[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE ROLES AND RESPONSIBILITIES OF INSPECTORS GENERAL WITHIN FINANCIAL
REGULATORY AGENCIES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
ORGANIZATION, AND PROCUREMENT
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 25, 2009
__________
Serial No. 111-49
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
56-375 WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio JOHN L. MICA, Florida
JOHN F. TIERNEY, Massachusetts MARK E. SOUDER, Indiana
WM. LACY CLAY, Missouri TODD RUSSELL PLATTS, Pennsylvania
DIANE E. WATSON, California JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio
JIM COOPER, Tennessee LYNN A. WESTMORELAND, Georgia
GERALD E. CONNOLLY, Virginia PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of BRIAN P. BILBRAY, California
Columbia JIM JORDAN, Ohio
PATRICK J. KENNEDY, Rhode Island JEFF FLAKE, Arizona
DANNY K. DAVIS, Illinois JEFF FORTENBERRY, Nebraska
CHRIS VAN HOLLEN, Maryland JASON CHAFFETZ, Utah
HENRY CUELLAR, Texas AARON SCHOCK, Illinois
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
------ ------
------ ------
------ ------
Ron Stroman, Staff Director
Michael McCarthy, Deputy Staff Director
Carla Hultberg, Chief Clerk
Larry Brady, Minority Staff Director
Subcommittee on Government Management, Organization, and Procurement
DIANE E. WATSON, California, Chairman
PAUL E. KANJORSKI, Pennsylvania BRIAN P. BILBRAY, California
JIM COOPER, Tennessee AARON SCHOCK, Illinois
GERALD E. CONNOLLY, Virginia JOHN J. DUNCAN, Jr., Tennessee
HENRY CUELLAR, Texas JEFF FLAKE, Arizona
JACKIE SPEIER, California ------ ------
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
C O N T E N T S
----------
Page
Hearing held on March 25, 2009................................... 1
Statement of:
Kepplinger, Gary L., general counsel, Government
Accountability Office...................................... 10
Kotz, H. David, inspector general, U.S. Securities and
Exchange Commission; William Desarno, inspector general,
National Credit Union Administration; A. Roy Lavik,
inspector general, Commodities Futures Trading Commission;
Vanessa K. Burrows, legislative attorney, Congressional
Research Service; Clark Kent Ervin, director, Homeland
Security Program, Aspen Institute; and Danielle Brian,
executive director, Project on Government Oversight........ 31
Brian, Danielle.......................................... 78
Burrows, Vanessa K....................................... 61
Desarno, William......................................... 48
Ervin, Clark Kent........................................ 74
Kotz, H. David........................................... 31
Lavik, A. Roy............................................ 55
Larson, Hon. John B., a Representative in Congress from the
State of Connecticut....................................... 4
Letters, statements, etc., submitted for the record by:
Brian, Danielle, executive director, Project on Government
Oversight, prepared statement of........................... 81
Burrows, Vanessa K., legislative attorney, Congressional
Research Service, prepared statement of.................... 63
Desarno, William, inspector general, National Credit Union
Administration, prepared statement of...................... 51
Ervin, Clark Kent, director, Homeland Security Program, Aspen
Institute, prepared statement of........................... 76
Kepplinger, Gary L., general counsel, Government
Accountability Office, prepared statement of............... 13
Kotz, H. David, inspector general, U.S. Securities and
Exchange Commission, prepared statement of................. 35
Larson, Hon. John B., a Representative in Congress from the
State of Connecticut, prepared statement of................ 7
Lavik, A. Roy, inspector general, Commodities Futures Trading
Commission, prepared statement of.......................... 57
THE ROLES AND RESPONSIBILITIES OF INSPECTORS GENERAL WITHIN FINANCIAL
REGULATORY AGENCIES
----------
WEDNESDAY, MARCH 25, 2009
House of Representatives,
Subcommittee on Government Management,
Organization, and Procurement,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:35 p.m., in
room 2247, Rayburn House Office Building, Hon. Diane Watson
(chair of the subcommittee) presiding.
Present: Representatives Watson, Cuellar, Speier, Bilbray,
Platts, Duncan, and Towns [ex officio].
Staff present: Bert Hammond, staff director; Valerie Van
Buren, clerk; Adam Bordes, professional staff; Carla Hultberg,
chief clerk, full committee; Jean Gosa, clerk, Domestic Policy
Subcommittee and Information Policy, Census, and National
Archives Subcommittee; Charles Phillips, minority chief counsel
for policy; Dan Blankenburg, minority director of outreach and
senior advisor; Adam Fromm, minority chief clerk and Member
liaison; Stephen Castor, minority senior counsel; and Molly
Boyl, minority professional staff member.
Ms. Watson. I am sorry that the first thing I have to do is
apologize for being so late.
But I want to say hello and good afternoon to all of you.
This is the Subcommittee on Government Management,
Organization, and Procurement of the Committee on Oversight and
Government Reform. So I will now call you and myself to order.
Without objection, the Chair and the ranking minority
member will have 5 minutes to make opening statements followed
by opening statements not to exceed 3 minutes by any other
Member who seeks recognition.
I would like to welcome you to our first subcommittee
hearing this session, ``The Roles and Responsibilities of the
Inspectors General in the Financial Regulatory Community.'' As
the chairwoman of the Subcommittee on Government Management,
Organization, and Procurement, I look forward to working with
Ranking Member Bilbray and the subcommittee members to ensure
that our Federal bureaucracy is both effective and efficient in
carrying out its responsibilities. I welcome our witnesses,
especially my colleague Congressman John Larson. I look forward
to hearing your testimony.
Today's hearing could not come at a more critical time for
our panel, as our financial markets continue to struggle with
mounting losses and insufficient capital reserves to meet the
credit needs of our domestic economy. As we begin to implement
newly established market stabilization programs across the
financial regulatory community, we must also look ahead to
ensure that our financial regulators have an effective
Inspector General component as part of their agency operations.
Personally, I believe no regulatory or market structure reforms
will prove successful if our market regulators lack an
independent and objective IG to oversee their activities.
The role of Inspectors General is an essential one for
ensuring that our Federal agencies function both effectively
and freely from undue political pressure or conflicting
interests. These pervasive elements far too often creep into
the culture of agencies, therefore compromising the very
programs and staff that are charged with overseeing and
enforcing the rule of law throughout the marketplace. In order
to achieve this goal, we must ensure that our IGs are fully
independent in their activities while also ensuring that they
have adequate resources and legal authorities necessary for
carrying out their duties. These elements are critical if we
are to have faith in the regulatory mechanisms established to
protect investors from reckless and fraudulent investment
practices.
Last fall, Congressman Cooper worked to enact the Inspector
General Reform Act of 2008 which provided significant
improvements in the authorities and responsibilities granted to
the IGs for carrying out their duties. These include new law
enforcement authorities, increased budget autonomy, a unified
Government-wide IG council, and additional reporting
responsibilities to improve agency transparency. Today,
however, many IGs are still appointed by their agency heads or
commission chairs, thus opening some IG offices to potential
conflicts of interest with the same agency leadership they are
charged with overseeing. While this is a complicated issue with
valid points on both sides, I believe it is one that merits a
serious discussion in order to ensure the independence and
reliability of agencies' IGs.
Today I hope that our panelists will be able to discuss
their efforts to ensure that our market regulatory functions
are being carried out efficiently by our agencies. Part of this
must include how agency IGs are coordinating with the newly
established Special IG for the Troubled Assets Relief Program
[SIGTARP], in order to ensure that program funds are being
spent appropriately and in accordance with the law. I am also
hoping to hear about their ongoing activities to investigate
where market regulators have failed in overseeing the very
institutions that now require nearly $1 trillion in government
assistance in order to remain viable.
Furthermore, I look forward to hearing from Congressman
Larson on his legislation, House of Representatives 885, the
Improved Financial and Commodities Markets Oversight and
Accountability Act. This bill would designate the IGs of
several key financial market regulators to the level of
Presidential appointments, therefore removing agency heads from
having any role in the appointment or removal of an IG from
office.
So once again, I want to thank our panelists and I want to
thank the Members for coming today to join us. And we look
forward to their testimony.
And at this point our co-chair, the minority leader, will
have about 3 to 5 minutes for his statement.
Mr. Bilbray. Madam Chair, I would just like to ask that my
opening statement be introduced into the record.
Ms. Watson. Without objection, so ordered.
Mr. Bilbray. Thank you. And so, to get to the testimony as
quickly as possible, let me just say that I appreciate you
holding this hearing.
And I would like to thank the Congressman for basically
drafting this bill because I think it is really critical that
now is the time that we take a look at this whole IG issue. I
mean, the act was originally initiated in 1978, back in the
olden days when some of us were young and just getting into
politics. It is time that we look at this very periodically to
make sure the good intentions that we have tried to wreck in
the past are actually working, especially now at a time with
bailouts. You have rescues; you have big spending.
And Inspectors General are absolutely essential. I mean, if
there was any concern in the past of when and where and how
public funds were being used, right now the public has a
hypersensitivity to it. And for good reason because of just the
sheer numbers and the long-term impact that inefficiency can
have.
I would just like to say that we always talk about how this
is not Democrat or is not Republican or whatever. That is all
great in abstracts. But this is one issue where we really don't
know where the answer is. We need to probe. And it really is an
example of where politics is more of an art than a science. It
is not as exact as a lot of people like to think. And I hope
that this hearing is the beginning of that probing to find
where is the fine tuning, where is the nuance, where can we
improve the system. I think the Congressman has one proposal
that we need to look at seriously and then compare it to other
options along the road. And I really think that a hearing like
this is exactly how we can do it.
And I have to say, Madam Chair, I think a lot of people
have been concerned that in crisis we do things quick, not
well. And a lot of us, I know, are going back now and saying
there were a lot of things done in the recent past that we wish
we could go back and revisit. Here is a chance for us to get
the facts, to work together, and to fine tune this before we
ask the people of the United States to live with our decisions.
And so I appreciate the ability to have this hearing. I
appreciate the Congressman being here today. And I look forward
to hearing all of the witnesses today so we can start that
process of creating our work of art that hopefully will be
something we will be proud of long after we are gone,
especially one that makes sure that the voters are happy with
the way we are handling their resources. This IG issue is
obviously one of those issues that really is essential for us
to do right if we are going to fulfill our responsibility of
being the vanguards and the protectors of the taxpayers' money.
And I appreciate the hearing again and yield back, Madam Chair.
Ms. Watson. Thank you, Congressman Bilbray.
Congressman Cuellar, would you like to have an opening
statement?
[Inaudible due to sound system malfunction.]
Ms. Watson. Thank you. I would like to call on Congressman
Platts at this time. Thank you for your leadership of this
subcommittee. We appreciate the work that you do for the
people.
Mr. Platts. Well, I thank you, Madam Chair. It certainly
was a honor for 4 years to chair this subcommittee with now the
full committee chair, then the ranking member, Mr. Towns from
New York. I am honored to stay part of this effort.
Thank you for your hosting this hearing. One of the things
we saw during those 4 years is the importance of IGs when it
comes to truly ensuring efficiency and responsible operations
of the Federal Government. And I want to commend our colleague,
Mr. Larson, for his proposal for further enhancing the status
and the independence of IGs of these five agencies, in
particular given the challenges we are facing in our financial
market. So I look forward to his testimony and to hopefully our
successful movement of his legislation. Thank you, Madam Chair.
Ms. Watson. Thank you. I now would like to welcome the
chairman of the full committee, Mr. Towns, who decided to come
and sit in with us on our first hearing. Would you like to make
a statement?
Chairman Towns. Let me say first of all, I want to
congratulate you. And I want to say that I think this is the
best subcommittee of all, I want you to know that, because this
is the one that, of course, I was ranking member on and one
that I had an opportunity to Chair as well. I had the
opportunity to work with Congressman Platts on many, many
issues.
So I just want to say, Madam Chair, that I look forward to
working with you. I would just like to yield back and wait to
hear from Congressman Larson.
Ms. Watson. Thank you so much. Let me call our committee to
order. And we are honored to have with us as our first witness
the Honorable John Larson. And thank you for your patience.
STATEMENT OF HON. JOHN B. LARSON, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF CONNECTICUT
Mr. Larson. Thank you, Madam Chair.
[Inaudible due to sound system malfunction.]
Mr. Larson. So let me thank you all again for this
opportunity. And most importantly, let me thank your committee,
as I think the chair adequately and eloquently stated the
outset, for the work that you have done, the fine legislation
that you have produced that Jim Cooper was a part of, and the
pleasure of working with Ed Towns and the committee in terms of
shaping this current legislation, House of Representatives 885,
that we have before you. I would like to quickly, if the Chair
would agree, submit a testimony from the Public Citizen in
support of this legislation.
Ms. Watson. Without objection, so ordered.
Mr. Larson. I also would like to revise and extend my
remarks and submit my testimony. I will summarize if I can so
any questions that you might have, we can get to those as
quickly as possible.
The need for this arose as we dealt with the issue of
speculation more than a year ago in a nonpartisan basis, again
recognizing the increased need for oversight and review. It was
pointed out at the time that the CFTC did not have, it had an
Inspector General, but it did not have independent status. That
individual was hired by and reported directly to the CFTC. This
committee waived jurisdiction but broadly supported it and this
was taken to the floor and passed overwhelmingly,
nonpartisanly. It unfortunately was not taken up in the Senate.
Upon discussion with Mr. Towns earlier this year and with
his staff, we said, you know, this goes beyond the CFTC. And if
we look at the kind of troubled waters, as Chairwoman Watson
pointed out, that we find ourselves in today with all of these
financial institutions and the ramifications therein, it became
apparent to me and I think certainly to this committee and Mr.
Towns that there was a need for us to make sure that our
Inspectors General, a law that was first adopted in 1978 and
upgraded last year by this committee, that we further augment
and bolster their responsibility and their credibility with the
American public to make sure that Inspectors General in
critical agencies have independent status.
Now, under that legislation, there are two types of Igs.
One is under Section 3 that has independent status. By that
they are appointed by the President and confirmed by the U.S.
Senate. Under Section 8, IGs also exist but in this case they
are appointed by the president of the agency, the governing
entity of the agency, and serve at the behest of that.
I think especially in these troubled times and with the
problems that we face only exponentially growing, it is the
desire of the public to make sure, especially as it relates to
governmental entities, that they are doing their responsibility
of oversight and review, which of course this committee is
specifically charged with.
So this legislation is very simple. It says that we need to
focus on the five agencies that have direct involvement in
making sure that they are involved with the oversight of our
financial institutions, both in the commodities and financial
markets: the CFTC, the Board of Governors of the Federal
Reserve, the National Credit Union Administration, the Pension
Guaranteed Benefit Fund, and the Securities and Exchange
Commission. All need to come under this kind of independent
scrutiny that I think everyone in the U.S. Congress wants to
see.
And all this bill does is augment the fine work that you
have already done by giving them that kind of status that
already exists in the law under Section 3 of that code. That
would make these Inspectors General independent in status. It
would expand their scope and their independence and give them
additional resources. This committee went a long way toward
providing resources last year and understood this early on.
This gives added importance and independence in this day and
age.
Now, how do I know that we need that and what kind of
information do we have to back that up? We all know and can
feel in our guts that intuitively this makes sense. But, in
fact, we had the Congressional Research Service do a study and
what that study showed was very clear. Amongst agencies that
have an independent Inspector General appointed by the
President and approved by the Senate, they are involved in more
than 117 ongoing audits and investigations.
Amongst their same counterparts who are not appointed by
the President but appointed by the agency and work at the
direction of the agency, they have currently done 12 and have
11 that are under review. So in the case of independent
Inspectors General appointed by the President and approved by
the Senate, they do 10 times as many audits and reviews. At a
time when every economist, every pundit, everyone who is
looking at this situation says what we need and what we have
needed all along is to make sure that we had greater oversight
and review, I think this speaks volumes to the necessity for
this legislation.
It is my hope along with Mr. Platts, and I was happy to
hear him say that, and in working with Mr. Towns that we can
expedite this legislative process. I believe this could
probably be put on our consent calendar because of its nature
and the gravity of this situation, as Chairwoman Watson has
pointed out. I look forward to working with Chairman Towns and
I thank him for his help and support and his committee's aid.
It was at their suggestion, I might add, that we look into
expanding this because they had already done such a thorough
job with the Cooper legislation last year. And with that, I
will yield back the balance of my time and submit to any
questions you might have.
[The prepared statement of Hon. John B. Larson follows:]
[GRAPHIC] [TIFF OMITTED] 56375.001
[GRAPHIC] [TIFF OMITTED] 56375.002
Ms. Watson. Thank you so much, Congressman. This concludes
the Congressman's testimony. If any of the Members would like
to raise a question, we will take about 5 minutes.
[Inaudible due to sound system malfunction.]
Ms. Watson. So again, I must apologize. I will recess for a
time for us to go to the floor and vote. Then we will come back
here and we will go on with our panelists. So are there any
questions from committee members for Mr. Larson?
Chairman Towns. Not a question, but I would just like to
assure him that I look forward to working with him to make
certain that we move this legislation forward. I think it is
very, very much needed. And, of course, I agree with you. I
think it is something we should be able to get on the consent
calendar.
Ms. Watson. Mr. Bilbray.
Mr. Bilbray. Yes, I appreciate the item. Let me just say
right off, one of the independent auditors who is handling the
Agency for International Development, I will just tell you, and
I have talked to the chairman about that, there is an agency
that I think hasn't had enough auditing. I think in Afghanistan
the big scandal is not going to be what has happened with the
war but what hasn't happened with economic development. And
with your encouragement of going from a few agencies, would you
just discuss the aspect of rather than proving, expanding it in
an evolutionary way, now it has been kind of encouraged to be
revolutionary and sort of be much broader originally? Is there
a degree of discomfort for the fact that we may regret that we
haven't done one or the other? I mean done one first and then
phased in the next?
Mr. Larson. Well, I think this would be what President
Obama has called the ``fierce urgency of now.'' And as
Chairwoman Watson pointed out, with the severity of the times
we find ourselves in, indeed in uncharted waters, and the need
for us to have more expertise, more oversight, and more
independent hands on the wheel, whether it was benign neglect
or whether it was someone asleep at the switch, I think the
American public has demanded that we have this kind of
independent oversight and review. As my grandfather Nolan used
to say, trust everyone but cut the cards.
Mr. Bilbray. Well, let me just say that, you know, there
was that old saying that if you can keep your head cool and
calm while everybody else is losing it, you obviously don't
understand the magnitude of the problem. [Laughter.]
But a dirty little secret is everybody knows that I surf
but they don't know I do a lot of sailing. And I remember
somebody who was sailing in Mexico with me one time said, you
know when we are in trouble and when we are in danger when
Brian is quiet and introverted. I think sometimes keeping cool
and not panicking, not just doing something is a very important
part of a crisis.
I just want to make sure we make a diligent step here
because I do worry about how quickly we are jumping to things
because of crisis. And remember, the line that you have to do
something is what one lemming says to the other before jumping
off a cliff. So I want to make sure that we do have that. I
think that you have a good, sound proposal here. I just think
that those of us by definition on oversight have to make sure
that it is not a cliff but actually a step up in the direction
we want to go. And I yield back, Madam Chair.
Ms. Watson. Thank you. We are now going to take a brief
recess. We will reconvene, I imagine it will be around 3:30
p.m. So thank you so very much Mr. Larson.
Mr. Larson. I thank the Chair, I thank the ranking member,
and I thank our distinguished Chair and all the committee
members for their time.
[Recess.]
Ms. Watson. We are now going to start with the second
panel. It is a policy of the Committee on Oversight and
Government Reform to swear in all witnesses before they
testify. I would like to ask Mr. Kepplinger, I think you are
the first in this set, to rise and raise your right hand.
[Witness sworn.]
Ms. Watson. Let the record reflect that the witness
answered in the affirmative. I would now like to introduce Mr.
Gary L. Kepplinger, who serves as the General Counsel of the
Government Accountability Office. Prior to his appointment in
2006, he served as Deputy General Counsel and Managing
Associate General Counsel in charge of accounting,
appropriations, information management, and special
investigation matters. And I ask that the current witness give
a brief summary of your testimony. Keep the summary, if you
can, under 5 minutes in duration. Your complete written
statement will be included in the hearing record. Thank you and
you may begin.
STATEMENT OF GARY L. KEPPLINGER, GENERAL COUNSEL, GOVERNMENT
ACCOUNTABILITY OFFICE
Mr. Kepplinger. Thank you, Madam Chairwoman. It is always a
challenge for me to stay under 5 minutes but I am going to give
it my best shot.
Our Nation is currently in the midst of one of the worst
financial crises since the Great Depression. As we recently
reported, the current U.S. financial regulatory system has
relied on a fragmented and complex arrangement of Federal and
State regulators that has not kept pace with major developments
in financial markets and products, let alone with their
associated risks. It is now quite apparent that the U.S.
financial regulatory system is ill suited to meet the Nation's
needs in the 21st century and that significant reforms are
critically needed. Both the Congress and the administration are
considering a number of options aimed at strengthening the
financial regulatory system to reduce the likelihood that the
Nation will experience a similar financial crisis in the
future. Effective oversight is an important part of any
consideration in modernizing our current outdated system.
House of Representatives 885, the Improved Financial and
Commodity Markets Oversight and Accountability Act, would
provide for the Inspectors General at selected financial
regulatory agencies, namely the Board of Governors of the
Federal Reserve System; the Commodity Futures Trading
Commission; NCUA, the National Credit Union Administration;
Penny Benny, the Pension Benefit Guarantee Corp.; and the
Securities and Exchange Commission, to be appointed by the
President with Senate confirmation. These IGs are currently
appointed by their agency heads and can be removed by their
agency heads with advanced notification to the Congress. In our
opinion, House of Representatives 885 would enhance the
independence of these IGs either under the current financial
regulatory system or a modernized system.
In the past, Congress has taken actions to convert IGs from
appointment by their agency heads to appointment by the
President as a way to enhance independence. On the heels of the
savings and loan and banking crisis two decades ago, Congress
converted the IG at the Federal Deposit Insurance Corporation
from agency appointment to appointment by the President due to
the perceived limitation of the IG's independence resulting
from the appointment process. In another example, Congress
converted the Tennessee Valley Authority IG from appointment by
the agency head to appointment by the President because of
concerns about management interference with the IG's oversight.
And there are others. In both of the examples I talked about,
Congress recognized that changes in the appointment of the IGs
would enhance their independence.
As we have noted in prior reports and testimony,
independence is one of the most important elements of an
effective IG function. Professional auditing standards, the
Generally Accepted Government Auditing Standards [GAGAS] that
are issued by the Comptroller General, recognize that audit
organizations located in government entities, including IGs
appointed by their agency heads, can meet the requirement for
organizational independence. Much of the IG Act provides
specific protections for IGs to ensure that the audit and
investigative functions located within the agency being
reviewed is insulated from inappropriate management pressure.
However, the difference in the appointment and removal
processes between Presidentially appointed IGs and those
appointed by their agency heads results in a clear difference
in the level of IG organizational independence. In this regard,
I think we would all agree with the common sense proposition
that the further removed the appointment source is from the
entity to be audited, the greater the level of independence.
And I think the flip of that is similar with respect to the
removal authority.
The recently enacted IG Reform Act of 2008 amends the IG
Act to further enhance the independence of the IGs. The agency
appointed IGs will now be required to be selected without
regard to political affiliation and solely on the basis of
integrity and defined abilities, just like IGs appointed by the
President.
In addition, the Reform Act enhances the independence of
the IGs by requiring notification to the Congress of the
reasons for an IG removal or transfer at least 30 days prior to
any such action rather than after the fact notification. The
Reform Act also created the Council of IGs on Integrity and
Efficiency to replace the administratively created councils
that governed the Presidentially appointed IGs and those of
agency heads. The new IG Council is expected to aid the IG
community and foster Government-wide efforts to coordinate and
improve IG oversight.
Currently, considerable debate is underway over whether and
how current financial regulatory systems should be changed,
including calls for consolidating regulatory agencies,
broadening certain regulators' authorities, or subjecting
certain products or entities to more regulation. A strong,
independent, and coordinated IG oversight and accountability
function should be an important element of this reform.
That is the end of my statement. I would be happy to take
any questions, Madam Chair.
[The prepared statement of Mr. Kepplinger follows:]
[GRAPHIC] [TIFF OMITTED] 56375.003
[GRAPHIC] [TIFF OMITTED] 56375.004
[GRAPHIC] [TIFF OMITTED] 56375.005
[GRAPHIC] [TIFF OMITTED] 56375.006
[GRAPHIC] [TIFF OMITTED] 56375.007
[GRAPHIC] [TIFF OMITTED] 56375.008
[GRAPHIC] [TIFF OMITTED] 56375.009
[GRAPHIC] [TIFF OMITTED] 56375.010
[GRAPHIC] [TIFF OMITTED] 56375.011
[GRAPHIC] [TIFF OMITTED] 56375.012
[GRAPHIC] [TIFF OMITTED] 56375.013
[GRAPHIC] [TIFF OMITTED] 56375.014
[GRAPHIC] [TIFF OMITTED] 56375.015
[GRAPHIC] [TIFF OMITTED] 56375.016
Ms. Watson. We are attempting, as you have heard, to really
improve the efficacy of this particular position. Is there
anything else that you would suggest to make this a more
independent agency and a more reliable one? It is all going to
come down with your evaluations and your recommendations, so
what are we missing that you would like to see?
Mr. Kepplinger. We have approached the issue also from a
slightly different perspective. A number of the IGs, CFTC, SEC,
I think they are relatively small in size. Another approach
would be to consolidate those audit functions into existing,
Presidentially appointed IGs. We had offered the concept before
that you could make CFTC and SEC part of the Treasury IG and
NCUA part of the FDIC IG's Office and Penny Benny part of the
Department of Labor IG Office. Those are all Presidentially
appointed IGs. We had in the past recommended that the IG at
the Federal Reserve be Presidentially appointed because of the
significance of the functions and the activities of that agency
and its size.
Ms. Watson. What bothers me is the politicizing of the IG
reports and also the fact that the ideology from the
administration is part and parcel of the IGs' function and
office. So when you say political appointment, how can we guard
against politicizing that particular position and the ideology
that person might carry that aligns itself with the President?
Mr. Kepplinger. I am a lawyer. I approach things as a
lawyer. I would note that with respect to the DFEs, as a result
of your colleagues, Mr. Cooper and Senator McCaskill's effort,
that the DFE IGs, those that are agency head appointed, they
are now supposed to be appointed without regard to political
affiliation and solely on the basis of integrity and the
defined abilities that would be relevant to an IG. That has
been the law with respect to Presidential IGs since 1978. It
was made explicit for DFEs in 2008.
Ms. Watson. The turmoil that we are in at the current time
and the fact that we are at a crisis unseen before, maybe even
worse than it was at the end of the 1920's and 1930's, my
concern is that the IG report be absolutely impeccable and
represent the facts as they are found. Is there an evaluation
component that we can add in that might help? I know you do
recommendations at the end of your reports.
Mr. Kepplinger. I am the General Counsel in an audit
organization and I agree with you 110 percent, Madam Chair,
that the objectivity and the credibility of the audit
organization is its most important asset. And we at GAO are
very, very, very, very protective of our objectivity and
credibility. With respect to the IGs and the audit communities,
there is now the Council of IGs for Integrity and Efficiency
that has an integrity committee that looks at wrongdoing
amongst the IGs. There are also peer reviews of their
organizations and their activities. I believe it is on a 3-year
cycle. And, you know, that should go a long way to ensuring the
quality of the work of the auditors.
Ms. Watson. Thank you for that. I would like to announce
the presence of Congresswoman Jackie Speier who hails out of
California, one of my colleagues many, many years ago in one of
my other lives. Welcome to the committee and I welcome your
presence here. Would you like to address Mr. Kepplinger with
questions?
Ms. Speier. Thank you, Madam Chair. I am honored to serve
on this committee with you. Mr. Kepplinger, I couldn't be more
in agreement with you, maybe more violently so, than you have
already expressed. I believe strongly that the Inspector
General function in this country has to be made stronger and
more independent than it is right now. And I would agree with
you that we should get rid of the agency appointed Inspectors
General. I read in the analysis, Madam Chair, that there
actually have been examples where recent investigations of IG
Offices at the National Aeronautic and Space Administration and
the Department of Commerce have raised some concerns because
there just is a closeness that exists when you are actually
appointed by that entity.
It brings to mind a case in California, I believe after you
left, where there were horrendous problems in the Department of
Corrections. The investigations unit at the Department of
Corrections was not operating properly. And I carried
legislation to create an Inspector General that was independent
of the department and that was appointed by the Governor for a
specific timeframe so that if the Governor didn't like the
kinds of inspections or the reports that the Inspector General
came up with, that would not prevent the Inspector General from
continuing to be in office. So I do applaud that kind of an
approach.
I think we really should get rid of the appointed
Inspectors General from the departments. I am curious, Mr.
Kepplinger, what your feelings are about term limits or at
least a fixed term, I should say? And you can bleed a
particular agency or starve a particular entity by just not
giving it enough resources, so how do you guarantee the
independent funding of an Inspector General's Office that is
adequate to do the job?
Mr. Kepplinger. Ms. Speier, there are I think about three
questions in there and hopefully my memory will permit me to
answer all three. First, with respect to the issue of the
appointment, you know, it is a two sided coin, independence. To
a certain extent, once you are appointed and you have the
position, your real concern is more often focused on who can
remove you. And my point has been the further removed you are
from the entity you are auditing, the more independent you are
going to be. So I think we are in violent agreement, maybe not
mob violent, but violent agreement.
With respect to the issue of term limits, the IGs are, I
think, fairly characterized as executive branch employees. Term
limits that limit the President's authority to oversee and to
remove could pose significant issues in terms of the
Executive's authority. There are, certainly, the Comptroller
General who has as a unique position and other legislative
Article 1 entities like the Court of Claims who have term
positions. There are only a few.
Well, the one executive branch position that has a term
that I can think of is the Director of FBI. And that is because
of the desire, and I think it is a political accommodation, not
necessarily a legal one, but it is a political accommodation,
between the two Branches that the FBI's need to be independent,
credible, and objective in its investigations and enforcement
actions, if you will, argue in favor for a term limit. I think
it is a 7-year term for the Director of the FBI.
Now, you had one other question and it is escaping my
memory at this point. I was happy to see people up here with
the purple banners in favor of Alzheimer's because at times I
feel I have early stage dementia. But if you can remember your
third question, I had a response for it.
Ms. Speier. It was the funding issue and how you can starve
an Inspector General's Office as a way of putting them out of
business?
Mr. Kepplinger. Well, I would commend again Mr. Cooper and
Senator McCaskill because in the 2008 Reform Act a process was
put in place to make the IGs' articulation of their funding
needs transparent through the budget process.
Ms. Speier. But let us say that an Inspector General is
doing very good work but is embarrassing an administration. The
budget for that Office could be reduced in a way that would
then limit the ability of that Inspector General to do his or
her job.
Mr. Kepplinger. Under the Reform Act, the IGs' comments
about their funding needs is part of the President's budget
when submitted for the IG's account so it has transparency. And
presumably it would be a matter for the appropriations process
to deal with what is the right amount.
Ms. Speier. Thank you.
Ms. Watson. Thank you very much. I would like now to go to
our Member from Tennessee, Mr. Duncan.
Mr. Duncan. I have just a couple of questions since I just
got here. Let me ask you, Mr. Kepplinger, are there any powers
that a Presidentially appointed IG has that other Inspectors
General do not have?
Mr. Kepplinger. No, generally I think they have the same
scope of authority.
Mr. Duncan. All right.
Mr. Kepplinger. There are a few exceptions but even those
exceptions cut across Presidential appointees and agency head
appointees.
Mr. Duncan. All right. And I have noticed that with the
exception of the top Cabinet members, it sometimes takes an
awfully long time to get people appointed, like U.S. attorneys
and so forth. It seems that they put them though a needlessly
lengthy investigation of 13 or 14 months sometimes. How long
has it generally taken to get a Presidentially appointed IG
into office? Do you know?
Mr. Kepplinger. Off the top of my head, I do not know.
Mr. Duncan. All right. Thank you very much.
Ms. Watson. Thank you so much. And thank you, Mr.
Kepplinger for coming. I have one more question and it is a
short one. Do we have enough protection in the long run for
whistleblowers?
Mr. Kepplinger. My response is yes. And I haven't, Madam
Chair, made a study of this except in one regard. Legislation
passed in the last Congress established a statutory IG in GAO.
This was a first for us. And in the process of doing that, we
transferred the whistleblower protections that are currently in
place for the IGs into our own statute and made them applicable
for our employees and our IG. At the time, my sense was that
those were really quite adequate. But leaving open the
possibilities that there is always an opportunity for
improvement, my general response would be yes, I think they are
adequate. But I don't say that with a heck of a lot of
confidence or prior review of that issue. OK?
Ms. Watson. The committee would like to thank you for your
time and the information you have shared with us. Thank you
very much.
Mr. Kepplinger. Thank you very much. It was my pleasure.
Thank you.
Ms. Watson. Thank you. OK, it is now time to turn to the
third and the last panel. If they would come up to the table, I
will swear them in. Right now we are in recess for a couple of
minutes while the current witnesses come to the table.
[Recess.]
Ms. Watson. It is the policy of the Committee on Oversight
and Government Reform to swear in all witnesses before they
testify. All of you are in place now. Would you raise your
right hands?
[Witnesses sworn.]
Ms. Watson. Thank you. You may be seated. Let the record
reflect that the witnesses answered in the affirmative. I would
now like to take a moment to introduce our panel. Before we
begin, I will note for the record that Ms. Elizabeth A.
Coleman, the Inspector General of the Board of Governors of the
Federal Reserve System was invited to testify today but was
unable to join us. She did, however, submit a statement for the
record. Without objection, we will enter that into the record.
First I would like to introduce Mr. H. David Kotz. He is
the Inspector General of the Securities and Exchange
Commission. There he conducts audits and investigations of both
agency functions and self-regulatory organization activities.
Prior to his service at the SEC, he served as the Inspector
General of the Peace Corps and as Assistant General Counsel.
The next is Mr. William DeSarno. He is the inspector
general of the National Credit Union Administration. There he
developed his Office's first strategic plan and oversees all,
including planning, budget, and staffing, issues. Mr. DeSarno
began his NCUA career in 1997 as Assistant Inspector General
for Audits and was named Inspector General in 2005.
Then there is Mr. A. Roy Lavik. He is the Inspector General
of the Commodities Futures Trading Commission. He has over 25
years of Federal experience primarily in the area of anti-trust
and regulatory law. He has served in his current position since
1990. Prior to his time at CFTC, he worked at both the Federal
Reserve Board and the Federal Trade Commission.
And next we have Ms. Vanessa K. Burrows, a Legislative
Attorney in the American Law Division of the Congressional
Research Service. There she serves as an issue expert on
matters relating to Inspectors General throughout the
Government.
And then Mr. Clark Kent Ervin--Clark Kent, I love that--Mr.
Clark Kent Ervin, the director of the Aspen Institute's
Homeland Security Program. He joined the Institute in 2005.
Before doing so, he served as the first Inspector General of
the U.S. Department of Homeland Security from January 2003 to
December 2004. Prior to his service at DHS, he served as the
Inspector General of the U.S. Department of State and the
Broadcasting Board of Governors.
And finally, Ms. Danielle Brian serves as the executive
director of the Project on Government Oversight [POGO], a non-
profit, non-partisan watchdog organization that works with
whistleblowers and government insiders to expose corruption,
fraud, and abuse of power. She began her career with POGO in
1986 and has degrees from Smith College and Johns Hopkins
University.
I will ask that each of the witnesses now give a brief
summary of their testimony and to keep this summary, if you
can, under 5 minutes in duration. Your complete written
testimony will be included in the hearing record. And so we
will start now with Mr. Kotz. Please proceed.
STATEMENTS OF H. DAVID KOTZ, INSPECTOR GENERAL, U.S. SECURITIES
AND EXCHANGE COMMISSION; WILLIAM DESARNO, INSPECTOR GENERAL,
NATIONAL CREDIT UNION ADMINISTRATION; A. ROY LAVIK, INSPECTOR
GENERAL, COMMODITIES FUTURES TRADING COMMISSION; VANESSA K.
BURROWS, LEGISLATIVE ATTORNEY, CONGRESSIONAL RESEARCH SERVICE;
CLARK KENT ERVIN, DIRECTOR, HOMELAND SECURITY PROGRAM, ASPEN
INSTITUTE; AND DANIELLE BRIAN, EXECUTIVE DIRECTOR, PROJECT ON
GOVERNMENT OVERSIGHT
STATEMENT OF H. DAVID KOTZ
Mr. Kotz. Good afternoon. Thank you for the opportunity to
testify today before this subcommittee as the Inspector General
of the Securities and Exchange Commission. In my testimony
today, I am representing the Office of Inspector General. The
views I express are those of my Office and do not necessarily
reflect the views of the Commission or any Commissioners.
The mission of the Office of Inspector General is to
promote the integrity, efficiency, and effectiveness of the
critical programs and operations of the SEC. This mission has
become increasingly important in light of the current economic
crisis facing our Nation. My philosophy as an Inspector General
is to focus on the significant issues and high risk areas,
looking at big picture items relating to whether the programs
and operations in the agency are working effectively rather
than simply identifying isolated minor infractions or
procedural violations. I believe that this approach is
particularly important in light of current market conditions
and the significant challenges facing the SEC and other
governmental agencies that regulate our financial markets.
I believe it is more important than ever that financial
regulatory agencies such as the SEC have an independent,
effective, and fully funded Office of Inspector General to
assist the Commission in confronting these challenges. I am
proud to report that over the past 14 months that I have served
as the SEC's Inspector General, our Office has risen to these
challenges and then some. Notwithstanding a small staff, we
have issued numerous audit and investigative reports discussing
issues critical to SEC operations and the investing public and
making significant recommendations for improvement. Many of
these reports have been critical of SEC operations, programs,
and management. And I have not always been the most popular
individual at my agency. Nonetheless, I feel it is my duty to
the Commission, the Congress, and the investing public,
particularly in these challenging times to conduct independent
audits and investigations and to issue thoughtful, unbiased,
and frank reports.
I will provide you just a few examples of recent activities
undertaken by my Office, some at the request of congressional
committees. In September 2008, our audit unit issued a
comprehensive report analyzing the Commission's oversight of
the SEC's Consolidated Supervised Entities [CSE], program which
included Bear Stearns, Goldman Sachs, Morgan Stanley, Merrill
Lynch, and Lehman Brothers. The audit identified significant
deficiencies in the CSE program and provided 26 recommendations
to improve the Commission's oversight of the CSE firms.
In response to the report's findings, former SEC Chairman
Christopher Cox announced the end of the CSE program and
promised to review and move to aggressively implement the
report's recommendations. The Office of Inspector's General
audit unit also issued a second report during that same time
period analyzing the Commission's Broker-Dealer Risk Assessment
Program and made several recommendations to improve that
program.
More recently, my Office has issued several other
significant audit reports. In February we issued an audit
report that analyzed the $178 million in disgorgement waivers
that the Division of Enforcement had granted between October
2005 and May 2008. We found that proper procedures were not
always followed in recommending these waivers and provided
several recommendations designed to improve the process. Just
last week we issued a comprehensive audit report on
Enforcement's practices and procedures for responding to and
processing naked short selling complaints. Our report concluded
that Enforcement's existing complaint receipt and processing
procedures hinder its ability to respond effectively to naked
short selling complaints and that Enforcement's procedures
result in naked short selling complaints being treated
differently than other types of complaints. We are also
currently working on several additional audit reports that we
plan to issue in the upcoming month that address issues
currently of concern to the Commission and the investing
public, including a comprehensive analysis of the SEC's
oversight of the credit reporting agencies which may have
played a critical role in the current economic crisis.
We also have a vibrant and vigorous investigative unit that
under my direction is conducting or has completed over 50
comprehensive investigations of allegations of violations of
statues, rules, regulations, and other misconduct. These
investigative reports have been issued without management
influence or pressure and have focused on all levels of
employees including senior SEC staff. In addition, we are
currently conducting a comprehensive investigation and
evaluation of matters related to Bernard Madoff and affiliated
entities.
In late December 2008, former SEC Chairman Chris Cox
contacted me and asked my Office to undertake an investigation
into complaints received by the SEC regarding Mr. Madoff going
back 10 years and the reasons why the agency found these
complaints lacked credibility. Since that time, we have been
working at a rapid pace to perform this important work and have
made substantial progress to date. We have determined that the
matters that must be analyzed regarding the Madoff
investigation go well beyond the specific issues that former
Chairman Cox asked us to investigate. Therefore, our oversight
efforts will include an evaluation of broader issues regarding
the overall operations of the SEC. We intend to provide
overarching and comprehensive recommendations to ensure that
the SEC is able to fulfil its mission.
In order to strengthen the oversight of Federal financial
regulatory structure as a whole, my Office works in tandem with
other Federal financial regulatory IGs to provide coordinated
oversight. For example, I currently serve on the Troubled
Assets Relief Program [TARP], Inspector General Council along
with the Special IG from the TARP and IGs from several
financial regulatory agencies as well as the GAO which meets to
discuss coordination of TARP related activities and oversight
efforts. I also meet separately every month with additional
Federal financial regulatory IGs to discuss coordinated
oversight efforts among the financial regulatory IG community.
I greatly appreciate the subcommittee's interest in
assisting the IGs in performing their critical work. The
recently enacted amendments to the Inspector General Act made
great strides in enhancing Inspector General independence and
ensuring that the Inspectors General receive sufficient
appropriated funds to achieve their mission. The improvements
in this legislation include the requiring of advance notice to
Congress of the removal of an IG as well as provisions
establishing pay parity on the part of both Presidentially
appointed and Designated Federal Entity [DFE] IGs.
Since I began my tenure as Inspector General of the SEC in
December 2007, my Office's staffing levels have increased by
nearly 80 percent and I have requested an increase of our
overall budget of nearly 30 percent for fiscal year 2009, which
I understand will be processed as soon as the funds become
available. Notwithstanding these increases, additional
resources would greatly assist my Office in continuing its
important work. I specifically suggest that to the extent
Congress provides additional appropriations to agencies such as
the SEC for increased enforcement efforts, there be a
commensurate and proportionate funding to the corresponding
Office of Inspector General to provide for oversight of the
additional funds allotted to the agency.
Additionally, the legislation recently passed by the Senate
to provide the Special Inspector General for the TARP
[SIGTARP], with additional authorities and responsibilities is
illustrative of measures that may be enacted to enhance
Inspector General independence and effectiveness. For example,
the SIGTARP legislation requires the Secretary of the Treasury
to take action to address deficiencies identified by a report
or investigation of the SIGTARP or to certify to the
appropriate committees of Congress that no action is necessary
or appropriate.
Finally, I respectfully offer my opinion that converting
IGs from DFE to Presidentially appointed is not necessary and
in my view would not improve the current level of DFE IG
oversight. Having been an Inspector General at two DFEs, at the
Peace Corps and now at the SEC, I can state without any
hesitation that one can be a completely independent and
effective Inspector General within the DFE structure. Although
I have issued numerous reports at both agencies that have been
critical of those agencies' operations and management, no one
has ever attempted to impair or question my independence. In my
personal situation at the SEC, my Office's reports and approach
to oversight have not diminished in any way with the recent
change in administration or appointment of a new SEC chairman.
I can report that politics play absolutely no role in my
Office's decisions. For this reason, I do have some concerns
that converting the Inspector General of the SEC or the IGs of
other financial regulatory agencies from DFE to Presidentially
appointed IGs could result in unnecessarily politicizing the
Office of Inspector General. There are additional potential
drawbacks to the Presidentially appointed IG process including
the often lengthy vetting and confirmation process that may
lead to the IG position being vacant for a significant period
of time. During this time of financial crisis, it is more
important than ever that there is continuity of the operations
and oversight activities currently undertaken by IGs of
financial regulatory agencies.
In conclusion, I greatly appreciate this subcommittee's
interest in the SEC and my Office. I believe that the
subcommittee's and Congress's involvement with the SEC is
extremely important to strengthen the accountability and the
effectiveness of the Commission. Thank you.
[The prepared statement of Mr. Kotz follows:]
[GRAPHIC] [TIFF OMITTED] 56375.017
[GRAPHIC] [TIFF OMITTED] 56375.018
[GRAPHIC] [TIFF OMITTED] 56375.019
[GRAPHIC] [TIFF OMITTED] 56375.020
[GRAPHIC] [TIFF OMITTED] 56375.021
[GRAPHIC] [TIFF OMITTED] 56375.022
[GRAPHIC] [TIFF OMITTED] 56375.023
[GRAPHIC] [TIFF OMITTED] 56375.024
[GRAPHIC] [TIFF OMITTED] 56375.025
[GRAPHIC] [TIFF OMITTED] 56375.026
[GRAPHIC] [TIFF OMITTED] 56375.027
[GRAPHIC] [TIFF OMITTED] 56375.028
[GRAPHIC] [TIFF OMITTED] 56375.029
Ms. Watson. Before we proceed, I have a question. You said
something when you were referring to complaints that you were
receiving from, I guess, whistleblowers, people on staff, and
so on. You said they lacked credibility. Now, did I hear you
correctly? Would you expand and explain what you said about the
credibility?
Mr. Kotz. Sure. In connection with the Madoff
investigation, what we are investigating in the Bernard Madoff
investigation is why is it that the SEC, not our Office but the
SEC Enforcement Division, received complaints. There was one
whistleblower, Harry Markopolos, who came forward with a
complaint stating that he believed that Bernard Madoff was
engaged in illegal activity and that complaint went to the SEC.
It didn't go to the IG's Office, it went to the SEC.
And obviously the SEC did not find that there was a Ponzi
scheme because that did not come out until Bernard Madoff
confessed on December 11th. So our investigation is to look at
why it was that the SEC received these complaints and
nevertheless was unable to find the Ponzi scheme. And that was
the concern about credibility.
Ms. Watson. That came from the SEC?
Mr. Kotz. Yes, right.
Ms. Watson. OK. I just wanted to place it where it should
be.
Mr. Kotz. Yes, yes.
Ms. Watson. Thank you.
Mr. Kotz. Thank you.
Ms. Watson. We will now proceed to Mr. DeSarno.
STATEMENT OF WILLIAM DESARNO
Mr. DeSarno. Chairwoman Watson and members of the
subcommittee, I appreciate this opportunity to come before you
today and testify on matters concerning the independence and
authority of Designated Federal Entity Inspectors General,
including House of Representatives 885. I thank you for calling
this hearing and for your support of the IG community.
My name is William DeSarno, inspector general of the
National Credit Union Administration, whose primary mission is
to ensure the safety and soundness of federally insured credit
unions. I was appointed to the IG position at NCUA in 2005
after having served since 1997 as assistant IG for Audits and
then deputy IG at NCUA. Previously I was an audit manager at
the Department of the Treasury, Office of Inspector General and
before that an audit manager at what is now the Government
Accountability Office. Finally, I began my Federal career 41
years ago in the U.S. Army where I served in Vietnam.
The NCUA Board appointed its first IG in 1989 in the wake
of the 1988 amendments to the IG Act of 1978 which created
statutory IGs at smaller Federal entities. The NCUA Board and
the OIG have worked hard over this 20 year period to establish
a relationship built on mutual respect and trust. House of
Representatives 885 would amend the IG Act to make the IG at
the NCUA an establishment IG appointed by the President and
confirmed by the Senate. I do not believe that this change in
the IG status at NCUA would enhance either the independence or
the effectiveness of the IG. Rather, I believe it would work to
the detriment of the IG role at NCUA.
My independence as IG at NCUA has not been hampered because
I was appointed by the NCUA Board. To the contrary, the Board
has never attempted to interfere with an IG audit or
investigation. Indeed, the NCUA Board has consistently
expressed high expectations for oversight, stated its
intolerance of fraud and abuse, and paid close attention to IG
findings.
The NCUA OIG, while small, has historically been adequately
staffed and with adequate resources to carry out its statutory
obligations. My Office formulates its own budget and has a
separate line item in the agency's budget. The NCUA Board has
consistently supported my staffing needs.
The NCUA IG has had its own counsel since 1990 who reports
exclusively to the Inspector General. The NCUA Board has also
consistently approved funding for contract help when I have
requested it. And let me also add that our audit and
investigation reports are in no way filtered through either the
Board or the chairman's office prior to issuance.
Prior to the enactment of the IG Reform Act, the only area
where the NCUA IG did not enjoy similar stature with other
senior managers at NCUA was in the area of pay where the IG was
paid significantly less than other NCUA senior staff. This
situation was further exacerbated because the IG did not accept
bonuses or cash awards as other NCUA senior managers regularly
did. With the agency's implementation of the IG Reform Act's
pay provisions, the IG salary was elevated to the average of
the other senior managers and the pay disparity was resolved.
Were House of Representatives 885 to pass, the Presidentially
appointed IG's pay would be significantly less than the average
total compensation of NCUA's senior level managers. Moreover, a
Presidentially appointed NCUA IG could end up with an annual
salary less than some of his or her subordinates in the OIG.
This is precisely the outcome the IG Reform Act of 2008 sought
to and did correct.
Due to the current challenges facing the entire financial
services industry, the NCUA OIG has a critical role in its
oversight and accountability functions. For example, my Office
has seen a growing material loss review workload in the past
year. This work is mandated by the Federal Credit Union Act and
the OIG currently has an unprecedented number of reviews either
underway or in the planning process. We have redirected most of
our audit resources to this review work. Were a Presidential
appointee to replace an IG who is familiar with the unique
nature of the credit union industry as well as the day to day
functioning of an IG Office, the potential disruption to OIG
operations in completing this critical work would, I believe,
be significant.
A final concern I have should House of Representatives 885
change the appointment status of DFE IGs is that the selection
process risks politicization which would significantly threaten
IG independence. Congress required that IGs be nonpartisan and
that the President appoint them without regard to political
affiliation. In the 20 years that the IG concept has existed at
NCUA, the NCUA Board has never appointed an IG on the basis of
political affiliation.
In conclusion, while I do not speak for the NCUA Board or
the other DFE IGs, I do not believe that House of
Representatives 885 would enhance the independence already
afforded the NCUA IG. With the greater protections and enhanced
independence afforded IGs by the IG Reform Act of 2008, the
NCUA IG is well suited to carry out the responsibilities
mandated by the act. Thank you again for the opportunity to
appear before this subcommittee and I would be pleased to
answer any questions you might have.
[The prepared statement of Mr. DeSarno follows:]
[GRAPHIC] [TIFF OMITTED] 56375.030
[GRAPHIC] [TIFF OMITTED] 56375.031
[GRAPHIC] [TIFF OMITTED] 56375.032
[GRAPHIC] [TIFF OMITTED] 56375.033
Ms. Watson. Thank you so much. Mr. Lavik.
STATEMENT OF A. ROY LAVIK
Mr. Lavik. I appreciate as the others do the opportunity to
come before you all and give our view of the legislation and
what we think is probably happening. And again, I will stand
ready for questions. I don't think, given the time and so on
that I will regurgitate my statement here. But let me just
concentrate on a couple of things.
One is the independence issue. And I can only speak for my
own agency, not for the others. But for example, some time ago
we investigated the chairman of our agency because there was a
question of whether she had replaced someone at the behest of
the White House or whether it was because of her own feelings
about the situation. It was someone who we found was not, she
just didn't like the head of the enforcement. But that shows
you that we certainly were independent. I will give her much
credit. She is now Mr. Kotz's boss in a sense. She is now
chairman of the SEC, a very good person.
We also more recently looked in at the behest of four
Senators on the question of the huge price increase for barrels
of oil this last July. It was called an interim report and was
issued by CFTC staff and staff from other economic regulatory
agencies. And what we found there is that in fact there had
been a change in classification of one of the large oil
companies into what is called speculative. That is a bad word
these days. I am not so sure it should always be bad, but it is
and at least it should be explained readily what was going on.
We found that the agency had reclassified appropriately.
The problem was that unless you were an expert in the field,
someone who is constantly in it, you would not have understood
the push and the shove of that. And we noted that in our report
to the four Senators that there had been an inadequate
explanation. I cite this again as an indication of
independence. This was lobbying the chairman, not just the CFTC
but other entities.
The other thing I would say about House of Representatives
885 is, there is an old cliche, you get what you pay for. And
that is not always true. We had a chairman just prior to that
who was willing to take the pay salary because he made a hell
of a lot of money in the investment banking business. You can
find that. But there are those of us who haven't and have kids
in college and so on. Pay is a big consideration.
I can tell you at my agency, and I think it is true of
others but I will let them speak themselves, and I can be
objective about this because I am at such an age I probably
won't be around for more than another year or two, but my pay
would be decreased on the order of about $40,000 a year. And
that is relative to the other people at the CFTC. Now, if that
is Congress's will, that is fine. I mean, that is your
responsibility.
But it seems to me, as you might guess given my advice,
perverse. If you want to have good people, generally you have
to pay for it. And I think cutting someone's salary $40,000,
and again, I can be semi-objective because I don't plan to be
around much longer, but I think this is something you ought to
really think about and make your decision. That is all I really
have to say. If you have any questions, whenever it will be
fine.
[The prepared statement of Mr. Lavik follows:]
[GRAPHIC] [TIFF OMITTED] 56375.034
[GRAPHIC] [TIFF OMITTED] 56375.035
[GRAPHIC] [TIFF OMITTED] 56375.036
[GRAPHIC] [TIFF OMITTED] 56375.037
Ms. Watson. Thank you so much. And now Ms. Burrows.
STATEMENT OF VANESSA K. BURROWS
Ms. Burrows. Thank you, Madam Chairwoman. Chairwoman Watson
and members of the subcommittee, thank you for inviting me here
today to comment on proposed changes effecting Offices of
Inspectors General in House of Representatives 885. In
particular, my testimony will focus on differences between the
IGs located in Federal establishments and IGs located in the
Designated Federal Entities. DFE IGs are typically found in the
smaller agencies. Establishment and designated Federal entity
differ in terms of their removal, appointment, transfer,
budgets, applicable hiring laws, avenues for seeking legal
counsel, and pay.
The most notable difference between establishment IGs and
Designated Federal Entity IGs is the individual who appoints
and who may remove or transfer the IG. Establishment IGs are
appointed by the President, as you know, with the advice and
consent of the Senate. They may be removed or transferred only
by the President except in case of impeachment. Designated
Federal Entity IGs are appointed and may be removed or
transferred by the agency head except in the case of
impeachment. My written statement discusses the potential
advantages and disadvantages of converting these five IGs into
Presidentially appointed, Senate confirmed positions.
Another difference between the establishment IGs and the
Designated Federal Entity IGs is that by statue, establishment
IGs receive a separate appropriations account or a line item in
the establishment's appropriations. The Inspector General
Reform Act of 2008 has increased and created additional
safeguards in terms of the budgets of both establishment and
Designated Federal Entity IGs. The IG Reform Act requires the
IG to report an initial budget estimate to the head of the
agency. The agency head must then include this information as
well as comments of the Inspector General when transmitting the
request to the President. The President in turn must then
include in his budget submission the IG's initial budget
estimate, the President's requested amounts, and the comments
of the affected IG if the IG determines that the President's
budget would substantially inhibit the IG from performing his
or her duties.
The two types of IGs also differ in terms of how they may
select their own employees. DFE IGs, the Designated Federal
Entity IGs, are exempt from the sections of the IG Act, and
have always been since their creation in 1988, from the
sections that mandate the selection, appointment, and
employment of officers and employees in the establishment IG
Offices according to civil service employment laws. And that is
because, as Congress indicated in a House Report back in 1988,
some of these entities do not have to follow those laws and are
subject to different laws and regulations.
Establishment and DFE IGs also differ in their ability to
hire counsel or seek legal advice. These changes were created
in the IG Reform Act of 2008, which addressed the use of legal
counsel by the IG and specified that an establishment IG must
seek legal advice from an attorney who they hire under civil
service laws and who reports directly to that IG or to another
IG.
The Reform Act also provided three ways for a Designated
Federal Entity IG to obtain counsel. First, the Designated
Federal Entity IG could obtain counsel from an attorney
appointed by that IG in accordance with the specific laws and
regulations governing appointments in the agency within the
Designated Federal Entity. This counsel would report directly
to the appointing IG.
Second, the Designated Federal Entity IGs, on a
reimbursable basis, could obtain services from a counsel who
was appointed by and who reports to another Inspector General.
Third, the Designated Federal Entity IG may obtain the legal
services of an appropriate person on the newly created Council
of Inspectors General on Integrity and Efficiency.
The IG Reform Act of 2008 also continued preexisting
differences between establishment and Designated Federal Entity
IGs. For example, the Reform Act increased the pay of the
establishment IGs to the rate of Level III of the Executive
Schedule plus 3 percent. And currently Level III of the
Executive Schedule is $126,900. However, it included a
provision which would allow the IGs who currently received
higher pay to continue at that level. The IG Reform Act also
increased the pay of Designated Federal Entity IGs but did not
link them to the Executive Schedule. Some Designated Federal
Entity IGs may make more than their establishment IG
counterparts. The IG Reform Act also provided that Designated
Federal Entity IGs should be classified for pay purposes at a
level at or above the majority of the senior level executives
of the Designated Federal Entity IG such as a General Counsel
or Chief Financial Officer but that their pay could not be less
than the average total compensation including bonuses of those
senior level executives. The Reform Act also provided that the
Designated Federal Entity IGs pay could not increase by more
than 25 percent of the Designated Federal Entity IG's total pay
for the previous three fiscal years.
Madam Chairwoman, that concludes my prepared statement. I
would be happy to answer question that you might have.
[The prepared statement of Ms. Burrows follows:]
[GRAPHIC] [TIFF OMITTED] 56375.038
[GRAPHIC] [TIFF OMITTED] 56375.039
[GRAPHIC] [TIFF OMITTED] 56375.040
[GRAPHIC] [TIFF OMITTED] 56375.041
[GRAPHIC] [TIFF OMITTED] 56375.042
[GRAPHIC] [TIFF OMITTED] 56375.043
[GRAPHIC] [TIFF OMITTED] 56375.044
[GRAPHIC] [TIFF OMITTED] 56375.045
[GRAPHIC] [TIFF OMITTED] 56375.046
[GRAPHIC] [TIFF OMITTED] 56375.047
[GRAPHIC] [TIFF OMITTED] 56375.048
Ms. Watson. Thank you, Ms. Burrows. And now Mr. Ervin.
STATEMENT OF CLARK KENT ERVIN
Mr. Ervin. Thank you, Madam Chair. Thank you very much for
calling this very important hearing. I commend you for your
leadership on this issue.
We are learning the hard way because of the economic crisis
that we are in. the midst of the greatest economic crisis since
the Great Depression, yet again the importance of vigorous
oversight and aggressive regulation. And it is absolutely
critical to oversight that we have independent Inspectors
General. As you see from my prepared remarks, I have made four
recommendations that in my judgment would make Inspectors
General more independent and therefore give them greater
incentive to be aggressive in exercising the oversight
responsibilities that they have been given.
The first one goes, of course, to the very heart of the
legislation that we are considering and that is that I strongly
believe as you do that all of the Inspectors General in the
Federal system, and especially the Inspectors General of these
critical financial regulatory agencies--the Federal Reserve
Board, the Securities and Exchange Commission, the CFTC--be
Presidentially appointed. It simply stands to reason, as Mr.
Kepplinger said. It is a matter of logic that an IG is more
likely to stand up to an agency head if there is a disagreement
between the agency head and the Inspector General as to a
particular audit or investigation if ultimately the Inspector
General cannot be removed by that agency head.
I do not know Mr. Kotz, Mr. DeSarno, and Mr. Lavik. They
are all, I am sure, fine gentleman. I take them at their word
when they say that they themselves have been independent in the
discharge of their responsibilities. I take them at their word
when they say that their respective agency heads, boards, as
the case may be, have never interfered with their work. But
that is beside the point. The point is, I am concerned about
their successors and whether their successors will likewise
have the impeccable character and reputation and ability to
stand up to pressure that they have. We shouldn't make it
harder for Inspectors General to stand up to agency heads. We
should make it easier. And it simply is a matter of logic as I
said. I think it is noteworthy for example, that in Mr. Kotz's
statement, he began essentially by saying, the testimony I am
about to give is my own testimony, that of the Office of
Inspector General and not the SEC. There would be no reason to
say that if he were an appointee of the President. No one would
think that any remarks that he would make in a forum like this
would be those of the SEC.
The second recommendation that I would have is that
Inspectors General like the FBI Director, as Mr. Kepplinger
noted, and I would note another example he could not think of
one during his testimony, but another example of course is the
Federal Reserve chairman, and the Federal Reserve chairman,
which of course is exactly relevant here, likewise have a fixed
term, not term limits, but a fixed term. And the reason for
that, of course, is that these two officials are intended to be
independent from Presidential administrations. Though they are
appointed by a President, this fixed term is intended to
insulate them to the maximum extent possible. It matters less
to me exactly what the term is. It is more important that there
be a term. It would be most helpful if the term were to be long
enough to span Presidential terms. In the case of the FBI
Director, it is 7 years. I would note also, of course, the
Comptroller General has a 15 year term and that is intended to
insulate the Comptroller General from pressure from the
administration and also from the Congress.
Third, of course, Inspectors General are human beings and
therefore they are fallible like everybody else. So on occasion
an Inspector General should be removed from office. But
Inspectors General should be removed only for abusing their
office, not simply for doing their jobs. An aggressive IG will
occasionally, as I say, rub his or her agency head and the
incumbent administration the wrong way. But that is not cause
for removal. At present, a President need only notify Congress
in writing 30 days before he removes an IG that he is doing so
and why, with any reason given being reason enough. I think
that Presidents should have the ability to remove an IG only
for a cause that is spelled out in a statute. That is another
recommendation I would make.
And then fourth, no one to date has mentioned this, but
there are provisions in certain Inspectors General statutes,
Inspectors General who are appointed by the President that even
there limits the ability of the Inspector General to carry out
certain audits and investigations. In particular, there is a
provision in the statute for the Treasury IG that allows the
Treasury Secretary to prevent an Inspector General from
accessing sensitive information concerning deliberations and
decisions on policy matters, the disclosure of which could
reasonably be expected to have significant influence on the
economy or market behavior. As I say in my statement, it is
easy to imagine a situation in which a Treasury Secretary could
prevent an IG from looking at policies with regard to things
like, years ago, subprime mortgage lending and the variety of
exotic financial instruments that lie at the heart of the
present crisis.
So I think that we should look at all of the statutes that
pertain specifically to a given Inspector General and remove
those provisions that allow the agency head, even in those
circumstances where at present an Inspector General is
appointed by the President, that allows the agency head to
prevent an Inspector General from looking at a particular
matter either on the grounds of affecting market conditions or
on national security grounds. There are like provisions in
certain statutes of national security Inspectors General.
Finally, the greater the amount of money, the greater the
complexity of programs an Inspector General has to oversee, the
greater should be the resources given to the Office of
Inspector General. So I hope very much that efforts will be
made to significantly increase the budgets of all of the
financial regulatory Inspectors General during this critical
time. Thank you, Madam Chair.
[The prepared statement of Mr. Ervin follows:]
[GRAPHIC] [TIFF OMITTED] 56375.049
[GRAPHIC] [TIFF OMITTED] 56375.050
Ms. Watson. And thank you. We can now proceed to Ms. Brian.
STATEMENT OF DANIELLE BRIAN
Ms. Brian. Thank you very much, Madam Chairwoman, for
inviting me to discuss one of my favorite topics, the Federal
Inspector General system.
Over the past year and a half, POGO has been investigating
both the independence and accountability of that system. Last
week, we released our second report on IGs. Our first report,
which was released last year, focused specifically on
weaknesses that we believe hampered some of the IGs'
independence and recommended some necessary changes to the law.
The IG Reform Act of 2008, with the terrific leadership from
Congressman Cooper and Senator McCaskill, included most of the
improvements we believe were needed to enhance IG independence.
Since that time, POGO has been examining the other side of
that essential equation for Inspectors General which is
accountability. And we have provided copies of our report to
you today. Holding IGs accountable is a job that needs also to
be embraced more thoughtfully by the Congress and accomplished
more effectively by their peers through the IG Council's
Integrity Committee. But the IG system is not broken. However,
POGO urges the IG community to review its priorities.
The most troubling finding we found in our most recent
report is that IGs all to often treat those complainants or
whistleblowers who come to them with problems in their agencies
as mere afterthoughts. I need to point out this is not a
specific concern regarding the IGs who I share the table with.
But to answer your wonderful question, Madam Chairwoman, of the
earlier panel, I would strongly suggest that at this point
Federal employees do not have adequate whistleblower
protections. And that is no fault of the House. The House has
been regularly stalwart in insisting that Federal employees
have better whistleblower protections. Our problem has been
that the Senate has not accepted the strong recommendations
from the House on that matter so they remain very
underprotected, we believe.
But as our country reels from the economic crisis, we are
relying more on the IGs not only to detect and deter the misuse
of public funds, but to help restore confidence in our
Government's operations. I believe House of Representatives 885
has been offered in that spirit in order to provide IGs of the
financial regulatory agencies the independence that they
require. But I would respectfully suggest that the tools given
IGs in last year's legislation largely accomplish that goal.
And I did want to react to some of the earlier testimony
and offer a couple of cautionary notes. One thing is that IGs
whose behavior has caused concerns about their independence
have far more often actually been Presidential appointees. Two
that were specifically noted before were that of NASA and
Commerce. Those were Presidentially appointed IGs. I was also
very concerned about the discussion of the use of numbers of
audits or investigations as a measure of effectiveness of DFE
IGs as opposed to Presidentially appointed IGs. That is a big
part of the point of the report that we have offered to you. We
don't believe it is a good way to measure the quality of work
of an IG to measure the number of investigations or audits they
complete. I have learned that you can double the number of
audits by cutting in half the subject matter of the audits, and
then suddenly you have double the number of audits. That is not
a useful measure for measuring the quality of an IG. It also
didn't recognize that over half the DFE IG Offices only have a
total of six people. So it is important to keep in perspective
how many of those DFE Offices are just absolutely tiny.
I must admit that when I began focusing on the IG system
over a year ago, I shared the perception that underlies House
of Representatives 885, that DFE IGs are somehow less
independent because they are appointed by their agency heads
rather than the President. I have come to appreciate that in
some cases there is some logic to the DFE structure especially
for those agencies that are headed by a multi-person commission
or board generally filled with bipartisan appointments rather
than having a single agency head.
So it may in fact be the case that some DFE IGs, many of
those are those that are being discussed in this legislation,
are actually more independent because, as one IG put it to me,
I would have to PO five people to be removed as a DFE but as a
Presidential appointee only one person would have to want me
gone.
My second reason for believing that House of
Representatives 885, while very well intentioned, may be
counterproductive is that which was discussed before with
regards to the comparability pay structure because of these
uniquely unusual pay structures for the financial regulatory
agencies. And that would actually reverse the fix that had been
accomplished through last year's legislation.
Finally, while the legislation provides for the current IGs
to remain in place until a Presidential appointee is confirmed,
this change would then undercut the current IGs' authority by
making them acting at a time we would want these IGs to be
confident they can be bold and protected even when they are the
messengers of bad news.
Congress should be applauded for turning to the Inspectors
General and worrying about whether they are able to be the
aggressive watchdogs we need. But if the goal of this
legislation is to strengthen the important work of these IGs, I
would suggest respectfully that we may be focusing on the wrong
issue and that making them Presidential appointments may merely
be a distraction. I would suggest there are a few other changes
that you might consider to enhance their roles. For example,
most of these IGs are currently restricted from accessing
information directly from the regulated entities. These IGs
should have the capacity to subpoena both documents and
testimony from the entities regulated by their agencies. A
second valuable step forward, as mentioned earlier, would be to
apply the provision in the SIGTARP legislation which requires
the head of an agency to certify to Congress whether they are
implementing IG recommendations and to explain why if they are
not. A third improvement would be to give IGs control over
their approved budgets which means not just that their budgets
are more transparent, which was a very important improvement of
last year, but DFEs still have trouble making hiring and
promotion decisions within those budgets. And that is a change
that I think would be very important to accomplish.
And finally, the OIGs we are talking about today have not
benefited from the extra funds provided to their agencies that
have received stimulus funds. Increasing the resources
available to these IGs commensurate with the new expectations
of their Offices would be another real way of helping them do
their work.
So I applaud the Congress and I applaud you Madam
Chairwoman and the subcommittee for turning your attention to
this very important issue. And I look forward to working with
the subcommittee as it endeavors to make sure the IGs are all
they can be.
[The prepared statement of Ms. Brian follows:]
[GRAPHIC] [TIFF OMITTED] 56375.051
[GRAPHIC] [TIFF OMITTED] 56375.052
[GRAPHIC] [TIFF OMITTED] 56375.053
Ms. Watson. I want to thank all of the panelists. I really
appreciate your patience and coming up with something we can
dig into. Ms. Brian, I was quite interested in your final
remarks. You are an independent, private agency, right?
Ms. Brian. Non-profit, yes, Madam.
Ms. Watson. Non-profit?
Ms. Brian. Yes, Madam.
Ms. Watson. And I think you stated that information could
not be shared with your, I guess, investigators and so on.
Would you clarify that for me?
Ms. Brian. Well, I wasn't talking about my own. I was
talking, speaking to the IGs' access. Currently their capacity
is to gather information, and it actually changes slightly
agency by agency so you might ask my colleagues about their
particular agencies, but a number of those in question have the
capacity to look at what their agency has collected but can't
reach out to the bank or the financial institution and subpoena
documents. And they can't subpoena any testimony from anybody,
currently. That is the kind of capacity we think could be
really very valuable.
Ms. Watson. Let me go back to Mr. Kotz. Do you find it very
difficult to go into those lending agencies and get
information? What are the hurdles and challenges that you face?
Mr. Kotz. Yes. I mean, I do agree with those remarks that
if we had the ability to subpoena individual testimony of
lending agencies, of investment banks, of institutions that are
regulated by the SEC, that would be very helpful in our
operations. Right now, we can subpoena documents but not
testimony. We can subpoena testimony of SEC individuals but not
testimony of other folks. So we wanted to take the testimony of
the General Counsel of a large bank and we were able to do it,
but he would not submit to being under oath because we don't
have the power to subpoena the testimony in that manner. So I
would suggest that is a very good suggestion to improve our
ability to do our job.
Ms. Watson. Well, you know, I am stunned by the response
that you cannot get all the information you need to do a
credible job. And so with subpoenaing power, you think that
would be possible?
Mr. Kotz. Yes, I think that would be very helpful.
Ms. Watson. Mr. DeSarno, would you like to speak to that
concern?
Mr. DeSarno. Well, I would echo the comments from David
Kotz. At NCUA we have never had a problem in getting
information because if we need information, either records or
documents from the credit unions that NCUA supervises, we would
go through the NCUA examination staff to get those documents.
And of course, the agency had the authority to get those
documents for us from the regulated credit unions. And we have
been successful in every instance we have ever had so we have
never had to use any subpoena authority. But David is correct.
While we could, if we had to, subpoena records and documents
from the credit unions, I don't believe we have the authority
to actually force testimony from the employees of those credit
unions.
Ms. Watson. Is there anyone else on the panel that would
like to address that concern?
Mr. Lavik. I would just say that I have always found it
very strange, the bifurcated manner that you can subpoena
documents but not witness testimony. I think it goes back to
someone I met in a conference, a Congressman from Texas. He
explained to me that he just didn't trust us enough. He is no
longer there. He is a very good fellow, by the way, let me
hasten to add.
Ms. Watson. Is it like taking the fifth?
Mr. Lavik. Yes, sort of.
Ms. Watson. I do not understand how an individual who has
other people's money in their hands, Madoff, was able to get
away with it this long. What happened? Where did the system
break down? I understand he did his own accounting and all of
his own paperwork. You know, we talk about it here as cooking
the books. How in the world, I know there is a Ponzi scheme,
but with the SEC, how in the world could he get away with it
that long? I have people in my district that lost hundreds of
millions of dollars through him. How in the world could he get
away with that? Does anybody dare to give their idea of how he
was able to carry on in this way?
Mr. Kotz. I can only say that we will have that answer. We
are working on a report of how the SEC let it happen and we
will have an answer to all of those questions. And it will be a
report that, as appropriate, will be very critical of SEC, you
know, as an independent IG can do. So we will get to the bottom
of it from the SEC perspective. That I can assure you.
Ms. Watson. Well, thank you so much. When do you expect you
will be able to get to the bottom?
Mr. Kotz. We think we will have a report by the end of the
summer. It will be a comprehensive report of all the different
complaints that came into the SEC going back many years, all
the different examinations and investigations that the SEC
conducted and how it went wrong.
Ms. Watson. Well, I am going to request of my staff that
when that report is made public or given to Congress that we
hold another hearing and let you go through it and have people
to comment on it.
Mr. Kotz. Thank you, absolutely.
Ms. Watson. Now, I would like to continue to address areas
of concern. I would like to talk about the legal authorities of
the IG and whether the IGs at our financial regulatory agencies
have adequate laws. Of course, we have already talked about the
subpoenaing power. But is there anything else that you think
would be necessary legally to get to the bottom line, get to
the truth? Would anybody like to tackle that one?
Well, let me give you an example. The Federal Reserve IG is
required to examine all failed FDIC insured institutions that
have resulted in a material loss to the Deposit Insurance Fund.
Now, I would like to know whether any of the IGs here today
have had similar statutory requirements that would permit them
to examine financial institutions that have failed or that
require Government assistance to remain solvent? Wouldn't such
requirements for the IG from the SEC or the CFTC make sense if
we should witness another Lehman Brothers or collapse of a
hedge fund that is significantly leveraged in commodities or
futures? What is it that you would need? Anyone can respond.
Mr. DeSarno. Well, let me respond for the National Credit
Union Admnistration. Like the FDIC and the Treasury, we have
legislation in the Federal Credit Union Act that requires us to
do a material loss review of any failed institution, in this
case a credit union, that causes a loss of greater than $10
million to the Shared Insurance Fund. We have already completed
two of those reviews. Right now we are doing two more and we
have about three or four more in the queue waiting to do those.
So we have the authority we need to do those material loss
reviews. We are doing the work. It is stretching our resources
as far as we can possibly go. And the only thing I would
request is I would wish that the Congress and the agency and
the agencies that have the authority would provide the
Inspectors General with whatever resources they need in order
to get that work done.
In my case, I did request additional staff. We are hiring
an additional staff person. In fact, she will be coming on
board on Monday and that will help alleviate some of our
problems. We also requested additional funding, contract
dollars. We did get the contract dollars in our budget so we
can use the additional staff and contract dollars to augment
some of our material loss review work. But we do have the
authority that we need right now to look into those failed
institutions.
Ms. Watson. Well, you just answered my next question, if
you had reasonable resources.
Mr. DeSarno. Yes.
Ms. Watson. And I understand you don't. Let me pose
something else. Under current law, the heads of six Federal
agencies including Treasury and the Federal Reserve are
permitted to terminate or prevent an IG from carrying out an
audit, investigation, examination, or other activities for
specified reasons that include national security or criminal
investigative matters.
While I would never want an inquiry of any kind to
jepordize a criminal or a national security matter, I am
concerned that this type of exemption in power for an agency
head is excessive over what is supposed to be an independent
office. I would like to hear from any of you or each of you
whether the law ought to be altered in some way to ensure that
these exemptions are not misused.
Now, let me give you an example. I suppose the Treasury
Secretary or the Federal Reserve chairman could make a case
that market instability or systemic risk may be a threat to
national securit--how many times have you heard that?--so
perhaps an examination of firms on the verge cf collapse is
inappropriate. Now, would you consider this an inappropriate
use of the law?
But we as Congress, we are cutoff from the information,
shall I say, linkages out of the White House. We stood in the
dark on many things. When the whole economic crisis came out
publically in September and we had to move really quickly, I
was stunned. How did the market collapse so quickly and nobody
forecasted it? That blows my mind. You know, I know people in
futures; isn't that what futurists are all about? What
happened? Mr. Ervin.
Mr. Ervin. Thank you, Madam Chair. I can't comment on the
futures aspect of this, but you began by asking about our
position on these various provisions for certain IGs that allow
the agency head to prevent the Inspector General from pursuing
an investigation or audit on national security grounds. I
touched on that in my prepared remarks. There is such a
provision for the CIA Inspector General, for the Justice
Department Inspector General, for the Department of Homeland
Security Inspector General. So I was under that provision when
I was the Inspector General there, and the Treasury Inspector
General.
But as I mentioned in my statement, a Treasury Secretary
would not have to make the argument that a particular
investigation might impinge upon national security. There is a
specific provision in the Treasury IG statute that allows the
Treasury Secretary to stymie an investigation if, in the
judgment of the Treasury Secretary, there would be adverse
market effects from such an investigation without having to
show any national security nexus.
And my position is that all such provisions should be
excised from the applicable statutes because an agency head
could use such provisions, as you were suggesting, merely to
shield an administration from political embarrassment or
because an investigation might in its conclusion be contrary to
the ideology of a given administration. So I am very much
opposed to those provisions.
I had in my very first, and I will conclude, I had in my
very first meeting with then Secretary-Designate Ridge a
discussion about this very provision in the Department of
Homeland Security statute. I told him that if I were to be
confirmed that I would work very hard, in the spirit of full
disclosure, with Congress to try to get that provision excised.
He assured me that he would never use the provision, and to his
credit he never did. But the fact that it was in the statute
was always a potential sort of Damocles over the head of the
Inspector General. And I think this present economic crisis
that we are experiencing underscores how important it is to
excise such provisions.
Ms. Watson. Ms. Brian.
Ms. Brian. I would just want to echo my friend Mr. Ervin's
comments. I think it is a very problematic provision and I
think it is something the Congress should be reviewing.
Ms. Burrows. Madam Chairwoman, if I could also comment, I
can't comment as CRS on whether it would be good or bad to
remove this provision. But the way the provision works now is
that, for the Federal Reserve for example, the chairman makes a
statement to the IG that he is going to be exercising this
power. Then the IG provides the explanatory statement to
Congress within 30 days. One way or one approach might be that
the statement can go directly to Congress from the chairman of
the Federal Reserve or from the Secretary of the Treasury so
that Congress receives direct notification. And you could place
a time limit so it would occur within 3 days or 5 days or
whatever so you would know immediately if such power was being
exercised.
Ms. Watson. Thank you. I would like to direct this to Mr.
Kotz. In 2008, at a request of Senator Grassley's, your office
completed two inquiries on the effectiveness of the SEC's
Consolidated Supervised Entities and Broker-Dealer Risk
Assessment Programs. These were done in response to the fall of
Bear Stearns and Lehman Brothers. Your CSE report made 26
recommendations to the SEC for areas needing improvement and
several recommendations regarding the Risk Assessment Program.
First, can you tell us how many of these recommendations are in
the implementation stage by the SEC? Then let me just add the
other couple of questions on the same issue.
Mr. Kotz. OK, there is a process in our office. The agency
comes to us and says, we would like to close these
recommendations. Then we make a decision of whether we think
that it is appropriate to close the recommendation and provide
advice on that. So we recently received from the SEC numerous
requests to close recommendations. Many, almost all were of the
recommendations in the CSE report and many of the
recommendations in the Broker-Dealer Risk Assessment report.
However, I will tell you that we are looking at them very
carefully to see if we believe that sufficient work has been
done to close them. So there is certainly an effort on the part
of the agency to try to demonstrate that they have implemented
those recommendations but we have not completed our process as
to whether we believe that they actually have been. And we are
very careful. We scrutinize very carefully what the agency has
done before we actually agree that something should be closed.
Ms. Watson. Now, did you take initiative on your own to
inquire how did Bear Stearns and Lehman Brothers got to where
they are?
Mr. Kotz. Yes. Well, I mean, we conducted that audit
report. We conducted the audit looking at Bear Stearns to try
to figure out how it is that this process went forward while
the SEC was engaged in regulation and yet, as you said, it
seemed to be a surprise to everybody. It is one thing for it to
be a surprise to, you know, investors out there. It is another
thing for it to be a surprise for the regulators who are
meeting with the folks from the entities, you know, on a common
basis. And going back to your previous point, it was raised
somewhat in our audit that if we issue this report it would
have some effect on the markets because it was very critical of
the SEC. And there was no provision in place like with those
other agencies. Those are all the Presidentially appointed IG
agencies. In those cases, there was a provision that allowed
the agency head to stop it. In our case, it was suggested that
perhaps this would have an adverse impact and we simply said
well, thank you very much, but we are going to go ahead and
issue the report anyway. So this was a case where we did feel
it was important to get out the information about what happened
with the SEC's regulation of Bear Stearns, and so we provided a
comprehensive report. And now we are following up to make sure
they actually did what they said they were going to do.
Ms. Watson. You know, it is like trying to unscramble eggs.
I don't know if it can ever be done. But anyway, did you find
that there was enough there before it was revealed to really
get started investigating? I think I heard you say you were
taking a look at it. You know, all of a sudden, this thing blew
up to the public and I am wondering what were the indicators
along the way?
Mr. Kotz. We found that, you know, the SEC was aware of
vulnerabilities on the part of Bear Stearns and did not place
enough pressure on Bear Stearns to reduce its leverage or risk.
You know, I mean, it is a little bit difficult because
hindsight is 20/20. So at that point in time, after it
happened, you look at the indicators and you say, oh, that was
an indicator.
Nevertheless we did find that there were situations where
the agency was aware of potential risk factors and yet did not
pressure Bear Stearns enough with respect to those risk
factors. We also found, for example, that there were certain
standards that the SEC could have been tougher with requiring
Bear Stearns to comply with. We found that the SEC authorized
those firms to have internal audit staff perform critical audit
work.
So they allowed internal audit staff to perform the audit
work involving risk management rather than having an outside
entity. Obviously if you have an outside entity, you are going
to have better audit work. So there were specific areas that we
found that we felt after looking at it, even with hindsight
being 20/20, that said these are indicators--you missed these
indicators--how come you didn't see this at the time? And then
we made recommendations so the SEC now knows how to deal with
things going forward.
Ms. Watson. You deserve a drink of water.
Mr. Kotz. Thank you.
Ms. Watson. I am going to go to Mr. DeSarno now. What are,
Mr. DeSarno, the greatest challenges that now face the NCUA in
its oversight of the credit union industry? And are credit
unions also experiencing higher default rates from market
issues? Has the recession exposed an increasing number of NCUA
insured institutions?
Mr. DeSarno. Well, let me say first of all that I have been
at NCUA for about 11 years and this is the first time we have
had to do any material loss reviews. So what that means is that
we have never had losses to the Shared Insurance Fund of $10
million or more. And we are having them now. But with that
said, I think I can comfortably say that the credit union
industry is much better off than the banking industry. It may
sound self-serving but it is because they really didn't get
involved in a lot of the riskier investments.
For the most part, credit unions did make mortgages and
they did make mortgage loans, and they are having some higher
default rates, but that is not causing them the problems of
going out of business. The material loss reviews that we have
done so far in two specific credit unions, the reason that
those credit unions went down is because they got involved in
very speculative real estate deals outside of their area of
influence. These were credit unions in the middle of the
country that decided they were going to get involved in the
real estate market in Florida. And when the housing market went
down, then they lost an awful lot of money. NCUA now is taking
steps to prevent that from happening in the future.
Looking forward, what are the most critical challenges
right now? I think the most critical challenge right now for
NCUA is dealing with the corporate credit union structure. They
are taking action right now. That, because the corporate credit
unions were the ones that were involved in investing in
mortgage backed securities and of course they got bit by the
mortgage backed security problem that everyone else has run
into. And so NCUA right now is in the process of trying to
restructure the corporate credit unions. And I think that will
have a positive impact on the credit union industry as we go
forward.
Ms. Watson. OK, thank you. And Mr. Lavik.
Mr. Lavik. The futures industry has had some instances of
bankruptcy, failure, but certainly not to the same extent as
commercial banks or, from what Bill says, credit unions. Partly
I think it is because of the provision of margin. You have to
put up margin to buy a futures contract and that is adjusted
daily. So, for example, if your price of your futures goes
down, you have to put up more margin.
So there have been some failures but, interestingly enough,
the two that I am aware of were not recently. They go back, the
one case about 5 years. The fellow who was in charge of it was
a rather big, what they call a futures commission merchant. He
is now spending some time in jail. And there was one about 2 or
3 years ago. But anyway, the point is I can't think of one
right now of a large size that has been in the recent economic
turmoil. We have been lucky.
Ms. Watson. Yes, I always saw credit unions differently
because it is the field of people who invest in their credit
union and usually they are in----
Mr. DeSarno. It is a cooperative move.
Ms. Watson. It is a cooperative move. And they don't take
the same kind of risks. And I have always been stunned by the
fact that we don't know what is inside those portfolios. And
when you make the wrong decision, we suffer. And so, not being
able to get to that kind of information leaves it strung out.
I want to know also, how has the newly combined Council on
Inspectors General for Integrity and Efficiency improved the
coordination and the efficacy of IGs? Anybody want to talk
about improvement? Do you see it yet?
Mr. Lavik. The one thing I would say is that when we met
seperately there were usually 25 to 30 people in the room
depending upon the particular time. Now there are almost 60. My
impression generally is that, and I think there are some
studies on this, the more people you have in a room can inhibit
decisionmaking or consensus. Now, that has some pluses, but
frankly, and I will defer to my Deputy back here, Ms. Judith
Ringle, because she has actually gone to the meetings. They are
crowded, she says. I have to say, as you can probably tell from
my comments, I am not sure if it was a positive move to combine
the two.
Ms. Watson. Do they feel intimidated, do you think, that
large group sitting among the experts?
Mr. Lavik. You know, I don't know. I have always been an
ECIE and I used to go to some of their meetings because I was
an adjunct. I didn't feel intimidated. It is like--but that was
smaller, that was 30 people--it is like anything. You find some
really sharp PCIEs and you find some sharp maybe ECIEs and you
find some who aren't that much.
Mr. DeSarno. Let me, I just want to, you know, add a
comment to that as well. We have only had, I think we have had
maybe three joint meetings now so far as the CIGIE. And I think
it is helpful. Even though it is a bigger room and it is a much
bigger setting, I think it is good that everybody meets at the
same time and we are all getting the same message at the same
time. Because in the past, even though we, you know, we met
individually as ECIE, it was a smaller group and a lot of times
we weren't getting the same message as the PCIE, Presidentially
appointed IGs. So I think now we are all getting the same
message. We all have the same opportunities. So I think it will
work out for the best.
Ms. Watson. Thank you. Ms. Burrows, how are the DFE IGs
currently evaluated when their agency heads have the
appointment authority? Are there independent evaluations that
are conducted or is it done by agency personnel? And is the
process different from the Presidential appointment IGs?
Ms. Burrows. Well, currently both the Presidentially
appointed IGs and the Designated Federal Entity IGs have to be
appointed without regard to political affiliation and solely
based on their skills in auditing, management, and other types
of skills. But I couldn't necessarilly speak to how each agency
decides how to appoint its IG. It might vary between the
agencies. I don't think there is necessarily any criteria that
they are looking for. But that might be a question that I
could, you know, research and get back to you.
Ms. Watson. Could you do that?
Ms. Burrows. Sure, of course. I would be happy to.
Ms. Watson. Put it in writing. We appreciate that.
Mr. Lavik. Excuse me, Madam. One of the things that our
agency, when I was initially appointed, the person did rate me.
But I would say it is well over 10 years ago now that we came
to an agreement that we are not rated and we don't take
bonuses. This was even before the legislation that now forbids
it. And that is certainly very helpful because there are subtle
pressures one can make in ratings and so on as we are all
aware. But at least, as I say, in my agency, I can't speak for
that though I think there are many others that are not
evaluated, rated by their chairmen, but certainly the CFTC, we
haven't been. And that goes back, I would say, to 1998, several
years.
Mr. DeSarno. Yes, the situation is very similar at NCUA.
You know, we are on a merit pay system so I receive kind of
like a pass/fail evaluation almost. But my average increase is
just the average of what the other senior staff receive for
that year. So it is not a written performance evaluation so I
am not going to be downgraded or penalized if I issue a hard
hitting report. I mean, that won't happen. And so my increase
would just be the average of what the other senior staff
members get.
Ms. Burrows. If I could also add that in 2005 there was a
controversy with the Legal Services Corp. that they had tried,
the board of the Legal Services Corp. had tried to impose
performance evaluations on their IG after their IG had issued
some reports that were highly critical of how the agency was
spending its resources. It is an agency that generally serves,
provides legal services to the poor. And CRS had done an
analysis to whether it was legally tenable to require
performance evaluations of IGs. There is no specific part in
the IG Act that would prohibit a performance evaluation but the
general tenets of the IG Act in terms of independence and only
general supervision by the agency head would seem to indicate
that would not be a favorable avenue to pursue in terms of the
agency head conducting a performance evaluation of its IG. But
that could be something that Congress could clarify, that this
would be a prohibited act to conduct a performance evaluation
of an IG.
Ms. Brian. Madam Chairwoman, in our review of the
Inspectors General, our sense was the only time that was at all
operative was prior to the legislation when some DFEs were
actually receiving bonuses, many of which wouldn't accept them
even though they were eligible.
Ms. Watson. Please don't mention the B word, bonuses.
Ms. Brian. Right, well, I mean and as you can imagine,
there is an essential problem with that. And so the law then
prohibited such bonuses and sort of removed that concept from
the IG system as far as I understand.
Mr. Ervin. And if I can add to that, in my experience as a
Presidentially appointed IG, I would say a couple of things.
There is, for Presidentially appointed IGs, there really isn't
an evaluation process per se. Certainly there is no evaluation
by the agency head. Of course if there are complaints against
an IG, those could be lodged with the PCIE, under the old
system and that system continues to this day. A complaint can
be lodged and then it is investigated. In terms of salary,
compensation as Ms. Brian said, the issue arose since a
Presidentially appointed IG controlled his or her budget, in
theory an IG could give himself or herself a bonus. But that
was never done. Obviously it was frowned upon. If I just might
take this occasion, also to say a quick word since we are
talking about bonuses and salaries?
Ms. Watson. Please do because you were the next I was going
to call on and I think you are addressing most of my question.
So go ahead.
Mr. Ervin. On this salary issue, because it is tangentially
related, a number of people have raised the point that one of
the effects of this legislation that we are here to talk about
would be in effect to lower the compensation of the Inspectors
General who are not Presidentially appointed if they were to
be. And certainly that is a legitimate concern. I think that
should be addressed separately.
Of course, I would not support an effect where as a
consequence of this, their salaries would be diminished. But to
me that is not an argument for not appointing, not making these
Inspectors General Presidentially appointed. As I say, doing so
clearly and only logically, it seems to me, would enhance their
independence.
Ms. Watson. Thank you so much. You covered some of the
questions I was going to ask so we are going to go to our last
witness now, Ms. Brian. Your recommendation in your most recent
report on IGs states that Congress should consider adding more
meaningful and reflective reporting requirements to statutorily
required semi-annual reports. Please describe for us what some
of these might be.
Ms. Brian. Well, what I found is when we looked at the
numbers, and this goes back to my earlier questioning of using
numbers to measure the effectiveness of an IG's work, is that
is one of the measures that an IG is required to report in
their SAR. And we found, sadly, there is a lot of work that
goes into these semi-annual reports or SARs. I am sad to report
how few people read those reports because they are really
boring. They are full of a lot of numbers.
Ms. Watson. A lot of words, many pages.
Ms. Brian. And you know, I am just calling it as it is. So
one example of that is that they are to report the numbers of
cases referred for prosecution. And that is a measurement that
has been used, I was with a former Deputy Director of OMB where
he was testifying that was a real measure of the quality of the
work of an IG. But when we got behind those numbers, we found
that it really doesn't tell you very much. So, for example, if
the numbers of referrals for prosecution from an IG shop is
declining, it is assumed that means they are working less hard.
It could be, however, that they are taking on much more
important, putting their resources into much more important
audits that aren't beefing the numbers up but are taking a lot
more resources. Another thing to keep in mind is we found over
the last 10 years, we talked to a lot of prosecutors, and it
turns out that the IG shops are referring fewer bad cases. What
we found was a pretty high declination rate. They refer a lot
of cases for prosecution. The U.S. attorneys would look at them
and say this is a dog; I am not going to do it. So there is a
pretty high declination rate. Now what we are finding is that
the declination rate is much lower because the IGs are
referring fewer but stronger cases and they are actually
consulting with U.S. attorneys, you know, early on in a more
consultative way. So those are sort of the examples of why the
numbers aren't very effective.
We thought the better way of approaching reports to
Congress was to look at what the IG thought was the most
important work. What were the things they really wanted the
Congress to be aware of that was happening in their agencies?
If that kind of reporting is done to really focus the SARs in
those ways, then maybe you would be able to find out, you know,
as an early warning in some of these crises that are
approaching us and we are saying how did we find out about them
after the fact.
Ms. Watson. I appreciate that. We have seen a couple of
cases in recent years where the IGs were found to have acted
inappropriately or to have conflicts with the very agencies
they are charged with overseeing. Are there adequate measures
in place such as a peer review, which has been mentioned
already, or external monitoring programs to keep check on these
IG Offices?
Ms. Brian. Thank you for that question. We looked at the
mechanism that is used to evaluate an IG's poor conduct, the
Integrity Committee, and that continues to be the case through
the laws now statutorily created. And we think that is a pretty
good model where it is other IGs reviewing allegations of
misconduct. However, there are some flaws in its execution. One
is that we have found what has been happening is the Integrity
Committee will have a finding or will go through an entire
lengthy investigation but then won't have an actual finding at
the end of the day. In one fairly famous case, the conclusion
was that the IG should be disciplined up to and including
removal from office. It was in the last administration. And the
OMB received this information and then came back to the
Integrity Committee and said, so are you saying he should be
removed? And because they hadn't really made that conclusion,
they said, well, we didn't say that. And so nothing actually
happened. So we think that is a change that needs to occur.
The other flaw we believe is that the Integrity Committee
is currently now statutorily headed up by a member of the FBI.
And the problem with that is that the FBI is, of course,
looking for criminality. Rarely, I would hope, is it going to
be the case that an IG is accused of criminality. It is going
to be more a case of poor judgment or inappropriate behavior
for an IG. We had another case where an IG actually
acknowledged that he had provided to the President--this was a
Presidentially appointed IG--provided to the President a very
controversial report prior to its release for his counsel's
opportunity to redact information. The Integrity Committee
concluded essentially that he didn't violate the law, which is
true.
However, I would believe most IGs would agree with me and I
certainly believe that was really inappropriate behavior for an
IG. So if that committee were headed up by an IG rather than a
member of the FBI, I think the standards for conduct would be
more appropriate.
Ms. Watson. Well, I want to thank Mr. Kotz, Mr. DeSarno,
Mr. Lavik, Ms. Burrows, Mr. Ervin, and Ms. Brian for your
expert testimony. And believe me, we have taken a lot of this
down. Our work is just beginning. And if there is one place
that I think Congress has failed, and that is in its oversight
duties. As the Secretary of Labor said in her acceptance
speech, there is a new sheriff in town. So I want to thank my
colleagues who were here and had to leave.
I want to thank each and every one of you for the time you
have given us this afternoon and the wealth of information to
start our wheels rolling. I think you are going to see a
difference now with a new administration and more openness and
all our concerns about how did we get ourselves into this mess.
We have to answer to the people who sent us here to Washington.
We expect to be able to do that. And we expect to be able to
mitigate some of these problems, provide solutions, so that
they who pay their taxes will have a better quality of life.
So without objection, this committee is adjourned with a
sincere thanks to all of you.
[Whereupon, at 5:15 p.m., the subcommittee was adjourned.]