Jan. 30, 2023 —The Securities and Exchange Commission today proposed amendments to its ethics rules to strengthen and modernize its ethics compliance program. The amendments would add new requirements and prohibitions to the program, which already includes some of the most stringent ethics requirements in the executive branch for all agency employees, their spouses, and minor children.
“I was pleased to support today’s proposal to strengthen, modernize, and optimize the SEC’s ethics requirements,” said SEC Chair Gary Gensler. “We at the Securities and Exchange Commission are entrusted by the public to oversee the U.S. capital markets. These amendments, if adopted, would help ensure that the SEC honors the trust that the public has placed in us.”
Currently, SEC employees are required to preclear securities transactions and comply with minimum holding periods. All employees are prohibited from, among other things, transacting in securities of companies the agency is investigating, engaging in short selling, transacting in derivatives, participating in initial public offerings for seven calendar days, or purchasing or carrying securities on margin.
The amendments, which are being proposed jointly with the Office of Government Ethics, would update the SEC’s Supplemental Ethics Rules, 5 CFR Part 4401.102, Supplemental Standards of Conduct for Members and Employees Securities and Exchange Commission. Specifically, if adopted, the amendments would:
- Expand the existing prohibited holdings restrictions to ban employees from investing in financial industry sector funds;
- Authorize the SEC to collect data on employees’ covered securities transactions and holdings directly from financial institutions through an automated electronic system; and
- Exempt diversified mutual funds from the Supplemental Ethics Rule’s requirements, given that they generally pose a low risk of conflicts of interest, misuse of nonpublic information for personal gain, or appearance problems. Mutual funds that concentrate investments in a particular sector, industry, business, state, or country other than the United States would remain subject to the rules.
Prohibitions Against Financial Industry Sector Funds
While the Commission has long prohibited employees from investing in stocks of entities directly regulated by the Commission, such as broker-dealers and investment advisers, the proposed amendments would expand the prohibited holdings restrictions to ban employees from investing in financial industry sector funds, as employee ownership of financial industry sector funds poses similar risks of conflicts of interest and appearance concerns.
Enhancements to Data Collection
The proposed amendments also would authorize the SEC to collect data on employees’ covered securities transactions and holdings directly from financial institutions through an automated electronic system. Automating the collection of this data would enhance internal compliance controls by facilitating the detection and remediation of violations in real-time, reducing burdensome manual processes for transaction confirmations and reporting, and providing an independently verifiable source for compliance monitoring and testing.
Finally, the proposed amendments would optimize the efficient and effective use of agency resources to monitor compliance of securities investments and transactions that involve significant ethics risks. Specifically, because diversified mutual funds generally pose a low risk of conflicts of interest, misuse of nonpublic information for personal gain, or appearance problems, as compared to other types of securities, the proposed amendments would exempt diversified mutual funds from the Supplemental Ethics Rule’s requirements. However, mutual funds that concentrate investments in a particular sector, industry, business, state, or country other than the United States would remain subject to the rules.
Have a securities law question? Call New York Securities Lawyers at 212-509-6544.
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.