Craig Lewis had been the Securities and Exchange Commission’s chief economist for just two months when a federal appeals court threw out an SEC rule that would have given investors more power to oust corporate directors. Lewis had spent 18 months at the SEC as a visiting academic fellow, and knew such a ruling was possible, but the July 2011 ruling was nevertheless a watershed moment.
The court issued what The Wall Street Journal called “a harsh rebuke” to the agency, essentially saying its analysis was inadequate and short-sighted.
“That helped set the tone for my tenure,” Lewis says of the so-called proxy-access rule. “It was the catalyst for beginning to rethink the role economists needed to play in rule-making, to get them involved early and make economic analysis an integral part of the process.”
Lewis served three years as the SEC chief economist before returning to Vanderbilt in July. Lewis, Owen’s Madison S. Wigginton Professor of Management, can look back on a tenure that shifted significant power and enhanced participation in SEC rule-making to a dramatically beefed-up staff of economists.
“I had to effectively certify whether the economic analysis was up to snuff and we were able to significantly contribute to the process. That has led to a number of big wins for the agency,” he says. “While I was chief economist, there was never a rule that was successfully challenged on the basis of the economic analysis, and the rules that are still coming out today are very robust in their economics.”
The experience, says Lewis, “will benefit both my research program and my classroom teaching in a number of important ways.”
The SEC kept calling
His wide-ranging research interests include corporate financial policy, capital formation and asset pricing, as well as convertible debt financing, stock market volatility and herding by equity analysts. But the catalyst for his tenure on the SEC was a paper he’d written on shareholder reaction to class action litigation. SEC economists invited him to present his research, then asked if he might be interested “in coming to visit for a year or two.” With two children in high school, he declined, telling them “it might be interesting” when he and his wife, Tari, became empty nesters in two years.
“Two years later they called to see if I was still interested,” he says. He presented another paper and this time accepted their invitation to join as an economic fellow. In that role, beginning in January 2010, he served as an adviser on policy issues and brought analytic tools to bear on the derivatives market and violations of securities laws. In May 2011, SEC Chairman Mary Schapiro offered him the post as chief economist and director of the Division of Risk, Strategy, and Financial Innovation, a think tank and the SEC’s first new division in 37 years.
Calling him “a distinguished economist with a clear understanding of the complexities of financial markets,” Schapiro said at the time that Lewis would “help to inject strong data-driven analysis into the SEC’s decision-making process.”
His job, overseeing the area that performs the economic analysis that accompanies all SEC rule-making, “looked a lot like that of the dean of a business school,” he says. “It was one of managing business processes and project flow, and making sure we were hitting our deadlines and meeting our obligations.” The work was “all-consuming. The hours were massive,” he says, something he attributes to his own competitive nature as much as the task itself. “I worked a lot because I wanted to be successful. I’m hypercompetitive.”
Much of that work had to do with SEC implementation of the 2010 Dodd-Frank Act, which gave the federal government enhanced regulatory power over the financial industry in the wake of the financial turmoil that followed the 2007-08 subprime mortgage crisis.
In addition, under the 2002 Sarbanes-Oxley Act, the SEC is mandated to review corporate 10-K reports, the annual disclosure forms filed with the SEC. Lewis brought textual analysis to bear on the process of determining whether firms found to be fraudulent “use different vocabularies than nonfraud firms” in the management discussion and analysis sections of those reports.
“We do find evidence,” he says of work he did with Gerard Hoberg of the University of Southern California, “that there’s something of a verbal shell game going on where you talk about certain elements in an attempt to deflect attention from other problems the firm might be experiencing. They tend to overemphasize benign elements in their annual reports and underemphasize things that are probably causing the problems that motivate them to engage in some kind of accounting shenanigans.”
Proving the power of data
The credit default database is one manifestation of the efforts he led to incorporate more rigorous analytical techniques into the rule-making process. “It’s an example of a data analytic initiative the division took on that turned out to be very influential in the way various rules were drafted. That was one of the first times people in some of the rule-making divisions saw the power of data,” he says. “We were able to offer financial thresholds for rules that were significantly different from what was proposed but were completely reasonable once you actually saw the data.”
Analysts, for example, determined a dollar figure for the amount of annual transactions that would qualify someone as a dealer in the credit default swaps space. “Delivering real, meaningful analysis that fundamentally changed rules was really quite a big step forward for the agency,” he says.
All of this took a great deal of manpower. Congress, determined that Dodd-Frank would lead to change, “put pressure on the agency to hire additional economists,” according to Lewis. During his tenure, the number of employees in the division increased from 60 to nearly 120 and the division itself was renamed the Division of Economic and Risk Analysis.
Janet S. Schmautz worked with Lewis as his confidential assistant during his time as chief economist. “Others can attest to how Craig Lewis built the division based on technical ability. As his confidential assistant, I can attest to how he developed the division using interpersonal skills,” she says. “He brought everyone along with a sense of camaraderie and good will, gaining him universal respect and admiration.”
A certified public accountant who work-ed early in his career for Arthur Young & Company, Lewis earned his master’s and doctoral degrees from the University of Wisconsin–Madison. He joined the Vanderbilt business faculty in 1986 and has won a number of awards for teaching excellence. A frequent speaker and guest lecturer at industry and academic events around the world, he is an expert on corporate financial policy and asset pricing.
His SEC experience gave him new knowledge about his field and himself.
“One of the great things about being there is the rate at which you learn,” he says. “I would argue it is very similar to that first year when you’re in your Ph.D. program. I have a much better sense of what’s going on in the financial world. You think that after spending 20-plus years as a finance professor you have a fairly good idea of how markets work and the subject matter that you teach in class. I was quickly disabused of that notion. I realized that there is a lot more that I didn’t know than I knew.”
The increased knowledge and contacts will have a direct effect on his teaching.
“I had a front-row seat to a lot of important events right after the financial crisis,” he says. “I’ve had conversations with folks who are newsmakers—Ben Bernanke, Jack Lew, all the principals of the large federal regulatory bodies—and those experiences were quite interesting and fun. I think the students will enjoy just a little bit of color around how financial regulators implement the Dodd-Frank Act, for example. All of those things, and the ability to bring in new types of guest speakers to the classroom, are a direct benefit of that experience.”
Lewis also can continue to watch his SEC accomplishments play out. In July, for instance, the SEC adopted amendments to rules governing money market mutual funds, making structural and operational reforms.
“At the time, it was almost a guarantee that somebody was going to challenge that rule. We’re still waiting, but it looks like it is not going to be challenged in court, and that the industry is going to accept the rule as is,” he says. “That, to me, is in large part a vindication of economic analysis, because the economics changed that rule in a very fundamental way.”