Schapiro, in a statement, said she takes the report "very seriously." She added that it would be "inappropriate" to comment on the Justice Department referral.

"I've known David for many years to be a talented, highly skilled lawyer," Schapiro said.

Kotz began his probe in March after Becker and his brothers were sued by the court-appointed trustee in the Madoff bankruptcy case to recover $1.5 million in what he termed fictitious profits from the inherited account.

When he joined the agency in 2009, Becker told Schapiro and William Lenox, then the agency's ethics counsel, about his family's Madoff investment. Lenox told Becker in May 2009 that he didn't have a financial conflict of interest and could work on the policy for compensating the victims.

Adjusted For Inflation

As general counsel, Becker advocated that Madoff investors be compensated for losses from an SEC-overseen insurance fund using a formula that adjusted for inflation. The argument, which was approved by the commission, could have made it less likely that the trustee would seek to reclaim profits from Becker.

The SEC said today that it would take a new vote on the issue in light of the report's findings, a step Kotz recommended. The inflation-adjusted formula hasn't been adopted in the Madoff bankruptcy case.

If the method were used, the amount of money that the trustee would be able to seek from Becker and his brothers would have been reduced by about $140,000, Kotz said in the report.

Becker may also have violated the law by offering an opinion on proposed legislation that would have limited a trustee's ability to bring so-called clawback suits like the one filed against him, Kotz wrote. In testimony to the inspector general, Becker defended his participation, saying the measure he weighed in on was "political noise" rather than a serious proposal.

Schapiro Testimony

In her testimony to Kotz, Schapiro said she would have asked Becker not to participate in Madoff policy if she had known he was potentially subject to a lawsuit or if she "understood that he had any financial interest."