By Rodney F. Tonkovic, J.D.
The SEC has updated the ethics rules governing the securities purchases and holdings of its staff. The amendments update the SEC’s Supplemental Ethics Rules and include amendments prohibiting investments in financial industry sector funds, enhancing data collection, and optimizing the use of agency resources. The amendments were adopted jointly with the Office of Government Ethics and amend existing SEC standards while supplementing ethical standards applicable to all Executive Branch employees. The rules will be effective 30 days after publication in the Federal Register (Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission, Release No. 34-99582, February 22, 2024).
The updates to the SEC’s Supplemental Ethics Rules, 5 CFR Part 4401.102, Supplemental Standards of Conduct for Members and Employees Securities and Exchange Commission include:
Prohibitions Against Financial Industry Sector Funds: The SEC has long prohibited employees from purchasing or owning securities in entities directly regulated by the agency. This prohibition has been expanded to include financial industry sector funds in order to avoid conflicts of interest and to assure the public that employees are not profiting from the Commission's access to material information. This prohibition also addresses the incongruity previously resulting from an SEC employee's theoretical ability to hold unlimited shares in a financial industry sector fund that concentrates holdings in directly regulated entities.
Enhancements to Data Collection: The proposal would have required the use of an automated system to collect reportable transactions and holdings. Taking into consideration commenters' concerns about privacy and cybersecurity, the final rules instead authorize the use of either an internal or third-party automated compliance system and permit rather than require employees to use an automated compliance system to comply with the reporting requirements. The existing 5-day transaction certification requirement has also been retained. The release notes that the technical requirements of any automated compliance system have yet to be determined.
Optimizing Efficient and Effective Use of Agency Resources: Existing regulations required all securities transactions (unless specifically exempted) by employees to be pre-cleared and then reported to the SEC. In order to focus on higher-risk trading and reporting, the pre-clearance, reporting, and holding requirements for "permissible diversified investment funds" have been eliminated. These permitted funds include diversified registered investment companies, money market funds, 529 plans, and diversified pooled investment funds, all of which pose little or no risk of conflicts of interest for members and employees, the Commission says.
"I was pleased to support today's adoption of rules to strengthen the SEC’s ethics requirements," said SEC Chair Gary Gensler. "These amendments modernize our compliance program and will help ensure the SEC honors the trust the public has placed in our agency."
The release is No. 34-99582.