The new Chairman of US SEC recently outlined a series of measures the agency is taking to strengthen its internal compliance program to guard against inappropriate employee securities trading.
The measures the agency is taking include:
- 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.
- 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.
- SEC Chairman 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.
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 SEC.
- 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.
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. It 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.
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.
I suggest HKMA and SFC also publicize their internal employing trading rules for the sake of good corporate goverance.
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