Sept. 11 (Bloomberg) -- The Securities and Exchange Commission’s watchdog began an inquiry into the influence U.S. rescue funds may play in determining fines for misconduct, such as Bank of America Corp.’s accord to pay a $33 million penalty.

Inspector General H. David Kotz agreed to examine potential SEC punishments of banks that got aid from the $700 billion Troubled Asset Relief Program, because taxpayers may absorb the fines. Representative Elijah Cummings requested the investigation and asked Kotz to examine the SEC’s penalty against Bank of America for misleading investors. The bank got $45 billion in government assistance.

“It is conceivable to expect that additional violations of securities laws will be revealed,” Cummings, a Maryland Democrat, wrote in an Aug. 6 letter to Kotz and Neil Barofsky, the inspector general for TARP. “Those violations could have occurred at firms that have received government assistance.”

The SEC in August accused Charlotte, North Carolina-based Bank of America of failing to disclose to investors it had agreed to let Merrill Lynch & Co., the firm the bank was acquiring, pay as much as $5.8 billion in employee bonuses and incentives. Kotz’s review ratchets up scrutiny of the punishment, which is being questioned by a federal judge.

U.S. District Judge Jed Rakoff in New York has declined to approve Bank of America’s settlement, asking last month whether the amount is “remotely reasonable” and why the SEC didn’t sue executives for deceiving investors about the bonuses.

‘Fair’ Settlement

The SEC called the Bank of America settlement “fair” and “in the public interest” in a brief filed Sept. 9 with Rakoff’s court. Bank of America, in its brief, urged Rakoff to approve the accord and said it stands “ready to litigate” against the agency if he refuses.

Bank of America has said it won’t use TARP money to pay the fine. The SEC said the proposed fine won’t affect the bank’s “obligation” to return funds, making it “highly unlikely” taxpayers will be affected.

Cummings asked Kotz and Barofsky to review the roles of Federal Reserve and Treasury Department officials in “issues” that led to the Bank of America fine.

Cummings, in a letter released yesterday by his office, also asked for examinations into whether SEC staff weighed concerns such as whether fines may threaten a bank’s viability and whether penalties will harm shareholders “when the shareholder is the U.S. taxpayer.”

Kotz told Cummings in an Aug. 20 letter he would conduct the probes. Barofsky said he shouldn’t participate because he’s involved in “ongoing” investigations with the SEC into the “circumstances of Bank of America’s merger with Merrill Lynch.”

SEC spokesman John Nester said the agency will cooperate with the investigation.

Bonus Outcry

Bank of America bought New York-based Merrill Jan. 1 for $29 billion, combining the world’s biggest commercial lender and the largest securities firm. The Merrill bonus payments drew criticism from Bank of America shareholders after Merrill reported a $27.6 billion loss for last year.

Lawmakers have questioned whether Fed Chairman Ben S. Bernanke and former Treasury Secretary Henry Paulson pressured Bank of America to complete its acquisition of Merrill because they were concerned that the deal’s failure would threaten the financial system.

Bernanke told a House committee in June that the Fed acted with the “highest integrity.” Paulson in July said he never discouraged Bank of America’s management from disclosing information to investors.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: September 11, 2009 08:19 EDT