TheCorporateCounsel.net

Yesterday, the SEC announced that it had adopted amendments to its ethics rules that govern the securities holdings and transactions of all agency employees, their spouses, and minor children. As one might expect, the SEC already had in place very robust ethics requirements around trading in securities by SEC personnel and related persons, which instilled in me to this day a reluctance to ever trade in any individual company stocks, even if permitted by my firm’s trading policy. The SEC describes its recent amendments as follows:

The amendments update the SEC’s Supplemental Ethics Rules, 5 CFR Part 4401.102, Supplemental Standards of Conduct for Members and Employees Securities and Exchange Commission.

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 rule amendments 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 amendments permit employees to comply with existing reporting requirements by authorizing financial institutions to transmit data on their covered securities transactions and holdings directly to the SEC through an automated electronic system. This amendment is expected to 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.

Optimizing Efficient and Effective Use of Agency Resources
Finally, the amendments facilitate 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 rule amendments 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 remain subject to the rules.

I would say the biggest takeaway for me from my years being subject to the SEC’s trading restrictions (and subsequent experience with law firm and public company insider trading policies) is that even the appearance of impropriety is often just as problematic as actually violating the law or a policy, so if it seems close to the line, just don’t do it. Some trade that is going to yield you a short-term gain is not worth jeopardizing your career or your freedom. Another thing that always sticks with me is the line “ethics is a team sport.” If you have questions, ask them, even if they seem obvious. Maintaining an open line of communication is always one of the most critical pieces of any effective compliance program, and that is most certainly the case in the securities trading context.

– Dave Lynn