A report from the SEC’s Inspector General has publicized that two attorneys at the Securities and Exchange Commission are under “active” criminal investigation by the FBI for trading stocks based on inside information. Bad news for an agency that is still under fire for missing the Madoff fraud.
Besides the salacious news, there are some items in the report that I think are interesting for a compliance professional.
According to some undated material, there was a thought in the early days of the SEC that its employees should not be permitted to trade in securities at all. That position was not finally adopted, but there is along history of limiting the ability of SEC employees to trade in securities. The restrictions are designed to ensure public confidence that Commission staff are not benefiting personally with respect to their information about securities. There is also an important need to prevent real and apparent conflicts of interest.
Rule Five of the Commission’s Conduct Regulation, 17 C.F.R. 200.735-5, contains the limitations applicable to all SEC Commissioners and employees. Some key limitations are:
- Carrying securities on margin, purchasing securities with borrowed funds, and selling short
- Purchasing securities of a company that to the employee’s knowledge is involved in current Commission investigations or proceedings
- Purchasing or selling options, futures, or options on futures
- Selling a security that has been held for fewer than six months
The SEC has a detailed reporting structure that employees must follow when buying and selling securities. It sounds like the structure doesn’t work.
“Our investigation revealed that the Commission lacks any true compliance system to monitor SEC employees’ securities transactions and detect insider trading. In addition, the OIG found that there is a poor understanding and lax enforcement of the Rule 5 reporting requirements.”
The SEC requires the investment advisers it regulates to have strict controls to avoid insider trading. It seems they lack the control themselves.
CBS News video story:
- Copy of SEC IG Report: “Employee’s Securities Transactions Raise Suspicions of Insider Trading” – by Bruce Carton of Securities Docket
- SEC Attorneys Probed For Insider Trading by CBS News investigative producer Laura Strickler and chief investigative correspondent Armen Keteyian.
- Outline of Rules of Ethics for Employees and Officials of a Securities Regulatory Agency (.pdf) by the SEC
- Rule 5 Limiting SEC Employee Conduct 17 C.F.R. § 200.735-5