Corporate Governance

The SEC, Congress, and the Harm of a Rogue Inspector General (Part 3)

By J Robert Brown Jr.

So who should appoint the Inspector General?  The chair of the SEC or the President?

At some level, it hardly matters.  The President has the power to appoint the chair of the SEC.  Thus, in most cases, the President's interests and those of the Chair will be in rough allignment.  To a small degree, it gives the President a modest amount of additional influence over an independent agency.  It also probably makes dismissal for benign reasons like non-performance a bit tougher since it is probably more difficult to get the attention of the White House on these types of mundane issues. 

Finally, dismissal for non-benign reasons is less likely when it is up to the President.  Most investigations within the SEC will not matter to the President, even if they result in embarassing disclosure.  Kotz had publicly embarassed the SEC on a number of occasions, whether the invesigation into Pequot or staff Internet habits.  These types of things would not likely raise the ire of the President but could result in dismissal by the chair.  In short, presidential appointment and removal would increase the ability of the Inspector General to act in a manner that was unpopular within the SEC.

Are their costs in moving the appointment power?  Absolutely.  For one thing, the President can sweep out the Inspector Generals upon a change of Administration and make sure that no holdovers are left in place.  Under this approach, Kotz, an appointee of the prior administration, might have been ousted when President Obama took office. 

Having said that, however, the new chair of the SEC (in this case Mary Schapiro) already had the authority to do so.  That she did not reflects the historically uneventful nature of the post.  After all, Kotz is only the second Inspector General to serve at the SEC.  Yet his actions have demonstrated that this is not the case.  On a going forward basis, any new Chair, at least when appointed by a new administration, will no doubt need to take a hard look at the Inspector General and consider seriously his/her removal.   So giving appointment/removal authority to the President is not likely to result in any significant change in practice.

What presidential appointment does do, however, is increase the authority of Congress with respect to the Inspector General.  Congress must approve the appointee and must be provided with advance notice of removal.  It will help politicize the position.    

Full post as published by The Race to the Bottom on May 13, 2010 (boomark / email).