The SEC, the Inspector General, and Political Pressure
J Robert Brown Jr. | Friday, June 18, 2010 at 09:00AM David Kotz, the Inspector General at the SEC, has a relatively broad mandate. He can largely investigate what he wants. That investigatory authority, however, needs to be wisely used and foremost ought to be designed to work to the benefit of the Commission. The last thing Kotz needs to do is to be seen as an extension of the political process, yet increasingly, that is how it seems.
There was considerable publicity around the Inspector General's decision to investigate the timing of the Goldman case after receiving a request from several Republican congressmen. We know he started an investigation in response because he announced it on Fox News. Well, he is at it again
Senator Grassley, the Ranking Republican on the Senate Finance Committee sent a letter demanding that Kotz look into the so called revolving door problem at the SEC. The Letter was not sent by the entire committee (which would require bipartisan support) or by the entire Republican component of the Committee (which would at least require organization and suggest that it wasn't a "shoot from the hip" kind of letter). Instead, it was sent only by the Senator from Iowa.
The Letter included little more than a handful of anecdotal examples of SEC personnel leaving the agency and suddenly representing clients with business before the Agency. There is nothing in the Letter that suggests anything particularly untoward or anything particulalry unusual. Indeed, the Letter specifically noted that:
- "Trading and Markets Division Associate Director Elizabeth King recently left the SEC to work for a leading high frequency trading firm, Getco, LLC. Given her former position at the SEC, this raises a number of questions about:
- (1) the extent to which Ms. King was personally involved in the SEC’s review of last month’s “flash crash” and related rulemaking activities on high frequency trading,
- (2) when she first had contact with Getco, LLC about the possibility of employment there and whether she recused herself from matters related to the SEC’s inquiry and rulemaking after that point, and
- (3) the extent to which SEC and government-wide ethic rules will limit her communications with her former colleagues at the SEC on behalf of Getco, LLC going forward.
In other words, Senator Grassley had nothing more than the fact that an SEC employee left the Agency and went to work for a company in a relatively high profile area. Indeed, according to the WSJ:
- Ms. King spent 17 years at the SEC. She was associate director for market supervision and oversaw the options and single-stock futures markets, a commission spokesman said.
- People familiar with her responsibilities said she "did not have a meaningful role" in the SEC's examination of high-frequency trading.
In short, Senator Grassley had nothing to go on other than an employee left and took a job with a regulated entity. In his letter, he nonetheless asked the Inspector General to:
- please (a) provide a summary of the matters your office has reviewed that raise similar revolving door issues, and (b) conduct a review of the circumstances surrounding Ms. King’s departure from the SEC and disclose the results so that Congress and the public can more accurately assess the integrity of the SEC’s operations?
The response? Mr. Kotz had already opened an investigation into Ms. Kings' circumstances and he would be "pleased to share the results" of this investigation with Senator Grassley. One has to wonder why Ms. King is already under investigation. But the tone of Mr. Kotz's letter is clear enough. Had she not been under investigation, he would have started one. And when he has a report, irrespective of its confidentiality or findings, he will turn it over to the Ranking Member of the Senate Finance Committee.
The job of the Inspector General should be less focused on political considerations and more focused on the needs of the Agency. That does not include investigating every employee who leaves to take a job with a regulated entity or every request made by a lone minority member of a committee.
Reader Comments (2)
As a taxpayer, I have been alarmed at the cases the SEC has brought and failed to bring, the revolving door of SEC personnel to the private sector (and their subsequent relatinoships back with the SEC) and, of course, the cases they have lost or later dismissed (and sometimes had to pay EAJA fees) - such as Cuban, Coffman, Nasgovitz, Guenthner, Tenfold, Cohen, Angel, etc. It is a disturbing list of false accusations and lives and reputations that have been damaged by an agency that has admitted to measuring the wrong things (counting cases brought, not true results). Perhaps the IG is measured on "investigations" brought, as opposed to true results?
If the SEC is uncomfortable with allegations and announcements of investigations when they are being investigated by the IG, they may want to consider what they do to companies and individuals when they make allegations, or when news of investigations is "leaked." This is especially true when they make allegations that prove to be untrue.
In some ways, this all reminds me of that silly argument of "hate the game, not the player." I don't see where the IG is doing anything different than what the SEC often does.
I agree with your concept, but find it difficult to support since the SEC does the same thing. Perhaps both sides should use more discretion and only release information about targets and cases when issues have been fully resolved and the targets of investigations/allegations/litigation have had a chance to express their side of the story as well.