WASHINGTON (Reuters) - The Securities and Exchange Commission pulled out all the stops when it tapped University of Texas law professor Henry Hu to head the first new division created at the agency in 37 years.
An unusually generous temporary contract brought Hu to Washington in September of 2009 to oversee the new Division of Risk, Strategy and Financial Innovation, part of the agency's effort to address an embarrassing failure to catch swindler Bernard Madoff and adapt to new Wall Street products that could become the next financial weapons of mass destruction.
Hu, with three degrees from Yale and the author of papers on derivatives and financial regulation, looked perfect to lead the "think tank" division that SEC Chairman Mary Schapiro tasked with anticipating market problems.
But Hu departed in January, leaving the division searching for a chief economist and new permanent director, and with questions swirling about how much was accomplished during his roughly 16 months on the job.
His hiring has been praised by some outside the agency as a creative effort to bring in top talent, but the arrangement rubbed some staffers the wrong way, including an SEC decision to cover the bulk of his daily living expenses.
SEC documents obtained by Reuters through a Freedom of Information Act request show Hu sought reimbursement for thousands of dollars per month. The agency's internal watchdog is now reviewing whether the arrangement was appropriate.
As the SEC works to implement dozens of new rules under the Dodd-Frank financial overhaul law and to revamp equity market structure, critics say the accomplishments and direction of the new division are still not clearly defined.
The division resulted from melding the SEC's offices of economic analysis and risk assessment. Later, in March 2010, the office of interactive disclosure - which works to make financial disclosures more accessible - was added.
The aim was a multidisciplinary division, but it is not clear whether it has truly succeeded in chipping away at the entrenched culture at the SEC which is known for placing a higher value on the role of lawyers.
That could leave the SEC vulnerable as Wall Street continues its breakneck pace of product development, and as the SEC needs airtight economic and market analysis to justify its rulemaking and to prevent successful legal challenges.
For some, the mission of the new division, known for short as "Risk Fin," was always too muddled.
Roy Smith, a finance professor at New York University's Stern School of Business, said his first impression was the division's job seemed "vague" with a lot of "cosmetic features to it."
"I'm sure they meant well at the time," said Smith, a former partner at Goldman Sachs.
Critics and agency employees told Reuters in interviews that Schapiro relied too much on a single person without clearly spelling out how it would operate.
SEC employees, who requested anonymity since they were not authorized to speak publicly, say the chairman's office had to send an adviser to keep an eye on the division during Hu's final months. In another action around that time, the division's now acting director, Jonathan Sokobin, an economist, was unofficially put in charge of running things while Hu remained as the official director.
In a series of emails, Hu said Schapiro offered him "a once-in-a-lifetime opportunity" to serve as an agent of change at a place with "long-established culture, norms, and practices."
Now back at the University of Texas and writing several books, Hu touted the division's accomplishments under his tenure. One such accomplishment, he told Reuters, was to elevate the stature of economists and other non-lawyer types that have not traditionally had a voice at the SEC.
"SEC staff who were not traditional lawyers -- nerds such as myself -- were given a real, highly visible seat at the table," he said in an emailed statement.
But Schapiro seems to have heeded complaints that economists were devalued by the new division structure.
She told the Senate Banking Committee in February that the new division head would also get the title of Chief Economist, restoring that position's stature at the agency.
Former SEC Chief Economist James Overdahl, who left the SEC in March 2010, said Schapiro's initial decision to make the position junior to the division director had hurt its effort to replace him.
"People noticed that the commission no longer had an economist reporting to the chairman's office," he said.