Corporate Governance

The SEC, the Inspector General, and Political Pressure

By J Robert Brown Jr.

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. 

Full post as published by The Race to the Bottom on June 18, 2010 (boomark / email).