The SEC, Congress, and the Harm of a Rogue Inspector General (Part 1)

The SEC's Inspector General, David Kotz, did substantial damage to his position and the SEC by recently announcing on Fox News that he would investigate the timing of the SEC's decision to bring an action against Goldman Sachs.  There is no evidence that the matter was deliberately timed.  Yet despite the absence of evidence, Kotz indicated that he would conduct an investigation, providing credence to the so far baseless accusations.  Moreover, he threw his own integrity into doubt by announcing the decision (something that probably should have been kept confidential) on a partisan cable network. 

As a result, his credibility as an "independent" arbiter of the facts has been unalterably damaged.  Future reports issued by his office will be seen in a partisan light.  This hurts the Commission.  The Commission needs someone in that position who is beyond reproach, who when he/she exonerates or blames carries irreproachable integrity.  Kotz no longer fits that description.

The need for a credible Inspector General is particularly acute right now.  The Inspector General at the SEC is currently appointed by the Chairman, one of only a handful of similar positions not appointed by the president.  Legislative proposals floating around, however, would transform the position into a presidential appointment, requiring the approval of the Senate. 

Such legislation has already passed the House of Representatives (HR 885) and would extend to the Inspectors General of the Commodity Futures Trading Commission, the Board of Governors of the Federal Reserve, the Securities and Exchange Commission, the National Credit Union Administration and the Pension Benefit Guaranty Corporation.  The legislation would, by the way, give the Inspectors in these agencies subpoena authority.  Similar language has apparently has been just added to the Dodd Bill. 

At the same time, Senator Grassley is trying to gain support for a proposal that would leave the position as an appointee of the agency but restrict removal to cause.  In addition, he wants to require that the Inspector General report to the entire board or commission (and, presumably not just the chair) and that the Inspector General be subject to an annual "peer review."  The Grassley proposal would, as we'll discuss, do serious damage to the current structure for the post of inspector general. 

This is a serious issue and one that requires careful thought.  It requires a strong position by the Commission, one way or another.  The voice of a non-partisan Inspector General would likely carry considerable weight.  While we will discuss this further, we note at this point only that anything Kotz could say on this issue will now be viewed entirely in political terms.  Thus, while he opposes the efforts to make his position a presidential appointee, the statement has no credibility.   It may be a position carefully developed on the merits or it may be political rhetoric.

In any event, the escapade over Goldman has cost the Commission an advocate.