On January 30, 2023, the U.S. Securities and Exchange Commission (“SEC”, “Commission”) proposed amendments to its ethics rules that govern the Commission’s employees, their spouses, and children. The proposal aims to strengthen and modernize the ethics requirements for SEC employees. Presently, employees are required to preclear securities transactions, comply with minimum holding requirements, and prohibited in participating in any securities activity that may pose conflicts of interests.
If the proposal is adopted, the amendments would expand the prohibited holdings restrictions, modernize how the SEC collects employee data, and provide additional exemptions. The update is attempting to expand prohibited holdings restrictions to ban employees from investing in financial industry sector funds. The Commission believes that financial industry sector funds pose risks of conflicts of interest and appearance concerns. Secondly, the Commission will look to automate the collection of employees’ covered securities transactions and holdings information through an automated electronic system. Automating the data collection will enhance the internal compliance controls of detecting potential violations, reduce the burden of manual reporting processes, and provide an independently verifiable source for compliance testing. Lastly, the Commission recognized that diversified mutual funds generally pose a low risk of conflicts of interest, misuse of nonpublic information for personal gain, or appearance problems. As a result, the SEC will look to exempt diversified mutual funds from the Supplemental Ethics Rule’s requirements. However, sector, industry, state, or country specific mutual funds will remain subject to the ethics rules requirements.
It appears that the SEC is not only focused on enhancing regulatory requirements for its registrants, but also looking to strengthen and modernize its internal ethics compliance program. The Commission is attempting to walk-the-walk with the addition of new requirements and prohibitions in hopes of garnering continued trust from the public. The SEC Chair Gary Gensler said, “We at the Securities and Exchange Commission are entrusted by the public to oversee the U.S. capital markets. These amendments, if adopted, would help ensure that the SEC honors the trust that the public has placed in us.” We applaud the SEC for the proposed rule. Hopefully, Congress will adopt similar rules that apply to our elected officials and their staff.
We will continue to monitor all of the changes from the SEC; however, it appears that they have no intention of slowing down with their proposals.
For over two decades, we have been providing compliance consulting services and servicing as outsourced Chief Compliance Officers. Our professionals have served as SEC regulators and in senior leadership, guiding the industry’s principal compliance association. Our consultants also have hands-on industry experience as chief compliance officers, experienced securities attorneys and senior management of investment advisers, broker-dealers and fund administrators.
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