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U.S. Securities and Exchange Commission

SEC Takes Steps to Strengthen Existing Rules Governing Securities Trading by Personnel


Washington, D.C., May 22, 2009 — Securities and Exchange Commission Chairman Mary Schapiro today outlined a series of measures the agency is taking to strengthen its internal compliance program to guard against inappropriate employee securities trading.

“It only makes sense that we have a world-class compliance program – just as we expect from those we regulate,” said Chairman Schapiro. “The employees at the SEC have a well-deserved reputation for integrity and professionalism. These measures will further bolster our standing by helping to prevent not only an actual impropriety, but the appearance of one as well.”

Within weeks after arriving at the SEC, Chairman Schapiro learned about potential weaknesses in the internal programs that monitor compliance with these rules and directed prompt action to follow through on the efforts already underway to strengthen the agency’s systems. She also directed that additional measures be implemented.

The measures the agency is taking include:

  • First, the staff has drafted a set of new internal rules governing securities transactions for all SEC employees that will require preclearance of all trades. It also will, for the first time, prohibit staff trading in the securities of companies under SEC investigation regardless of whether the employee has personal knowledge of the investigation. The rules have been submitted to the federal government’s Office of Government Ethics, which approves agency ethics rules.
  • Second, the SEC is contracting with an outside firm to develop a computer compliance system to track, audit and oversee employee securities transactions and financial disclosure in real time.
  • Third, Chairman Schapiro has signed an order consolidating responsibility for oversight of employee securities transactions and financial disclosure reporting within the Ethics Office. And, she has authorized the hiring of a new chief compliance officer.

Revising the SEC Rule Governing Securities Trading by SEC Personnel:

The staff has drafted internal rules governing securities trading and has submitted those rules for clearance by the Office of Government Ethics.

Current agency rules prohibit, among other things, short selling, carrying securities on margin, engaging in options or futures transactions in instruments whose value is derived from an underlying security, and holding a security interest in broker-dealers and registered investment advisers. The current rules also mandate that employees hold stock that they purchase for at least six months to limit speculative activity. Further, SEC employees are required to report all trades within five days of receiving confirmations.

In addition to the existing rules, the newly-approved rules will:

  • Require employees to pre-clear all their securities transactions to ensure, among other things, the company whose stock they are trading is neither being investigated by the SEC nor is involved in an IPO. Also, any employee with access to non-public information about a company’s registration statement may not trade in that security.
  • Prohibit ownership of securities in publicly-traded exchanges and transfer agents, in addition to existing prohibitions against owning securities in broker-dealers, registered investment advisers and others directly regulated by the Commission.
  • Require that all employees authorize their brokers to provide the agency with duplicate trade confirmation statements. Those statements would then be integrated into a new computerized system so that employees can more easily comply with reporting obligations and the ethics office can more effectively monitor compliance.
  • Require employees to certify before any trade that they do not possess any non-public information about the company being traded.

As part of the pre-clearance and compliance process, periodic reviews will be conducted by supervisors to compare transactions against the employee’s work projects to guarantee compliance with the rules.

Under the current rules, preclearance is recommended but not mandated. If an employee were to voluntarily seek such preclearance the only stocks that would be prohibited would be stocks of companies that have pending registration statements before the SEC. This is in addition to existing laws that prohibit anyone from trading on material non-public information. The new rule will expand the prohibited list to include all companies being investigated by the SEC.

Contracting for an Internal Computer Compliance System:

The SEC is contracting with an outside firm to develop a new agency-wide computer system that will enable the Ethics Office to pre-clear and track all employee securities transactions for compliance with the rules.

The new system would automate employee reporting of personal securities transactions which would simplify the reporting process for employees and ensure accurate pre-clearance checks. The new system would also provide for easy verification of transactions by comparing reported trades against confirmation statements provided directly by each employee’s brokerage firm. Further, the system would permit the Ethics Office to monitor transactions and detect any irregularities.

Under the current system, employees are not required to pre-clear their trades but instead must report any trade within five days of the confirmation of the transaction. Currently, if an employee calls to obtain preclearance of a trade, the preclearance check is run through a system that has significant limitations and does not contain information that would identify all stocks that should be prohibited.

Finally, the new system would capture the trades of all employees in one system rather than a series of various handwritten forms that are not presently required from all agency personnel.

Six months after the computer system is established, Chairman Schapiro will bring on board a compliance expert to review the system and ensure the program is operating effectively.

The SEC put out a request for bids in December and agency staff began reviewing proposals in February, with the expectation of selecting a vendor within the coming days.

Centralizing Compliance Functions within the Ethics Office:

Finally, Chairman Schapiro today signed an order consolidating the compliance and reporting responsibilities within the Ethics Office. She also has authorized the hiring of a new chief compliance officer.

Previously, responsibility within the SEC for ensuring staff compliance was spread between two offices. The split in responsibility depended on the type of form that an employee was required to complete.

“Streamlining the responsibilities within one office will help eliminate any potential for inefficiencies,” concluded Chairman Schapiro.



Modified: 05/22/2009