The Securities and Exchange Commission (SEC) proposed amendments this week designed to strengthen and modernize its ethics compliance program.
The proposed amendments would add new ethics requirements and prohibitions to the program 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,” SEC Chair Gary Gensler said. “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.”
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 lower risk. 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.
Currently, SEC employees are required to preclear securities transactions and comply with minimum holding periods. In addition, all employees are prohibited from 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 SEC has long prohibited employees from investing in stocks of entities directly regulated by the commission, such as broker dealers and investment advisers. However, 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.
Additionally, the proposed amendments would authorize the SEC to collect data on employees’ covered securities transactions and holdings directly from financial institutions through an automated electronic system. This would help enhance internal compliance controls by facilitating the detection and remediation of violations in real-time, the SEC posits.
Finally, the proposed amendments would optimize the use of agency resources to monitor compliance of securities investments and transactions that involve significant ethics risks. The proposed amendments would exempt diversified mutual funds from the requirements.