The SEC Adopts New Rules on Ethics for Securities Trading for Agency Personnel
VerifyInvestor.com
The SEC adopted new rules on February 22, 2024, for securities trading by agency personnel.
While the current ethics rules applicable to securities holdings and transactions of all agency employees, their spouses, and minor children are already vigorous, the new amendments are even more strict. The SEC’s purpose in amending the rules was to modernize them and make them even more stringent to increase the public’s confidence in the ethics of all agency personnel.
The Current Ethical Rules for Agency Employees and Their Families
For years now, SEC employees and their families have had exacting ethical rules to comply with when it comes to the various types of securities holdings and transactions they can engage in. Among other things, agency employees and their families:
must pre-clear securities transactions,
may not engage in any securities transactions involving companies the SEC is investigating,
may not engage in transacting in derivatives,
cannot participate in IPOs for seven (7) calendar days after the direct listing effective date, and
must report all securities transactions and confirm securities all transactions to the SEC within five (5) business days after receipt of confirmation of the transaction.
Despite these already demanding ethical requirements, the recent changes further restrict the types of securities transactions agency personnel can engage in.
The SEC’s purpose in amending the rules in this way was to modernize their ethics rules to reduce unnecessary and burdensome monitoring of transactions that do not pose a significant conflict of interest risk, yet at the same time increase the public’s confidence that agency members adhere to the strictest of ethics.
Key to the amendments for the SEC is avoiding conflicts of interest and even the appearance of a conflict of interest.
How the Rules are Changing.
Below are some ways — not all of them (for a full review of all amendments, see here) — in which the SEC revised its ethics rules on February 22, 2024, for agency personnel.
The new rules eliminate pre-clearance, reporting, and holding period requirements for certain “Permissible Diversified Investment Funds.”
One way in which the SEC updated its ethics rules for agency personnel is by eliminating the preclearance requirement.
Until now, agency personnel were required to clear ahead of time (i.e., “pre-clear”) all securities transactions with the SEC and report those transactions no later than within five (5) business days of confirmation of the transaction.
Unless a specific exemption is applied, the preclearance requirement applies to all securities transactions — including all diversified mutual funds and other diversified investment products referred to as “Permissible Diversified Investment Funds.”
Based upon its findings that diversified mutual funds and Permissible Diversified Investment Funds carry little to no conflict-of-interest risk, the SEC determined that eliminating the pre-clearance requirements for these types of investments made sense. According to the agency, eliminating the preclearance requirement for these low-to-no-risk investments outweighs its current benefits — which are minimal — while getting rid of the preclearance requirement will eliminate an unnecessary administrative burden.
2. The new rules do not require mandatory automated reporting of purchases, sales, acquisitions, and dispositions of securities.
SEC employees who engage in securities transactions are also required to manually submit brokerage or financial statements to the SEC within five (5) business days after receipt of confirmation. In addition, they must submit duplicate statements for each reportable transaction to the Designated Agency Ethics Official (“DAEO”).
To update and modernize its reporting system, the SEC originally proposed to change this rule to automate the reporting requirement by requiring agency personnel to allow the Office of Ethics Counsel (OEC) to collect all required data directly from financial institutions through a third-party automated electronic system. The original proposal also included changing the 5-day reporting period to a schedule set by the DAEO.
The use of third parties for certain compliance issues is not a new concept for the SEC. For example, third-party services can be used to verify investor status or to verify accredited investors.
However, after receiving and considering several comments on the required use of a third-party service to automate transaction reporting, the SEC changed its original proposal.
Accordingly, the final rule on reporting securities transactions by agency personnel requires:
Keeping the 5-day reporting requirement, but
Allowing, rather than mandating, the use of an automated system by employees to report securities transactions.
The SEC felt that this compromise — allowing employees to choose whether to report their transactions manually or use an automated system — sufficiently addressed the privacy and security concerns raised, while still making the reporting process more efficient.
The rule still allows for manual reporting by employees, and it still requires anyone manually submitting their report to the SEC to also submit a duplicate report to the DAEO.
3.The new rules prohibit employees from purchasing financial industry sector funds.
SEC personnel are currently prohibited from purchasing or owning any “security or other financial interest in an entity directly regulated by the Commission.”
To avoid potential conflicts of interest, the SEC’s recent amendments expand this rule to include prohibiting agency personnel from owning financial industry sector funds that invest in entities the SEC directly regulates — such as registered broker-dealers and investment advisers.
The new prohibition is tailored to only investments in the financial services industry that are regulated by the SEC. Nevertheless, the restriction is broad enough to “assure the public that Commission employees are not profiting from the SEC’s unique access to material information.”
4. The new rules clarify that the 7-day waiting period applicable to IPOs applies to all direct listings of securities.
Finally, SEC employees and members are currently not allowed to purchase securities that are part of an IPO (“initial public offering”) for seven (7) calendar days after the IPO is effective — “except for IPOs of shares in a registered investment company or other publicly traded or publicly available collective investment fund.”
Because the SEC believes that publicly traded securities present the same conflict of interest appearance concerns as traditional IPO offerings, it amended this rule to clarify that the prohibition applies to traditional IPO offerings and direct listings. Thus, according to the recent amendment, employees and members may not purchase securities that are part of a publicly traded IPO for seven (7) days after the direct listing effective date.
The SEC’s 2024 revisions to the ethics rules for agency personnel are expected to improve the agency’s efficiency and use of resources, while at the same time increasing employee accountability and bolstering public confidence in the agency’s integrity.
The Securities and Exchange Commission (SEC) is not just tough on issuers, requiring them to verify investors and, indeed, to verify accredited investors for their offerings. Still, they are also strict with their employees and members. At VerifyInvestor.com we understand the regulatory challenges facing issuers and investors alike. That’s why we offer world-class accredited investor verification services. Our services are fast, efficient, cost-effective, confidential, and reliable. We help companies fully and easily comply with their legal obligations to verify investors as accredited investors.