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Hearing of the Government Management, Organization and Procurement Subcommittee of the House Oversight and Government Reform Committee - Roles and Responsibilites of Inspectors General in Financial Markets Regulatory Agencies

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Location: Washington, DC


Hearing of the Government Management, Organization and Procurement Subcommittee of the House Oversight and Government Reform Committee - Roles and Responsibilites of Inspectors General in Financial Markets Regulatory Agencies

HEARING OF THE GOVERNMENT MANAGEMENT, ORGANIZATION AND PROCUREMENT SUBCOMMITTEE OF THE HOUSE OVERSIGHT AND GOVERNMENT REFORM COMMITTEE
SUBJECT: ROLES AND RESPONSIBILITIES OF INSPECTORS GENERAL IN FINANCIAL MARKETS REGULATORY AGENCIES
CHAIRED BY: REP. DIANE E. WATSON (D-CA)
WITNESSES: REP. JOHN LARSON (D-CO); DAVID KOTZ, INSPECTOR GENERAL OF THE SECURITIES AND EXCHANGE COMMISSION; WILLIAM DESARNO, INSPECTOR GENERAL OF THE NATIONAL CREDIT UNION ADMINISTRATION; ROY LAVIK, INSPECTOR GENERAL OF THE COMMODITIES FUTURES TRADING COMMISSION; GARY KEPPLINGER, GENERAL COUNSEL FOR THE GOVERNMENT ACCOUNTABILITY OFFICE; VANESSA BURROWS, LEGISLATIVE ATTORNEY FOR THE CONGRESSIONAL RESEARCH SERVICE; CLARK KENT ERVIN, DIRECTOR OF THE ASPEN INSTITUTE'S HOMELAND SECURITY PROGRAM; DANIELLE BRIAN, EXECUTIVE DIRECTOR OF THE PROJECT ON GOVERNMENT OVERSIGHT

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REP. BRIAN BILBRAY (R-CA): (In progress) -- exactly how we could do it.

And I've got to say, Madame 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 both are going back now and saying there's a lot of things done in the recent past that we wish we could go back and revisit. Here's a chance for us to get the facts, to work together, 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 Congressmen being here today and look forward to hearing all of the witnesses today so we can start that process of creating our work of art and hopefully we'll be proud of long after we're gone, especially one that make sure that the voters are happy with the way we're handling their resources and this IG issue is obviously one of those issues that really is essential for us to do right if we're going to fulfill our responsibility of being the vanguards and the protectors of the tax payers money.

And I appreciate the hearing again and yield back, Madame Chair.

REP. DIANE WATSON (D-CA): Thank you Congressman Bilbray.

And Congressman (Cuellar ?) would you like to have an opening statement?

REP. HENRY CUELLAR (D-TX): I just wanted to just -- (inaudible) -- the only thing is that when we're looking for -- (inaudible) -- I appreciate the work that you do Madame Chair and -- (inaudible).

REP. WATSON: Thank you. And I'd like to call on Congressman Platts at this time and thank you for your leadership of this subcommittee. We appreciate the work that you do for the people.

REP. TODD RUSSELL PLATTS (R-PA): Why thank you Madame Chair. It certainly was an honor for four years to chair the subcommittee with now the full committee chair and as ranking member Mr. Towns from New York, an honor to stay part of this effort. And for your hosting this hearing. One of the things we saw during those four years is the importance of IGs when it comes to truly ensuring efficiency and responsible operations in the federal government. And want to commend our colleague Mr. Larsen for his proposal of further enhancing the status and the independence of IGs at least five agencies in particular given the challenges we're facing in our financial markets. So look forward to his testimony and to hopefully our successful movement of his legislation.

Thank you Madame Chair.

REP. WATSON: Thank you. I now would like to welcome Mr. -- (inaudible) --who decided to come in and sit in with us. Our first hearing and would you like to make a statement?

REP. : Yeah, right, let me say first of all I think this is, 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 working on and was, one I had an opportunity to chair as well. And I had an opportunity to work with Congressman -- (inaudible) -- on many, many issues. So I just want to say Madame Chair I look forward to working with you and I would just like to yield back and wait to hear from Congressman Larson.

REP. WATSON: Thank you so much and 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.

REP. JOHN LARSON (D-CO): Thank you Madame Chair -- (inaudible) -- 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 at the outset for the work that you have done, the fine legislation that you've produced and Jim Cooper was a part of. And the pleasure of working with Ed Towns and the committee in terms of shaping this current legislation HR 885 that we have before you.

I would like to by quickly you know if the Chair would agree I would like to submit testimony from the public citizen in support of this legislation and also --

REP. WATSON: Without objection.

REP. LARSON: I'd like to revise and extend my remarks and submit my testimony and 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 deal with the issue of speculation more than a year ago in a non-partisan 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 overwhelming, non-partisanly, unfortunately was not taken up in the Senate.

Upon discussion with Mr. Towns earlier this year and with his staff, said you know this goes beyond the CFTC and if we look at the kind of troubled waters as Chairman Watson pointed out, that we find ourselves in today with all of these financial institutions and the ramifications therein became apparent to me and I think certainly to this committee Mr. Towns that there was a need for us to make sure that our inspector generals a law that was first adopted in 1978 upgraded last year by this committee that we further augment and bolster their responsibility and the credibility with the American public to make sure that inspector generals in those critical agencies had independent status.

Now under that legislation there are two types of IG, one under Section III that has independent status, but that they are appointed by the president and confirmed by the United States Senate. Under Section VIII, 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 bequest of that. I think especially in these troubled times and with the problems that we face only exponentially growing and the desire on 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 the commodities and financial markets, the CFP, the board of governors of the Federal Reserve, the National Credit Union Administration, and the Pension Guaranteed Benefit Fund, all need to and the Securities Exchange Commission all need to come under this kind of independent scrutiny that I think everyone in the United States Congress wants to see.

And all this bill does is augment the fine work that you've already done by giving them that kind of status that already exists in the law under Section III of that code. That would make these inspector generals independent in status, it would expand their scope, and their independence and give them additional resources. This committee went a long way towards 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 gut 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. That 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 inspector generals appointed by the president, approved by the Senate, they do ten times as many audits and reviews. At a time when every economists, every pundit, everyone who's looking at this situation says what we need and what we've 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, I was happy to hear him say that, and in working with Mr. Towns that we can expedite this legislative process that I believe could probably be put on our consent calendar because of its nature and the gravity of the situation as Chairwoman has pointed out.

I look forward to working with Chairman Towns and I thank him for his help and support. Without his committee's aid, and 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 yield back the balance of my time and submit to any questions you might have.

REP. WATSON: Thank you so much, Congressman. Thank you so much.

And this concludes the Congressman's testimony and if any of the members would like to raise a question, we'll take about five minutes -- (inaudible) -- call to the floor. So again I must apologize, my -- (inaudible) -- for a time for us to go to the floor and vote and then we'll come back here and we'll go on -- (inaudible) -- so are there any questions of committee members?

REP. : Not a question but I expect to show him that I look forward to working with him to make certain that we move this legislation forward. I think it's very, very much needed and of course I agree with you, I think it's something that we should be able to get -- (inaudible).

REP. WATSON: Mr. Bilbray.

REP. BILBRAY: Yeah, I appreciate the item. Let me say right off one of the independent auditors is handing the international development, the agency for international development. I'll just tell you as one that's talked to the chairman about that. There's an agency that I think hasn't had enough auditing I think in Afghanistan the big scandal was not going to be what's happened with the war but what hasn't happened with economic development.

And with your encouragement of going from a few agencies to a larger or -- would you just discuss the aspect of rather than proving expanding it in an evolutionary now it's 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?

REP. LARSON: Well I think it's --

REP. BILBRAY: (Inaudible) -- slightly astray too, so don't let me get the, get your --

REP. LARSON: I think this would be what President Obama has called the fierce urgency of now. And as Chairwoman Watson pointed out the severity of the times we find ourselves in, and in deed in unchartered waters, and the need for us to have more expertise, more oversight and more independent hands on the wheel. And 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 or as my grandfather Nolan used to say, trust everyone but cut the cards.

REP. BILBRAY: Well let me just say that you know there was that old saying that if you can keep our 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 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're in trouble and when we're in danger when Brian is quiet and introverted. Okay. 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 diligence step here because I do worry about how quickly we are jumping to things because of the crisis and remember the line you've got 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.

And I think that you've got a good sound proposal here, I just think that those of us by definition on oversight has to make sure that it's not a cliff but actually a step up in the direction we want to go. And I yield back Madame Chair.

REP. WATSON: Thank you. (Inaudible) -- brief recess, we'll reconvene, I imagine it'll be around 3:30. So thank you so very much -- (inaudible).

REP. LARSON: I thank the chair, I thank the ranking member and I thank our distinguished chair and all the committee members for their time.

(Brief recess called.)

REP. WATSON: We're now going to start with the second panel, and it's a policy of the Committee On Oversight And Government Reform to swear in all witnesses before they testify.

And I'd like to ask those -- (inaudible) -- to rise and to raise your right hand. Do you solemnly swear to tell the truth, the whole truth, and nothing but the truth?

MR. : I do.

REP. WATSON: And let the record reflect that the witness answered in the affirmative. I now would like to introduce Mr. Gary L. Kepplinger -- is it Kepplinger or Kepplinger?

MR. KEPPLINGER: Either one will do --

REP. WATSON: (Laughs.)

MR. KEPPLINGER: -- Madame Chairman, Kepplinger works.

REP. WATSON: Okay. Who serves as the counselor general 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 and keep this summary if you can under five minutes in duration. Your complete written statement will be included in hearings records. Thank you and you can get started.

MR. KEPPLINGER: Thank you, Madame Chairwoman. It's always a challenge for me to stay under five minutes, but I'm going to give it my best shop.

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 nations' needs of the 21st Century and 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. HR 885 the Improved Financial And Commodity Markets Oversight And Accountability Act would provide for the inspector generals at selected financial regulatory agencies, namely the Board of Governors of the Federal Reserve System, Commodities Future Trading Commission, NCUA National Credit Union Administration, Penny Benny the Pension Benefit Guarantee Corporation 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, HR 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've noted in prior reports and testimony, independence is one of the most important elements of an effective IG function. Professional -- (inaudible) -- standards, generally accepted government auditing standards, GAGAS, are issued by the controller general, recognize that audit organizations located in government entities including IGs appointed by their agency heads can be 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.

A 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 and notification.

The Reform Act also created the counsel of IGs on integrity and efficiency to replace the administratively creative counsels that governed the presidential appointed IGs and those that were agency heads. The new IG counsel 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's the end of my statement. I'd be happy to take any questions, Madame Chair.

REP. 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 because it's 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're relatively small in size. And another approach would be to consolidate those audit functions in existing presidentially appointed IGs. We had offered the concept before that you could make CFTC and SEC part of the Treasury IG and that NCUA part of the FDIC IG's office, and Penny Benny as part of the Department of Labor IG office. Those were 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.

REP. WATSON: What bothers me is the politicizing of the IG report. And also the fact that the ideology from the administration is part and parcel of the IG's function and office.

So when you say political appointment, how can we guard against politicizing that particular position, and the ideology that that person might carry that lines itself with the president?

MR. KEPPLINGER: I'm a lawyer, I approach things as a lawyer, I would note that both with respect to the DFEs as a result of your colleague Mr. Cooper and Senator McCaskill's efforts that the DFE IGs, those that are agency head appointed, they're now supposed to be appointed without regard to political affiliation 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.

REP. WATSON: The turmoil that we're in at the current time and the fact that we're at a crisis unseen before, maybe even worse than it was in the end of the '20s and the '30s, and that my concern is that the IG report be absolutely impeccable and represents the facts as 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, Madame 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 counsel of IGs for integrity and efficiency that is, has an integrity committee that looks at wrong doing amongst the IGs. There are also peer reviews of their organizations and their activities I believe it's a -- (inaudible) -- on a three year cycle. And you know, that should go a long way to ensuring the quality of the work of the auditors.

REP. WATSON: Thank you for that.

I'd 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 and would you like to address Mr. Kepplinger and with a question.

REP. JACKIE SPEIER (D-CA): Thank you, Madame Chair, and I'm 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 Inspector Generals. I read in the analysis Madame Chair that there have actually 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.

And it brings to mind a case in California, I believe after you left, where there was horrendous problems in the Department of Corrections. And 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 that was appointed by the governor for a specific time frame. So if the governor didn't like the kinds of inspections and 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 Inspector Generals from the departments. I'm curious Mr. Kepplinger what your feelings are about term limits and or at least a fixed term I should say and you can bleed a particular agency or starve I should say 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's adequate to do the job?

MR. KEPPLINGER: Ms. Speiers, there's 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's a two sided coin independence. To a certain extent, once 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're auditing, the more independent you're going to be. So I think we're in a 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, well certainly the Controller General who has as a unique position and other legislative Article I entities like the Court of Claims have term positions.

There's only a few executive, 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's a political accommodation, not necessarily a legal one, but it's a political accommodation between the two branches that the FBI 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's a seven 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 like early stage dementia but if you could remember your third question, I had a response for it.

REP. SPEIERS: The funding issue, 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 which put in place to make the IG's articulation of their funding needs transparent through the budget process.

REP. SPEIERS: But that still could -- let's say an Inspector General is doing very good work, but is embarrassing an administration --

MR. KEPPLINGER: Um-hum.

REP. SPEIERS: The budget for that office could be reduce 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 IG's comments about their funding needs is part of the president's budget when it's submitted for the IG's account. So it has transparency and presumably would be a matter for the appropriations process to deal with what is the right amount.

REP. SPEIERS: Thank you.

MR. KEPPLINGER: Um-hum.

REP. WATSON: Thank you very much. I would like now to go to our member from California, Mr. Duncan. Excuse me, Tennessee.

REP. JOHN J. DUNCAN, JR. (R-TN): (Laughs.)

REP. WATSON: The two of us are Californians.

REP. DUNCAN: Well I will tell you that Duncan Hunter and I used to always get, be mixed up with each other so that's all right, Madame Chairman. Just a couple questions since I just got here.

Let me ask you Mr. Kepplinger are there any powers that a presidentially appointed IG has that other Inspector Generals do not have?

MR. KEPPLINGER: No, generally I think they have the same scope of authority.

REP. DUNCAN: All right.

MR. KEPPLINGER: There's a few exceptions, but even those exceptions cut across presidential appointee and agency head appointees.

REP. DUNCAN: All right.

And I've noticed that with the exception of the top cabinet members it sometimes take an awfully long time to get people appointed like U.S. attorneys and so forth, it seems that they put them through a needlessly lengthy investigation, some 13 or 14 months sometimes. How long has it generally taken to get a presidentially appointed IG into office? Do you know?

MR. KEPPLINGER: No, off the top of my head I do not know.

REP. DUNCAN: All right. Thank you very much.

REP. WATSON: Thank you so much. -- (inaudible) -- one more question and -- (inaudible) -- we have enough -- (inaudible) -- whistle blowers?

MR. KEPPLINGER: My response is yes. And I haven't, Madame Chair, made a study of this except in one regard, legislation passed in the last Congress established a statutory IG in GAO, this is a first for us. And in the process of doing that, we transferred the whistle blower protections from, 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's always an opportunity for improvement, my general response would be yes, I think they are adequate. But you know, I don't say that with one, excuse me, a heck of a lot of confidence in prior review of that issue. Okay.

REP. WATSON: The Committee would like to thank you for your time and the information you have shared with us and thank you very much.

MR. KEPPLINGER: My pleasure.

REP. WATSON: And your patience.

MR. KEPPLINGER: Thank you very much. My pleasure. Thank you.

REP. WATSON: Thank you.

Okay. It's now time to turn to the third and the last panel. And as they come up to the table, I'll swear you in. -- (inaudible) -- in recess for a couple of minutes while the current witnesses come to the table.

(Recess.)

REP. WATSON: I would like all of you to stand because it's the policy of the Committee on Oversight and Government Reform to swear in all witnesses before they testify. And all of you are in place now. Would you raise your right hand? Do you swear to tell the truth, the whole truth, and nothing but the truth?

(Off mike.)

REP. 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 and before we begin I will note for the record that Ms. Elizabeth A. Coleman the Inspector General of the Board of Governors head 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'll enter that in the record.

First I would like to introduce Mr. H. David Kotz, he is the Inspector General of 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.

Next is Mr. William Desarno, he is the Inspector General of the National Credit Union Administration. There he developed his office's first strategic plans 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's 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 and has received in his current and 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 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 inspector generals 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 and before doing so, he served as the first inspector general of the United States Department of Homeland Security from January 2003 to December 2004. Prior to his service at DHS, he served as the inspector general at the United States Department of State and the broadcasting board of governors.

And finally Ms. Danielle Brian, who serves as the Executive Director of the Project on Government Oversight or POGO, P-O-G-O, a non-profit, non-partisan watchdog organization that works with whistle blowers 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 John 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 five minutes in duration. Your complete written testimony will be included in the hearing record.

And so we'll start now with Mr. Kotz. Please proceed. Kotz.

MR. KOTZ: Good afternoon. Thank you for the opportunity to testify today before the subcommittee as the inspector general for the Securities and Exchange Commission. In my testimony today I'm representing the officer of the -- (inaudible) -- views of my office do not necessarily reflect the views of the commission.

The commission 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, i.e. 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 the national regulatory agency such as the SEC have an independent effective and fully funded office of inspector general to assist the commission in compressing these challenges. I'm proud to report that over the past 14 months that I've served as the SEC's inspector general, our office has risen to these challenges and then some.

Notwithstanding a small staff, we've 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, to 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'll 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 entity CSE program, which included Bear Sterns, 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 programs.

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 General's 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 to analyze 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 procedure for responding to and processes 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 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 months that address issues currently of concerns 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 has conducting or has completed over 50 comprehensive investigations of allegations of violations statutes, rules, and 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 ten years and the reasons why the agency found these complaints lacked credibility. Since that time, we've 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 fulfill 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 Asset Relief Program, TARP as inspector general counsel along with the special IG from the TARP and IGs from several financial regulatory agencies as well as the GAO which meet 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 inspector general receives sufficient appropriated funds to achieve their mission. The improvements in this legislation include the requiring of advanced notice to Congress of the removal of an IG as well as provision to establish the pay parody on the part of both presidentially appointed and designated federal entity, DFDIGs. Since I began my tenure as inspector general of the SEC in December 2007, my office and 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 or 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 our 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 opinions that converting IGs from DFGs to presidentially appointed is not necessary and in my view would not improve the current level of DFGIG oversight. Having been an inspector general at two DFGs, 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 DFG 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 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 DFG 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 the subcommittee's interest in the SEC and my office. I believe that the subcommittee and Congress' involvement with the SEC is extremely important to strengthening the accountability and effectiveness of the commission.

Thank you.

REP. WATSON: (Inaudible) -- when we were referring to complaints that you were receiving and I guess whistle blowers, people on staff and so on, and you said they lacked credibility. Now did I hear you correctly and would you expound and explain what you said about 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 that the SEC enforcement division receives complaints, there was one whistle blower, Harry Markopolos who came forward with a complaint stating that he believed that Bernard Madoff was engaged in illegal activity. That complaint went to the SEC, it didn't go to the IG's office, went to the SEC. And obviously the SEC did not find that there was a ponzi scheme because that did not come up 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 were unable to find the ponzi scheme. And that was the concern about credibility that the chairman --

REP. WATSON: (Inaudible) -- SEC --

MR. KOTZ: Yes.

REP. WATSON: -- (inaudible)?

MR. KOTZ: Right.

REP. WATSON: I just wanted to place it where it should be.

MR. KOTZ: Yes, yes.

REP. WATSON: Thank you. We'll now proceed to Mr. 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 HR 885. I thank you for calling this hearing and for your support of the IG community. My name is William Desarno inspector general with the National Credit Union Administration who's 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 United States 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 relationship built on mutual respect and trust. HR 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 reforms 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 reformats pay provisions, the IG salary was elevated to the average of the other senior mangers and the pay disparity was resolved. Where HR 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 reformat 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 under way 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 HR 885 change the appointment status of DFG IGs is that the selection process risks politicization which would significantly threaten IG independence. Congress required that IGs be non-partisan and that the president point 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 DFG IGs I do not believe that HR 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.

REP. WATSON: Thank you so much -- (inaudible) --

(Laughter.)

MR. : You made me a compliment.

(Laughter.)

MR. : 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 appropriately happening and again I will stand ready for questions.

I don't think given the time and so on I will regurgitate my statement here. But let me just concentrate on a couple of things.

One is the independence issue and I mean 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, it 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. Someone who we found was not, she just didn't like the head of the enforcement. But it shows you that we certainly were independent, I will give her much credit, she is now Mr. Cox's boss in this sense, she is now chairman of the SEC, a very good person.

We also more recently looked in at the behest of four Senators the question of the huge price increase for barrels of oil this last July and -- (inaudible) -- called an interim report 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 from port of their into what's called speculative, and that's a bad word these days, I'm not so sure it should always be bad, but it is. And at least it should be explained readily what is going on.

We found that the agency had reclassified appropriately; the problem was that unless you were an expert in the field, someone who was 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 (inadequate ?) explanation. I cite this again as an indication of independence. This was involving the chairman, not just of the CFTC, but other entities.

The other thing I would say is about 885. There's an old cliché, "you get what you pay for", and that's not always true. We had a chairman just prior to that who was willing to take the (pay ?) salary because he'd made a hell of a lot of money in 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 in my agency -- and I think its true of others, but I'll let them speak themselves -- and I can be objective about this because I'm of such an age I probably won't be around for more than another year or two. But, my pay would be decreased on an order of about $40,000 a year. That's relative to the other people at CFTC.

Now, if that Congress' will, that's fine, that's 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. 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 its something you ought to really think about and make your decision.

That's all I really have to say. If you have any questions, whatever, it would be fine.

REP. : (off mike)

MS. : Thank you, Madame Chairwoman.

Chairwoman Watson and members of the subcommittee, thank you for inviting me here today to comment on proposed changes affecting offices of inspectors general and HR885.

In particular, my testimony will focus on differences between the IG's located in federal establishments and IG's located in the designated federal entities.

The FCIG's are typically found in the smaller agencies. Establishment and federal entity IG is different in terms of their removal, appointment, transfer, budget, applicable hiring laws, avenues for seeking legal counsel and pay. The most notable difference between establishment IG's and a designated federal entity IG, is the individual who appoints and who may remove or transfer the IG.

Establishment IG's 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 IG's 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 IG's into presidentially appointed, Senate confirmed positions. Another difference between the establishment IG's and the designated federal entity IG's, is that by statute establishment IG's 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 IG's. 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 amount 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 IG's also differ in terms of how they may select their own employees. The FCIG's -- the designated federal entity IG's -- are exempt from the sections of the IG Act and have always been, since their creation in 1998, 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. That's because, as Congress indicated in the 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 DFEIG's 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 attorneys 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 from an attorney appointed by that IG in accordance with the specific laws and regulations governing appoints in the agency within the designated federal entity. This counsel would report directly to the appointing IG.

Second, the designated federal entity IG, on reimbursable basis, could obtain services from a counsel who is 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 Counsel of Inspectors General on Integrity and Efficiency.

The IG Reform Act of 2008 also continued preexisting differences between establishment and designated federal entity IG's. For example, the reform act increased the pay of the establishment IG's to the rate of level three of the executive schedule, plus three percent. Currently, level three of the executive schedule is $126,900. However, it included the provision which would allow the IG's who currently received higher pay to continue at that level.

The IG Reform Act also increased the pay of designated federal entity IG's, but did not link them to the executive schedule. Some designated federal entity IG's may make more than their establishment IG counterparts.

The IG Reform Act also provided the designated federal entity IG 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 a 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 IG's pay could not increase by more than 25 percent of a designated federal entity IG's average total pay for the previous three fiscal years.

Madame Chairwoman, that concludes my prepared statement. I'd be happy to answer questions that you might have.

REP. : (off mike)

MR. (ERVIN?): Thank you, Madame 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're 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've 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've been given.

The first one goes of course to the very heart of the legislation that we're considering and that is, 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 Exchange Commission, the CFTC -- be presidentially appointed.

It simply stands to reason, as Mr. Kepplinger said, to matter of logic that an IG is more likely to stand up to an agency head if there's a disagreement between the agency head and the Inspector General as to a particular auditor investigation, if ultimately the Inspector General cannot be removed by that agency head.

I do not know -- (inaudible) -- Kotz, DeSarno and Lavik -- they are all, I'm sure, fine gentlemen; 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'm concerned about their successors and whether their successors likewise have the impeccable character, 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's noteworthy, for example, in Mr. Kotz's statement he began essentially by saying, "the testimony I'm about to give is my own testimony and that of the Office of Inspector General and not the FCC. There would be no reason to say that if he weren't an appointee of the president. No one would think that any remarks that he would make in a form like this would be those of the FCC.

The second recommendation that I would have is that the Inspectors General, like the FBI Director as Mr. Kepplinger noted -- and I would note that another example, he could not think of one during his testimony, but another example of course is the fed chairman. The fed chairman, which of course is exactly relevant here, likewise has a fixed term -- not term limits, but a fixed term.

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 -- (inaudible) -- them to the maximum extent possible.

It matters less to me exactly what the term is; it's more important that there be a term and it would be most helpful if the term were to be long enough to span presidential terms and in the case of the FBI Director, seven years. I would note also of course, the Controller General has a 15 year term and that is intended to insulate the Controller General from pressure from the administration and also from the Congress.

Third, of course, Inspectors General are human beings and therefore, their 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 given, being reason enough. I think that presidents should have the ability to remove an IG only for cause that is spelled out in a statute; that is another recommendation I would make.

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, 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 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, 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 and at the greater of 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, Madame Chair.

REP. : And thank you.

We can now proceed -- (inaudible) --. Ms. Brian.

MS. BRIAN: Thank you very much, Madame 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 IG's.

Our first report, which was released last year, focused specifically on weaknesses that we believe hampered some of the IG's 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 believed 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've provided copies of our report to you today. Holding IG's accountable is a job that needs also to be embraced more thoughtfully by the Congress and accomplished more effectively by their peers to the IG Counsel'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 -- (inaudible) -- is that IG's all too 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 IG's who I share the table with, but to answer your wonderful question, Madame Chairwoman, of the earlier panel, I would strongly suggest that at this point, federal employees do not have adequate whistleblower protections and that is of no fault of the House. The House has been regularly stalwart in insisting that federal employees have better whistleblower protection.

Our problem has been that the Senate has not accepted the strong recommendations from the House on that matter, so they remain very under-protected we believe.

As our country reels from the economic crisis, we are relying more on the IG's not only to detect and deter the misuse of public funds, but to help restore confidence in our government's operations. I believe HR885 has been offered in that spirit in order to provide IG's of the financial regulatory agencies independence that they require, but I would respectfully suggest that the tools given IG's in last year's legislation largely accomplish that goal.

I did want to react to some of the earlier testimony and offer a couple of cautionary notes.

One thing is that IG's 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 IG's.

I was also very concerned about the discussion of the use of numbers of audits or investigations as a measure of effectiveness of DFE IG's as opposed to presidentially appointed IG's. That's a big part of the point of the report that we have offered to you; we don't believe it's a good way to measure the quality of work of an IG is to measure by numbers -- number of investigations or audits they complete.

I've 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's 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's important 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 HR885; that DFE IG's are somehow less independent because they're 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 IG's, 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 HR885, while very well intentioned, may be counter productive is that which was discussed before with regards to the comparability pay structure because of the uniquely unusual pay structures for this (natural?) regulatory agency and that would actually reverse the fix that had been accomplished through last year's legislation.

Finally, while the legislation provides for the current IG's to remain in place until a presidential appointee is confirmed, this change would then undercut the current IG's authority by making them acting at a time we would want these IG's to be confident they can be bold and protected, even when they're 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 IG's, I would suggest respectfully that we may be focusing on the wrong issue and that making them presidential appointees may merely be a distraction.

I would suggest there are a few other changes that you might consider to enhance their role. For example, most of these IG's are currently restricted from accessing information directly from the regulated entities. These IG's should have the capacity to subpoena both documents and testimony from the entity's 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 they are not.

A third improvement would be to give IG's 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 DFE 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.

Finally, the OIG's we're 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 IG's 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, Madame 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 IG's are all they can be.

REP. : I want to thank all of the panelists and 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 independent private agency, right?

MS. BRIAN: Non-profit, yes ma'am.

REP. : 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 speaking to the IG's access.

Currently, their capacity is to gather information and it actually changes slightly agency by agency, so you might ask my colleagues here about their particular agency; but a number of those in question have the capacity to look at what the 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; and that's the kind of capacity we've think would be really, really valuable.

REP. WATSON: Let me go back to Mr. Kotz.

So you find it very difficult to go into those lending agencies and get information? I've heard of some challenges that you face.

MR. KOTZ: Yeah, 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 FCC, that would be very helpful in our operations.

Right now, we can subpoena documents, but not testimony; we can subpoena testimony of FCC individuals, but not testimony of other folks. So, we want to take 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 testimony in that manner.

I would suggest that that's a very good suggestion to improve our ability to do our job.

REP. WATSON: Well, you know, I'm stunned by the response that you cannot get all the information you need to do a credible job.

With subpoena power, you think that would be possible?

MR. KOTZ: Yeah, I think that would be very helpful.

REP. 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 staff -- the examination staff -- to get those documents. Of course, the agency has the authority to get those documents for us from the regulated credit unions and we've been successful in every instance we've ever had.

So, we've never had to use any subpoena authority, but David is correct that 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.

REP. WATSON: Is there anyone else on the panel that would like to address that concern?

MR. : I would just say I've always found it very strange -- (inaudible) -- manner that you can subpoena documents but not witness testimony and I think it goes back to someone I met in the conference, a Congressman from Texas.

He explained to me he just didn't trust us enough. A very good fellow by the way, it's not that.

REP. WATSON: Was it like taking the Fifth?

MR. : Sort of.

REP. WATSON: I do not understand how an individual who has other people's money in their hands -- (inaudible) -- was able to get away with (this loan?).

What happened, where did the system break down? I understand he did his own accounting, all of his own paperwork? We talk about it here as cooking the books.

How in the world -- I know there's -- (inaudible) -- with the FCC -- how in the world could he get away with this that long. I have people in my district that lost hundreds of millions of dollars through him. How in the world did he get away with that?

Anybody dare to give their idea of how he was able to carry on in this way? -- (inaudible) --

MR. : We will have that answer; we're working on a report of how the FCC let it happen and we will have an answer to all those questions and it will be a report that, as appropriate, will very critical of FCC as an independent IG can do.

We will get to the bottom of it from the FCC perspective, that I can assure you.

REP. WATSON: Well, thank you so much.

When do you expect you will be able to get to the bottom?

MR. : We think we'll have a report by the end of the summer.

It will be a comprehensive report of all the different complaints that came into the FCC, going back many years, all the different examinations and investigations that the FCC conducted and how it went wrong.

REP. WATSON: I'm going to request to my staff that when that report is made public or gets into Congress that we hold another hearing and then you go through it and have people to comment on it.

MR. : Thank you; absolutely.

REP. WATSON: Now, I'd like to continue to address areas of concern and I'd like to talk about the legal authorities of the IG and whether the IG's at our financial regulatory agencies have adequate law enforcement.

We've already talked about the subpoena power, but is there anything else that you think would be necessary, legally, to get to the bottom line and get to the truth? Would anybody like to tackle that one?

Let me give you an example. The Fed 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'd like to know whether any of the IG's 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 FCC 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: Let me respond for the National Credit Union Administration.

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 of the share insurance fund. We've already completed two of those reviews right now; we're doing two more and we've got 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 whatever resources they need in order to get that work done.

In my case, I did request additional staff. We're hiring an additional staff person; in fact, she'll be coming on board on Monday and that will help alleviate some of our problems. We also requested additional funding for 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.

We do have the authority that we need right now to look into those failed institutions.

REP. WATSON: Well, you just answered my next question; if you had reasonable resources.

I understand now if 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 activity for specified reasons that include national security or criminal investigative matters.

While I would never want an inquiry of any kind to jeopardize a criminal or national security matter, I'm concerned that this type of exemption and power for an agency head is excessive over what is supposed to be an independent office. I'd 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 Fair Chairman could make a case that markets instability or systemic risk may be a threat to national security. How many times have you heard that? (laughter)

So perhaps an examination of firms on the verge of collapse is inappropriate. Now, would you consider this an inappropriate use of the law? And for GAO, for the record, would you be able to determine how many IG investigations or audits --

REP. : He's gone.

REP. WATSON: Okay, let me just cancel that part out. I don't see him in the room.

But we, as Congress, we're cut off from the information, shall I say linkages out of the White House. We stood in the dark on many things. And when the whole economic crisis came out publicly in September, and we had to move real quickly, I was stunned. How did the market collapse so quickly, and nobody forecasted it. That blows my mind. You know, I know that people in futures -- so that what futurists are all about. What happens?

Mr. Ervin.

MR. ERVIN: Thank you, Madame Chairman. I can't comment on the futurist aspect of this, but it began by asking about our position on these various provisions for certain IGs, but allow the agency head to prevent the inspector general from pursing an investigation or audit on national security grounds.

I touched on that in my prepared remarks. There is such 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 affects 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 that could use such provisions as you're suggesting, merely to shield an administration from political embarrassment or because an investigation might, in its conclusion, be contrite to the ideology of a given administration.

So I'm very much opposed to those provisions.

I had in my first -- and I'll conclude, I had in my very first meeting with then, Secretary Tom Ridge, a discussion about this very provision in the Department of Homeland Security Statute. And I told him that if I were to be confirmed, 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 -- (inaudible). It's 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. BURROWS: I would just want to go -- my friend's Mr. Ervin's comments, I think that they're very problematic supervision, and I think it's something that the Congress should be reviewing.

MS. COLEMAN: Madame Chairman, 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's going to be exercising this power. And then the IG provides the explanatory statement to Congress within 30 days.

One approach might be that the statements go directly to Congress from the Chairman of the Federal Reserve or from the Secretary or the Treasury, so that Congress receives direct notification. And you could place a time limit, you know, so it would occur within three days or five days or whatever. So you would know immediately if such power was being exercised.

REP. WATSON: I'd like to direct this to Mr. Kotz. And in 2008, 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. And these were done in response to the fall of Bear Stearns and Lehman Brothers.

Your SEC report made the 26th recommendation to the SEC for area 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.

And then let me just add the other couple of questions on the same issue.

MR. KOTZ: Okay. We actually just received -- there's a process in our office. The agency comes to us and says we'd like to close these recommendations. And then we make a decision of whether we think that it's appropriate to close the recommendation, and provide advice on that.

So we recently received from the SEC numerous requests to close recommendations. Almost all of the recommendations in the CSC report, and many of the recommendations in the Broker Dealer Risk Assessment are important. However, I'll tell you we're looking at them very carefully to see if we believe that sufficient work has been done to close them.

So there's 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 happened. And we are very careful, and we scrutinize very carefully what the agency has done before we actually agree that something should be closed.

REP. WATSON: Now, you did take initiative on your own to inquire how did Bear Stearns and Lehman Brothers get to where they are?

MR. KOTZ: Yeah. Well, I mean, we conducted that audit report. We conducted the audit looking a Bear Stearns, and to try to figure out how it is that this process went forward while the SEC was engaged in regulation. And yet as you've said, it seemed to be a surprise to everybody.

It's one thing for it to be a surprise to, you know, an investor out there. It's another thing for it to be a surprise for the regulator who are meeting with the folks from the entities, you know, on a common basis.

And then going back to your previous point, it was raised somewhat, you know, that if we issue this report, it would have some affect 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 had to stop it. It --

(Audio break)

REP. WATSON: I want to know, also, how has the newly combined counsel on inspector generals for integrity and efficiency improved the coordination and the efficacy of IGs? Anybody want to talk about improvements?

MR.: The one thing I would say is that when you met separately there were usually 25 to 30 people in the room. That didn't go on at a particular time. Now, there's almost 60. And my impression generally -- and I think there's some studies on this, the more people you have in a room can then inhibit decision-making or consensus.

Now, that has some pluses, but frankly, you know -- and I will defer to my deputy back here, Ms. Judith Winkle (ph), because you've actually gone to the meetings, haven't you? What is your --

MS. WINKLE: So far they're crowded.

(Cross talk.)

MR.: (Laughter) They're crowded she says.

REP. WATSON: Crowded.

MR.: Yeah. I have to say, I -- as you can probably tell from my comments, I'm not sure it was a positive move to combine the two.

REP. WATSON: Do they feel intimidated, do you think, that large group, to be among the experts?

MR.: You know, I don't know. I've always been an ECIE. And I used to go to some of their meetings, because I was -- I didn't feel intimidated. It's like any -- but that was smaller. That was at 30 people. It's like anything, you find some really sharp PCIEs, and you find some sharp, maybe ECIEs, but you find some don't want that much.

MR.: I just want to, you know, add a comment to that, as well. We've only had about -- I think we've had maybe three joint meetings now so far, CIGIE. And I think it is helpful. Even though it's a bigger room, and it's a much bigger setting, I think it's good that everybody meets at the same time. And we're all getting the same message at the same time.

Because in the past even though we met individually as a PCIE and was a smaller group, a lot of times we weren't getting the same message as the PCIE, presidentially-appointed IGs. So I think now we're all getting the same message. We all have the same opportunities. So I think it'll work out for the best.

REP. WATSON: Thank you.

Ms. Burrows, how are the DFE IGs currently evaluated when their agency head has the appointment authority? And are there independent evaluations that are conducted or is it done by agency personnel? And is the process different from the presidential appointment IG?

MS. BURROWS: Well, currently both the presidentally-appointed IGs and the designated federal entity IGs have to be appointed without regard to political affiliation, and solely based on their skills and auditing and other management and other types of skills.

But I couldn't necessarily speak to how each agency decides how to appoint its IG. It might vary between the agency. I don't think that there's necessarily any criteria that they're looking for. But that might be a question that I could, you know, research and get back to you.

REP. WATSON: Could you do that?

MS. BURROWS: Sure. Of course.

I'd be happy to.

(Cross talk.)

MR. LAVIK (?): Excuse me, Madame, one of the things that our agency -- the one where I was initially appointed, the person did write me. But I would say it's well over 10 years ago now that we came to an agreement that we are not rated, and we don't take bonuses. This is even before the legislation has now -- that's now forbidden.

And that's certainly very helpful because there are some pressures one can make in ratings and so on, as we're all aware of. But at least as the same IGs, I can't speak for that. Though, I consider many others are not evaluated, rated by their Chairman. But certainly at the CFTC, we haven't been, and that goes back, I'd say to 1998. Several years.

MR. DESARNO: Yeah. The situation is very similar NCUA. You know, we're on a merit pay system, so I don't receive -- 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 the year. So it's not a written performance evaluation, so I'm 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, in 2005 there was a controversy with the Legal Services Corporation 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. Because it's an agency that generally provides legal services to the poor. And Serus had done an analysis as to whether it was legally tenable to require performance evaluations of IGs.

There's no specific part in the IG Act that would prohibit a performance evaluation, but the general tenants of the IG Act in terms of independence and only general supervision by the agency head would seem to indicate that that would not be a favorable avenue to pursue, in terms of the agency head conducting a performance evaluation of it's 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: Madame Chairwoman, in our review of the inspector 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. But --

REP. WATSON: Please don't mention the word -- the B word bonuses. (Laughter)

MS. BRIAN: Right. Well, I mean, you know, and as you can imagine, there's been such a 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 could understand.

MR.: And if I could add to that at my experience as a presidentially-appointed IG, I'd say a couple of things. There --

REP. WATSON: Move that mike.

MR.: Yes. May I -- (inaudible) -- with it. I don't know if it is necessary, but --

(Cross talk.)

MR.: For presidentially-appointed IGs, there really isn't an evaluation process per se. Certainly there's 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 that's investigated.

In terms of salary compensation as Ms. Brian said, the issue arose since a presidentially-appointed IG controlled his or her budget. And IG could give himself or herself a bonus, but that was never done. Obviously, it was frown upon.

If I just might take this occasion, also, to take a quick word since we're talking about --

REP. WATSON: Please do.

MR.: -- bonuses and salaries.

REP. WATSON: Since you were the next I was going to call on.

MR.: Right.

REP. WATSON: And I think you're addressing my questions, so go ahead.

MR.: On this salary issue, because it's tangentially related, a number of people have raised the point that one of the effects of this legislation that we're here to talk about, would be an effect to lower the compensation of inspector 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 the consequence of this, their salaries would be diminished. But to me that is not an argument. We're not appointing -- making these inspector general presidentially-appointed. As I say doing so clearly, and only logically, it seems to me, would enhance their independence.

REP. WATSON: Thank you so much. You covered some of the questions I was going to ask. So we're going to go to our last witness now, Ms. Brian.

Our recommendation continues. In your most recent report on IG states that Congress should consider adding more meaningful and reflective reporting requirements to statutorily require semi-annual reports. So 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 IGs work. One of the measures that an IG is required to report in their SAR. Which we found sadly there's a lot of work that goes into these semi-annual reports or SARS.

And I'm sad to report how few people read those reports. (Laughter) Because they're really boring. They're full of a lot of numbers, and, you know, just calling it as it is. And so one example of that is that they are to report the numbers of cases referred for prosecution. And that's a measurement that's been used.

I was with a former deputy director of (L&B ?) where he was testifying that was a real measure of the quality of the work from an IG. But when we got behind those numbers, you found that it really doesn't tell you very much. So, for example, the numbers of referrals for prosecution from an IG shop is declining. It is assumed that means they're working less hard.

It could be, however, that they're taking on much more importance, putting their resources into much more important audit, that aren't beefing the numbers up, but are taking a lot more resources. Another thing to keep in mind as we've 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 pretty high declination rates. They refer a lot of people for prosecutions. The U.S. attorneys would look at them and say this, "This is a dog. I'm not going to do it." So there's a pretty high declination rate. Now, we're finding that the declination rate is much lower because the IGs are referring fewer, but stronger cases. And they're actually consulting with U.S. attorneys, you know, early on in a more consulted 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 were to look at what the IG felt 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 and really focuses 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're saying, "How did we find out about them after the fact?"

REP. WATSON: I appreciate that. And we've seen a couple of cases in recent years where the IGs were found to have acted inappropriately or to have conflicts with very agencies they are charged with overseeing. And are there adequate measures in place, such as -- (inaudible) -- which has been mentioned already or external monitoring programs to keep a check on these IG officers?

MS. BRIAN: Thank you for that question. We looked at the mechanism that is used to evaluate an IG's poor conduct, is the Integrity Committee. And that continues to be the case through the laws now statutorily created. And we think that's 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've found -- what has been happening is the Integrity Committee will have a finding or it will go through an entire lengthy investigation, but it won't an actual finding at the end of the day. And 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 L&B receives this information, and then came back to the Integrity Committee, and says, "So are you saying he should be removed?" And because they hadn't really made that conclusion, they go, "We didn't say that," and so nothing actually happened. And so we think that's a change that needs to occur.

The other flaw we believe is the Integrity Committee is currently now statutorily headed up by the 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's going to be more a case of poor judgment or inappropriate behavior for an IG.

And 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 of his prior to its release for his counsel's opportunity to redact information. The Integrity Committee concluded that essentially he didn't violate the law. Which is true.

However, I would believe most IGs would agree with me and I certainly believed, that 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.

REP. WATSON: Well, I want to think Mr. Kotz, Mr. DeSarno, Mr. Lavik, Ms. Burrows, Mr. Ervin and Ms. Brian for your expertise testimony. And believe me, we've taken a lot of this down. Our work is just beginning. And if there's one place that I think Congress has failed, and that is in its oversight duties.

As Secretary of Labor said in her acceptance speech, there's a new sheriff in town. So I want to thank my colleagues who were here and had to leave. And 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 the new administration, and more openness and all, and our concerns about how did we get ourselves into this mess. We've got 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 paid their taxes, will have a better quality of life.

So without objection, this Committee is adjourned with a sincere thanks to all of you, and my staff.

END.

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