Today, the Securities and Exchange Commission (SEC) made a proposal to modernize and strengthen its ethical compliance program by proposing amendments to its ethics rules.
Ethical Rules Uplifting Securities Trading by Personnel to be Updated by SEC
The amendments would add new requirements and prohibitions to the program, which already includes some of the most stringent ethics requirements in the executive branch for all agency employees, their spouses, and their minor children. These new requirements and prohibitions would apply to all agency employees, their spouses, and their minor children.
According to Gary Gensler, the Chairman of the Securities and Exchange Commission (SEC), “I was pleased to support today’s proposal to strengthen, modernize, and optimize the SEC’s ethics requirements.”
The responsibility of monitoring the financial markets in the United States has been given to the Securities and Exchange Commission (SEC). If these amendments are approved, they will help ensure that the SEC lives up to the trust that has been placed in it by the general public.”
At the moment, employees of the Securities and Exchange Commission (SEC) are obligated to preclear securities transactions and adhere to minimum holding periods. It is forbidden for any employee to, among other things, trade in the securities of companies that are the subject of an investigation being conducted by the agency, engage in short selling, trade in derivatives, participate in initial public offerings for a period of seven calendar days, buy or carry securities on margin, or engage in short selling.
The amendments, which are being proposed in conjunction with the Office of Government Ethics, would bring the Supplemental Ethics Rules of the SEC up to date. These rules are found in 5 CFR Part 4401.102 and are known as the Supplemental Standards of Conduct for Members and Employees of the Securities and Exchange Commission. To be more specific, the following would occur if the amendments were to be adopted:
- Extend the existing restrictions on prohibited holdings so that employees are prohibited from investing in funds that are focused on the financial industry;
- Permit the Securities and Exchange Commission to collect information about the transactions and holdings of covered securities made by employees directly from financial institutions using an automated electronic system; and
- Given that diversified mutual funds, on average, present a low risk of conflicts of interest, misuse of nonpublic information for personal gain, or appearance problems, the requirements of the Supplemental Ethics Rule should be amended to exempt these funds from the requirements of the rule. The rules would still apply to mutual funds that focus their investments on a particular field, industry, company, state, or country that is not the United States of America.
Restrictions Placed Against the Funds of the Financial Industry Sector
The Commission has for a long time prohibited its employees from investing in the stocks of entities directly regulated by the Commission. Examples of such entities include broker dealers and investment advisers. The proposed amendments would expand the prohibited holdings restrictions to ban employees from investing in financial industry sector funds. This is due to the fact that employee ownership of financial industry sector funds poses similar risks of conflicts of interest and appearance concerns.
Improvements Made to the Data Collection Process
The Securities and Exchange Commission would also be given permission under the proposed amendments to collect data on the transactions and holdings of covered securities by employees directly from financial institutions using an automated electronic system.
Automating the collection of these data would improve internal compliance controls in a number of ways. It would make it easier to identify and correct violations in real time, it would cut down on the cumbersome manual processes that are currently used for transaction confirmations and reporting, and it would provide an independently verifiable source for compliance monitoring and testing.
Utilization of Agency Resources That Is Both Efficient and Effective Being Optimized
Finally, the proposed amendments would optimize the efficient and effective use of agency resources to monitor compliance with securities investments and transactions that involve significant ethical risks. This would result in a significant reduction in the amount of time and effort spent on compliance monitoring. To be more specific, the proposed amendments would exempt diversified mutual funds from complying with the requirements of the Supplemental Ethics Rule.
This would be done for the simple reason that, in comparison to other types of securities, diversified mutual funds generally present a lower risk of conflicts of interest, misuse of nonpublic information for personal gain, or appearance problems. However, the rules would still apply to mutual funds that focus their investments on a specific field, industry, company, state, or country that is not the United States of America.
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