had built a temporary proscenium, platform, and stage for the conference, blocking the bare cinder blocks, stacks of drywall, and pallets of marble slabs from the televised image although visible to the live audience. Mary Jo stayed in the greenroom as I listened to several prominent speakers including Treasury secretary Lew.
By the end of Mary Jo’s speech, I knew I could give notice. It was great. She encapsulated our many accomplishments and the SEC’s modernization, but more importantly she made the case-closed argument about why the SEC must remain the regulatory guardian of the nation’s investors and citizens. “Over the years,” she said, “the Commission and the staff have taken important steps to recalibrate its program to better match the current facts on the ground.” And the tools given the SEC by the Investment Company Act and Investment Advisers Act remain effective in “responding to the evolution of the asset management industry.”
She detailed how we had upgraded the SEC’s capabilities to meet its responsibilities in controlling conflicts of interest, reporting, registration and disclosure, fund portfolio composition, and operational risk. The SEC was readier than it had been in many years to meet its mission.
Best of all, she concluded by reinforcing the SEC’s absolutely essential role in managing the “ risk” in asset management that drove so much controversy since 2008:
One of the most fundamental post-crisis changes for all of the financial regulators, including the Commission, has been an emphasis on addressing risks that could have a systemic impact on the securities markets or the financial system as a whole. This renewed emphasis, in my view, complements our long-standing mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
The program that I have just outlined is designed to serve our historic three-part mission. But, at the same time, the measures we take will necessarily have a broader impact on the financial system. Asset management is a significant segment of our financial system—and, as we all know, the nature of finance means that changes to any significant segment has consequences for the others.10
Becoming director of IM was the greatest professional honor and most interesting work experience in my life. While many dragons remained to be slain within the bureaucracy of the SEC, I knew we had reinvigorated the leadership culture and the SEC’s processes and commitment to better handle the next market meltdown. I really enjoyed working with Mary Jo because of her incredible smarts and kind approach.
In mid-January 2015 I convened the IM division’s monthly town hall to provide updates to the staff in the division. The presence of my friend Commissioner Dan Gallagher may have tipped the staff off that I would be discussing something more than the new policy initiatives from Mary Jo’s speech. At the end of the meeting I said that I would be stepping down in two weeks. My voice choked up with emotion, but I got the words out. I was surrounded by so many people who work so hard for investors, people like my then deputy and successor David Grim, senior policy advisor Jennifer McHugh, counsels Marian Fowler and Rich Rodgers, rule makers Diane Blizzard and Sarah ten Siethoff, Jon Hertzke and his REO team, Carolyn Grillo who helped reorganize Exam and IM, and too many others to name. I would miss the people. I gave it my all and made significant changes while setting a new policy course. Others could steer the ship from here. I promised the staff that while I would no longer be at the agency with them, I would be cheering their efforts from the outside.
After a government snow day canceled the first try at a farewell party, we held the party in early March and had a wonderful celebration of my five years at the SEC. The older kids had school (including my oldest son who was a freshman at his new high school), but my wife, Sally, and my youngest son came down with me to attend. Mary Jo, Dan Gallagher, and former chair Elisse Walter all spoke, and my deputy and friend David Grim added a few remarks. Dan Gallagher summarized my efforts at the agency with such kindness:
Norm is a consummate professional, a motivational leader, and someone who is not scared to run the flag up the hill to pursue rational regulatory policy. Norm and Carlo di Florio, then Drew Bowden, did a fantastic job revitalizing OCIE [Exam] after some rough times in 2008 and 2009, and Norm carried that mission into IM. Norm, along with Craig Lewis, made it possible for the Commission to navigate the rocky shoals of the money market fund rule making, and he’s left us with a blueprint for future oversight of the asset management industry that will, if properly implemented, transform the agency’s efforts in that space.
The SEC didn’t make me a cynic; in fact I left more convinced than when I came that a sound financial system and a strong federal investors’ watchdog are fundamental to the economic growth that the United States needs to ensure the health and happiness of our citizens in the twenty-first century.
As I transitioned out of the SEC, I began a period of thinking about the crash and what would strengthen our entire financial system and the personal financial security of everyday American households. How could we avoid such a catastrophe in the future? After more than 25 years in law, finance, and government, I have a few ideas that I will share in the next chapter.
*From Julie’s testimony: “Many have asked me why I haven’t left the Commission over the course of the last several years. My answer has always been the same. I believe passionately in the mission of the SEC. I am proud to have devoted most of my professional life to the service of the investing public. I have tried to serve with honor and integrity. I am grateful for the many strong relationships I have developed with managers and staff throughout the Commission, which have kept me going through this difficult period. I am proud of the many accomplishments of the examiners and managers with whom I have worked all of these years. I hope I am fortunate enough to spend the remaining part of my career in the service of the Commission.”
*One SEC staffer actually had the guts to ask Chair Mary Jo White about this during an SEC town hall meeting.