Sometimes the hardest thing is to follow your own advice. Its also easier to give advice that to follow it. Could this be the dilemma of the SEC?

The Commission is a disclosure agency which tells issuers to furnish investors all of the material facts. During its investigations the SEC encourages cooperation, urging companies and witnesses to furnish all of the facts. The Commission holds it against those who do not follow this advice. If a witness invokes his or her constitutional right not to testify, the Commission draws an adverse inference. If a witness invokes privilege and withholds what the agency deems to be facts it wants, it may hold it against the witness or company. If the witness wants to withhold proprietary information even for legitimate business reasons, the SEC will demand that it be produced despite the fact that it has no real way to protect the information as Form 1662 well illustrates. If the witness does not turn over all of the facts the agency demands, the SEC will conclude that something is being covered up, hidden and worse.

When the tables are turned however the Commission seems to think a different set of rules apply. When Congress asks for information from the SEC, the agency seems to have no problem refusing to furnish the request. So it was last week when the Commission forwarded its response to Senator Grassley refusing to furnish the requested information.

Last month the Senator asked the SEC to furnish information regarding how it handled multiple referrals over the last decade from FINRA about suspicious trading by SAC Capital (here). Since several former SAC traders have been implicated in the on-going expert network insider trading inquiry and pleaded guilty there is a clear basis for congress to wonder what happened to those referrals.

The SEC refused. In a letter sent to the Senator dated June 9, 2011 the Commission explained that it does not discuss on-going law enforcement investigations. The letter then furnishes pages of detail about matters not covered by the information request. Understandably the Senator found the letter unresponsive. The Senator’s press release along with the SEC’s letter is available here.

There can be no doubt that the SEC’s letter is unresponsive. While its letter correctly notes that Commission law enforcement investigations are non-public, this is beside the point. The agency could have made some effort to provide some responsive information. For example, the Commission could have detailed how the requests were processed and given some assurance that there was appropriate follow up. The SEC could have offered to brief the Senator and his staff privately about any on-going investigative efforts. On the other hand if the SEC failed to conduct appropriate follow up it should have admitted the error.

The question now is, should the Commission’s own rules apply to it? Should the Senator and the public label the agency uncooperative and draw an adverse inference? Is it appropriate to assume that the SEC is just covering up a series of failures?

Even setting aside the notion of applying the SEC’s rules to it, there is good reason to assume that this is a cover up. It was not that long ago that every SEC staff division director stood before Congress and refused to give testimony about the Commission’s investigative efforts regarding Ponzi scheme king Bernard Madoff. In effect the agency invoked the Fifth Amendment (here). Now it is clear those refusals were made to cover up a series of failures. The SEC’s refusal here can be seen as nothing less.

The SEC claims it is working hard to restore its credibility. It claims it is working hard to be the investor’s advocate and the top cop of Wall Street and Main Street. More rules and lots of investigation statistics are not going to restore its credibility. If the SEC wants to bring a new ethics to the market place it starts with the Commission ending the double standard. A new ethics starts at the top with the Commission rebuilding its credibility. It starts with the SEC walking the walk. It starts with answering the questions truthfully and fully.