Proposed Rule2023-02235
Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission
Primary source
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Published
February 7, 2023
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("SEC" or "Commission"), with the concurrence of the Office of Government Ethics ("OGE"), is jointly issuing with OGE this proposed rule for Commission members and employees. This proposed rule would amend the existing Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission ("Supplemental Standards") jointly issued by SEC and OGE, would supplement the Standards of Ethical Conduct for Employees of the Executive Branch (OGE Standards) issued by OGE, and is necessary and appropriate to address ethical issues unique to the SEC. The Commission is proposing to revise transaction and reporting requirements for certain assets that pose a low risk of conflicts of interest or appearance concerns, and to prohibit employee ownership of sector funds that have a stated policy of concentrating their investments in entities directly regulated by the Commission. Further, the Commission proposes to authorize collection of covered securities transactions and holdings data from financial institutions through a third-party automated compliance system. The Commission also proposes to correct certain technical matters and adjust its transaction and reporting requirements to provide the flexibility necessary to implement a third-party automated compliance system.
Full Text
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[Federal Register Volume 88, Number 25 (Tuesday, February 7, 2023)]
[Proposed Rules]
[Pages 7891-7897]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-02235]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 88, No. 25 / Tuesday, February 7, 2023 /
Proposed Rules
[[Page 7891]]
SECURITIES AND EXCHANGE COMMISSION
5 CFR Part 4401
[Release No. 34-96768; File No. S7-02-23]
RIN 3209-AA15
Supplemental Standards of Ethical Conduct for Members and
Employees of the Securities and Exchange Commission
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission''), with the concurrence of the Office of Government
Ethics (``OGE''), is jointly issuing with OGE this proposed rule for
Commission members and employees. This proposed rule would amend the
existing Supplemental Standards of Ethical Conduct for Members and
Employees of the Securities and Exchange Commission (``Supplemental
Standards'') jointly issued by SEC and OGE, would supplement the
Standards of Ethical Conduct for Employees of the Executive Branch (OGE
Standards) issued by OGE, and is necessary and appropriate to address
ethical issues unique to the SEC. The Commission is proposing to revise
transaction and reporting requirements for certain assets that pose a
low risk of conflicts of interest or appearance concerns, and to
prohibit employee ownership of sector funds that have a stated policy
of concentrating their investments in entities directly regulated by
the Commission. Further, the Commission proposes to authorize
collection of covered securities transactions and holdings data from
financial institutions through a third-party automated compliance
system. The Commission also proposes to correct certain technical
matters and adjust its transaction and reporting requirements to
provide the flexibility necessary to implement a third-party automated
compliance system.
DATES: Comments should be received on or before March 31, 2023.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/submitcomments.htm">https://www.sec.gov/rules/submitcomments.htm</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#443631282169272b2929212a3037043721276a232b32"><span class="__cf_email__" data-cfemail="7200071e175f111d1f1f171c0601320117115c151d04">[email protected]</span></a>. Please include
File Number S7-02-23 on the subject line.
Paper Comments
<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-02-23. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's website (<a href="https://www.sec.gov/rules/proposed.shtml">https://www.sec.gov/rules/proposed.shtml</a>).
Comments are also available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Operating conditions may limit access to the Commission's Public
Reference Room. All comments received will be posted without change.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information. You should submit only information
that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Richard Ufford or Jay Bragga, Office
of the Ethics Counsel, (202) 551-5170, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1050.
SUPPLEMENTARY INFORMATION: The Commission is proposing to amend 5 CFR
4401.102 (Rule 102), its Supplemental Standards.
I. Background
On August 7, 1992, OGE published the OGE Standards. See 57 FR
35006-35067, as corrected at 57 FR 48557, 57 FR 52483, and 60 FR 51167,
with additional grace period extensions for certain existing provisions
at 59 FR 4779-4780, 60 FR 6390-6391, and 60 FR 66857-66858. The OGE
Standards, codified at 5 CFR part 2635, effective February 3, 1993,
established uniform standards of ethical conduct that apply to all
executive branch personnel.
Section 2635.105 of the OGE Standards authorizes an agency, with
the concurrence and joint issuance of OGE, to adopt agency-specific
supplemental regulations that are necessary and appropriate to properly
implement its ethics program. The Commission has previously adopted
supplemental regulations--found at 5 CFR part 4401--in 2010 with the
concurrence and joint issuance of OGE. See 75 FR 42273, July 20, 2010,
as amended at 76 FR 19902, Apr. 11, 2011. The Commission now seeks to
amend those existing supplemental regulations for the reasons set forth
below. The Commission, with OGE's concurrence, has determined that the
following proposed revisions to the supplemental regulations are
appropriate and necessary for successful implementation of the SEC's
ethics program in light of its unique programs and operations.
II. Proposed Amendments
The Commission, with the concurrence of OGE, is proposing to amend
its Supplemental Standards to (1) prohibit employee ownership of sector
funds that have a stated policy of concentrating investments in
entities directly regulated by the Commission (referred to herein as
``Financial Industry Sector Funds''), (2) eliminate pre-clearance,
reporting, and holding period requirements for certain diversified
investments (referred to herein as ``Permissible Diversified Investment
Funds''), (3) enhance consistency, timeliness, and accountability in
employee reporting of purchases, sales, acquisitions, and dispositions
of securities by authorizing the Commission to collect such information
automatically from the employee's brokerage or financial institution(s)
through a third-party
[[Page 7892]]
automated compliance application, (4) clarify that the limitation on
purchasing securities that are part of an initial public offering (IPO)
until seven days after the IPO also applies to direct listings of
securities, and (5) make other structural and technical corrections to
the regulations.
The SEC's revised supplemental rule would retain several important
compliance controls, which are among the most extensive compliance
restrictions in the Federal Government, including pre-clearance,
confirmation, and reporting of covered transactions (such as stocks,
bonds, and sector mutual funds), required minimum holding periods, and
mandatory annual certification of compliance.
A. Prohibited Ownership of Financial Industry Sector Funds
The Commission is responsible for regulating the trading of
securities, investigating securities fraud and manipulations, requiring
registration of brokers, dealers, and investment advisers, and
supervising the activities of entities it regulates for compliance with
the securities laws. 17 CFR 200.1. To ensure that the public can have
the utmost trust in these activities, the Commission has long prevented
employees from purchasing or owning any ``security or other financial
interest in an entity directly regulated by the Commission.'' 5 CFR
4401.102(c)(1). The Commission is proposing to amend Sec.
4401.102(c)(1) to explicitly prohibit employee ownership of certain
Financial Industry Sector Funds by expanding the scope of ``entities
directly regulated by the Commission'' to include registered investment
companies, common investment trusts of a bank, companies exempt in part
or in total from registration under the Investment Company Act of 1940,
or other pooled investment vehicles that have a stated policy of
concentrating their investments in entities directly regulated by the
Commission. The purpose of this proposed amendment is to avoid
conflicts and appearance concerns with employee ownership of sector
funds that invest in entities the SEC directly regulates such as
registered broker dealers and investment advisers. The existing rule
prohibits employees from purchasing or holding securities issued by
such entities. Investments in mutual funds (including exchange-traded
funds), however, are permissible, provided employees comply with OGE's
regulatory exemptions pursuant to 18 U.S.C. 208(b)(2) found in 5 CFR
2640.201(b), which restrict participation in matters affecting one or
more holdings of a sector fund. Consistent with the Commission's risk-
based approach, the proposed revision recognizes Financial Industry
Sector Funds pose a substantial risk of conflicting with SEC work.
Thus, to guard against actual and perceived conflicts and appearance
concerns, the Commission proposes to expand the existing prohibition to
include investments in sector funds that focus on entities directly
regulated by the agency. In accordance with 5 CFR 2635.403(d), affected
employees will be given a reasonable period of time to divest Financial
Industry Sector Funds. Except in cases of unusual hardship, as
determined by the agency, a reasonable period shall not exceed 90 days
from the date divestiture is first directed. Affected employees may be
eligible for a Certificate of Divestiture under section 1043 of the
Internal Revenue Code and 5 CFR part 2634, subpart J.
B. Eliminating Preclearance, Reporting, and Holding Requirements for
Permissible Diversified Investment Funds
The SEC's existing supplemental regulations require employees to
pre-clear all securities transactions and to confirm securities
transactions by reporting them to the SEC within five business days
after receipt of confirmation of the transaction. This current
requirement applies to all securities not explicitly exempted,
including diversified mutual funds and other diversified investment
products that pose little or no conflicts of interest for members and
employees. These diversified investment products, referred to herein as
``Permissible Diversified Investment Funds'' include diversified
registered investment companies (including open and closed-end mutual
funds and unit investment trusts), money market funds, as defined in 17
CFR 270.2a-7 (Investment Company Act Rule 2a-7), 529 plans, as defined
in the Internal Revenue Code, 26 U.S.C. 529, and diversified pooled
investment funds held in employee benefit plans or pension plans.
To the extent that such funds qualify as diversified mutual funds
or diversified unit investment trusts in accordance with 5 CFR
2640.201(a), OGE has already provided broad exemptions from criminal
financial conflict of interest law, 18 U.S.C. 208, that permit
employees to participate in particular matters that could affect the
underlying holdings of such funds or the funds themselves. See 5 CFR
2640.201(a), (d). Other Permissible Diversified Investment Funds may
pose little or no conflict of interest concerns, such as pre-paid
college tuition plans authorized by States under section 529 of the
Internal Revenue Code and collective investment trusts that are
commonly held in defined contribution retirement plans. As a result,
the SEC's current pre-clearance and reporting requirements, as applied
to Permissible Diversified Investment Funds, have proven
disproportionately burdensome for both SEC employees and the SEC's
Office of the Ethics Counsel (OEC) staff, given the minimal risks such
assets pose for most SEC employees. In order to shift agency ethics
compliance resources to better focus on relatively higher-risk trading
and reporting of equities and the detection of any prohibited holdings,
the Commission is proposing to modify its rules to reduce the emphasis
on reporting and pre-clearing of Permissible Diversified Investment
Funds, assets that pose substantially lower ethics risk. This risk-
based approach would appropriately tailor compliance activities to
address trading and holdings that pose the most significant potential
for conflicts of interest. Based thereon, the SEC is proposing to add a
new paragraph (g)(1)(vi) to eliminate the preclearance, reporting, and
holding requirements for Permissible Diversified Investment Funds and
to modify existing paragraphs (c)(2) and (6), and paragraphs (e)(2) and
(3), to reflect the changes regarding such funds. These changes would
not apply to any sector funds, including Financial Industry Sector
Funds, as described above, or to any other entities directly regulated
by the Commission, or to any private equity, venture capital, hedge
fund, or similar pooled investment instruments.
C. Automated Reporting of Purchases, Sales, Acquisitions, and
Dispositions of Securities
Currently, members and employees are required to report
transactions of securities to the OEC within five business days after
receipt of confirmation of the transaction so that ethics officials can
reconcile precleared trades. This reporting requirement is authorized
under 5 CFR 4401.102(f) and constitutes an additional supplemental
confidential reporting requirement authorized by OGE pursuant to
section 107 of the Ethics in Government Act of 1978, as amended, and 5
CFR 2634.103. Reporting is currently conducted by members and employees
through the Commission's Personal Trading Compliance System and relies
on employees to manually confirm and also provide evidence of
transactions through submission of brokerage or other financial
institution account statements. Although this process has
[[Page 7893]]
been successful, requiring employees to manually submit transaction and
brokerage data is burdensome and presents the opportunity for human
error. Moreover, OEC is aware that a number of private corporations
have shifted to automated software systems that provide direct
notification of securities transactions from an individual's broker or
other financial institution.
The Commission therefore proposes to amend paragraph (f) of the
regulation to authorize OEC to collect covered securities transactions
and holdings data directly from financial institutions through a third-
party automated electronic system to satisfy the requirements to report
securities holdings and transaction information. This amendment would
reduce the burden on employees and compliance staff, and improve data
accuracy and completeness, by replacing the requirements for manually
submitted account statements and manual transaction confirmations. It
would also facilitate compliance by allowing the OEC to independently
verify employee holdings and transactions. Further, it would reduce the
risk of human error or oversight in reporting and reviewing of
securities holdings and transactions.
The Commission has consulted with OGE on the proposal to authorize
OEC to require members and employees to comply with the reporting
requirements in paragraph (f) through a third-party automated
compliance system. OGE has advised that the proposed system is
consistent with section 107 of the Ethics in Government Act, which
permits OGE (and agencies, subject to OGE approval) to impose
additional confidential financial disclosure requirements on officers
and employees of the executive branch. Although the automated
transmission of brokerage statements and transaction information would
be effectuated by a member or employee's broker or other financial
institution, the broker is acting as an agent of the member or employee
in transmitting the information, and the ultimate responsibility for
complying with the reporting requirement is that of the employee. To
ensure that all employees are able to comply with the reporting
requirement, the Commission is proposing to provide that the Designated
Agency Ethics Official (DAEO) may permit a member or employee to
provide the required information through another means if they cannot
obtain consent from their brokerage or financial institution to use the
third-party automated compliance system. In exceptional circumstances,
the DAEO may permit any member or employee to report the required
holding and transaction information outside of any eventual automated
personal trading compliance system such as where OEC has determined
under the specific facts that use of the automated system is not
possible or would result in significant undue hardship.
The Commission is also proposing to revise transaction reporting
deadlines to provide necessary flexibility to adjust for securities
transactions and holdings data obtained as proposed from financial
institutions though a third-party automated compliance system. The
Commission proposes to modify the existing five business day reporting
requirement to require all employees to report transactions in the
manner and according to the schedule required by the DAEO. It is OEC's
hope that any eventual automated third-party compliance system would
allow for trade notifications sooner than the current five day
requirement, and this amendment would maintain flexibility for the DAEO
to require earlier (or permit later) reporting for SEC employees, as
appropriate, using an automated third-party compliance system.
D. Prohibit Purchases of Direct Listed Assets
Members and employees of the Commission are currently prohibited
from purchasing a security in an initial public offering (``IPO'') for
seven calendar days after the IPO is effective, except for IPOs of
shares in a registered investment company or other publicly traded or
publicly available collective investment fund. This restriction ensures
that employees do not use, or appear to use, material, non-public
information to their advantage in purchasing such securities.
The Commission believes that securities that are directly listed on
an exchange present the same appearance concerns and risks as
securities offered in a traditional IPO, given that direct listings are
typically accompanied by the filing of a registration statement, as in
a traditional IPO. For that reason, the Commission proposes to expand
the limitation found at paragraph (c)(2) of the regulation to prohibit
a member or employee from purchasing securities that are directly
listed to an exchange for seven calendar days after the direct listing
effective date.
The Commission also proposes to remove the current exception to the
prohibition on purchasing within seven calendar days for IPO shares in
a registered investment company or publicly traded or publicly
available collective investment fund because the Commission's proposed
exception for Permissible Diversified Investment Funds in paragraph (g)
would cover IPO shares in a registered investment company or publicly
traded or publicly available collective investment fund.
E. Technical Corrections
Finally, the Commission is proposing to make certain definitional
and technical changes to its rules, which include updating language to
reflect that the Office of the Ethics Counsel is no longer part of the
Office of General Counsel.
III. Request for Public Comment
We request and encourage any interested person to submit comments
on any aspect of the proposed amendments, other matters that might have
an impact on the proposed amendments, and suggestions for additional
changes. Comments are of particular assistance if accompanied by
analysis of the issues addressed in those comments and any data that
may support the analysis. We urge commenters to be as specific as
possible.
IV. Administrative Law Matters
The Commission finds, in accordance with section 553(b)(3)(A) of
the Administrative Procedure Act (``APA''),\1\ that the proposed
amendments relate solely to agency organization, procedure, or
practice. They are therefore not subject to the provisions of the APA
requiring notice, opportunity for public comment, and publication. The
Regulatory Flexibility Act of 1980 \2\ therefore does not apply.
Nevertheless, we have determined that it would be useful to publish the
proposed amendments for notice and comment before adoption. Because the
proposed rule relates to ``agency organization, procedure or practice
that does not substantially affect the right or obligations of non-
agency parties,'' the proposed rule is not subject to the Small
Business Regulatory Enforcement Fairness Act (5 U.S.C. 804(3)(C)). The
proposed rule does not contain any collection of information
requirements as defined by the Paperwork Reduction Act of 1995.\3\
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\1\ 5 U.S.C. 553(b)(3)(A).
\2\ 5 U.S.C. 601 et seq.
\3\ 44 U.S.C. 3501 et seq.
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V. Economic Analysis
The Commission is sensitive to the economic effects of its rules,
including the costs and benefits that result from its
[[Page 7894]]
rules.\4\ As discussed further below, we expect the economic effects of
the proposed amendments would be limited. The amendments do not
substantially alter preexisting requirements and are directed at
internal procedures that apply only to Commission members and
employees. Thus, we expect these changes would not impose any costs on
parties other than the Commission and its members and employees, or if
there are any such costs, we expect those costs to be negligible. We
further believe that the changes would not have any significant impact
on the functioning of securities markets, and so would have minimal, if
any, effects on efficiency, competition, and capital formation. Where
possible, we have attempted to quantify the costs, benefits, and
effects on efficiency, competition, and capital formation expected to
result from the proposed amendments.
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\4\ Section 2(b) of the Securities Act, section 3(f) of the
Exchange Act, section 2(c) of the Investment Company Act, and
section 202(c) of the Advisers Act require us, when engaging in
rulemaking, to consider or determine whether an action is necessary
or appropriate in (or, with respect to the Investment Company Act,
consistent with) the public interest, and to consider, in addition
to the protection of investors, whether the action will promote
efficiency, competition, and capital formation. 15 U.S.C. 77b(b),
78c(f), 80a-2(c), 80b-2(c). In addition, section 23(a)(2) of the
Exchange Act requires the Commission to consider the effects on
competition of any rules the Commission adopts under the Exchange
Act and prohibits the Commission from adopting any rule that would
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act. 15 U.S.C.
78w(a)(2).
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As explained above, the proposed amendments would allow the DAEO
flexibility to adjust transaction and reporting requirements for
securities and holdings data obtained as proposed from financial
institutions through a third-party automated compliance system and
eliminate disproportionately burdensome compliance requirements for
assets that pose minimal ethics risk, while expanding the scope of the
Supplemental Standards to include certain funds that pose relatively
higher ethics risk. We discuss below the potential benefits, costs, and
economic effects of three significant categories of proposed amendments
to the Supplemental Standards: (1) prohibiting employees from holding
Financial Industry Sector Funds; (2) eliminating the preclearance,
reporting, and holding period requirements for Permissible Diversified
Investment Funds; (3) authorizing OEC to collect covered securities
transactions data directly from financial institutions through a third-
party automated electronic system and adjusting transaction reporting
deadlines to account for implementation of such systems; and (4)
prohibiting purchases of direct listed assets for seven calendar days
after the direct listing effective date. In addition, the proposed
amendments make certain definitional and technical changes that we
believe would not have a substantial economic effect.
A. Proposed Amendments Concerning Financial Industry Sector Funds
The Commission is proposing to explicitly prohibit employee
ownership of Financial Industry Sector Funds by expanding the scope of
``entities directly regulated by the Commission,'' and excluding
Financial Industry Sector Funds from the exception for Permissible
Diversified Investment Funds. The existing rules prohibit members and
employees from purchasing or holding securities of entities directly
regulated by the Commission, but not Financial Industry Sector Funds
that focus on investing in entities directly regulated by the
Commission. Investments in Financial Industry Sector Funds, however,
are subject to preclearance, reporting, and holding period requirements
in the Supplemental Standards.
The proposed amendments could enhance the integrity of the capital
markets by further guarding against the perception of improper use of
nonpublic information by SEC employees. Expanding the prohibition to
include investments in Financial Industry Sector Funds would reduce the
risk of actual or perceived conflicts of interests and could bolster
investor confidence in capital markets.
The cost to implementing this amendment would be borne mostly by
the members and employees who currently hold these funds, as the
Commission would require members and employees to sell, or otherwise
divest, these types of assets. We do not have sufficient information to
quantify the total effects associated with such divestment. Finally, we
expect that implementing the proposed amendments would not add
significant technical and administrative costs to the Commission as
compliance would be accomplished via the Commission's existing
compliance system with minimal upgrade costs.
B. Proposed Amendments Concerning Permissible Diversified Investment
Funds
The Commission is proposing to modify its rules to eliminate the
preclearance, reporting, and holding period requirements for
Permissible Diversified Investment Funds by making them exempt from
such requirements under Rule 102(g)(1). Under the current rule,
Commission members and employees are required to preclear all trades in
Permissible Diversified Investment Funds and confirm any such executed
transactions. Commission members and employees are required to hold
Permissible Diversified Investment Funds for at least 30 days before
selling.
The proposed amendments would benefit Commission members and
employees by removing certain procedural requirements that currently
apply to their purchases and sales of Permissible Diversified
Investment Funds and consequently reducing delays in executing
investment choices. The magnitude of the benefits, however, would
depend on how implementing the proposed amendments would affect
individual members' and employees' investment decisions and portfolios,
which is difficult to predict.
We do not expect that the proposed amendments would impose costs on
the Commission, its members and employees, or the public. Because
Permissible Diversified Investment Funds are diversified and therefore
eligible for most applicable regulatory conflicts exemptions, we expect
that the proposed exemption would add no significant risk of real or
perceived conflicts of interest, and would allow the Commission to
focus on employees' holdings or transactions that present more
significant conflicts and appearance concerns.
C. Proposed Amendments Concerning Automated Reporting of Purchases,
Sales, Acquisitions, and Dispositions of Securities and Related
Adjustment of Transaction Reporting Deadlines
The Commission is proposing to amend Rule 102(f) to authorize OEC
to collect covered securities transactions and holdings data directly
from financial institutions through a third-party automated electronic
system to satisfy the requirements to report securities holdings and
transaction information and to modify the existing five-business-days
reporting requirement to require all members and employees to report
transactions that are not exempt under Rule 102(g)(1) in the manner and
according to the schedule required by the DAEO.
We do not expect the proposed amendments to result in significant
economic effects to the Commission or members of the public. The
proposed amendments would benefit Commission members and employees by
reducing their reporting costs because manual submission of transaction
data would no
[[Page 7895]]
longer be necessary.\5\ In addition, the proposed amendments could
enhance the integrity of Commission operations by allowing more
effective OEC oversight of member and employee activity through
improved data accuracy and completeness and independent verification of
employee holdings and transactions. The proposed amendments may provide
more or less time for Commission members and employees to report the
transactions depending on the schedule set by the DAEO.
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\5\ See Section II.0, supra.
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The costs of implementing an automated electronic reporting system
would be borne mostly by the Commission, including both initial costs
of setting up the system and ongoing maintenance costs. We do not
expect that the proposed amendments will impose costs on the public.
D. Proposed Amendments Concerning Prohibiting Purchases of Direct
Listed Assets
The Commission is proposing to expand the limitation in Rule
102(c)(2) to prohibit a member or employee from purchasing securities
that are directly listed on an exchange for seven calendar days after
the direct listing effective date.
The Commission believes that the proposed limitation could benefit
the integrity of the capital markets by further guarding against the
perception of improper use of nonpublic information by SEC employees.
Expanding the prohibition to include direct listed assets would reduce
the risk of actual or perceived conflicts of interests and could
bolster investor confidence in capital markets.
The costs from implementing this amendment would be borne mostly by
the members and employees who may otherwise have purchased securities
that are directly listed on an exchange insofar as the proposed
limitation will restrict their investment options. We do not expect
that the proposed amendments will impose costs on the Commission or the
public.
We request comment on all aspects of our economic analysis,
including the potential costs and benefits of proposed amendments.
Commenters are requested to provide empirical data, estimation
methodologies, and other factual support for their views.
Statutory Basis and Text of Rule
These amendments to the Commission's ethics rules are being
proposed pursuant to statutory authority granted to OGE and to the
Commission. These include 5 U.S.C. 7301; 5 U.S.C. Ch 131. (Ethics in
Government Act of 1978); E.O. 12674, 54 FR 15159; 3 CFR 1989 Comp., p.
215, as modified by E.O. 12731, 55 FR 42547; 3 CFR, 1990 Comp., p. 306;
5 CFR 2634.103, 5 CFR 2634.201(f); 5 CFR 2635.105, 2635.403, 2635.803;
15 U.S.C. 77s, 78w, 77sss, 80a-37, 80b-11.
List of Subjects in 5 CFR Part 4401
Administrative practice and procedure, Conflict of interests,
Ethical conduct, Government employees, Government ethics, Securities.
Authority and Issuance
For the reasons set forth in the preamble, the SEC, with the
concurrence of OGE, is proposing to amend title 5 of the Code of
Federal Regulations, chapter XXXIV, part 4401, as follows:
PART 4401--SUPPLEMENTAL STANDARDS OF ETHICAL CONDUCT FOR MEMBERS
AND EMPLOYEES OF THE SECURITIES AND EXCHANGE COMMISSION
0
1. The authority citation for part 4401 is revised to read as follows:
Authority: 5 U.S.C. 7301; 5 U.S.C. Ch 131. 15 U.S.C. 77s, 78w,
77sss, 80a-37, 80b-11; E.O. 12674, 54 FR 15159, 3 CFR 1989 Comp., p.
215, as modified by E.O. 12731, 55 FR 42547, 3 CFR, 1990 Comp., p.
306; 5 CFR 2634.103, 2634.201(f), 2635.105, 2635.403, and 2635.803.
0
2. Revise Sec. 4401.102 to read as follows:
Sec. 4401.102 Prohibited and restricted financial interests and
transactions.
(a) Applicability. The requirements of this section apply to all
securities holdings or transactions effected, directly or indirectly,
by or on behalf of a member or employee, the member's or employee's
spouse, the member's or employee's unemancipated minor child, or any
person for whom the member or employee serves as legal guardian. A
member or employee is deemed to have sufficient interest in the
securities holdings and transactions of his or her spouse,
unemancipated minor child, or person for whom the member or employee
serves as legal guardian that such holdings or transactions are subject
to all the terms of this part.
(b) In general. (1) Members and employees are prohibited from
purchasing or selling any security while in possession of material
nonpublic information regarding that security. Nonpublic information
has the meaning as provided in 5 CFR 2635.703(b).
(2) Members and employees are prohibited from recommending or
suggesting to any person the purchase or sale of security:
(i) Based on material nonpublic information regarding that
security; or
(ii) That the member or employee could not purchase or sell because
of the restrictions contained in this Rule.
(c) Prohibited and restricted holdings and transactions. Members
and employees are prohibited from:
(1) Knowingly purchasing or holding a security or other financial
interest in an entity directly regulated by the Commission, including a
registered investment company, common investment trust of a bank,
company exempt in part or in total from registration under the
Investment Company Act of 1940, or other pooled investment vehicle that
has a stated policy of concentrating investments in entities directly
regulated by the Commission.
(2) Purchasing a security in an initial public offering (``IPO'')
or direct listing prior to seven calendar days after the IPO or direct
listing effective date;
(3) Purchasing or otherwise carrying securities on margin;
(4) Selling securities short as defined in 17 CFR 242.200(a);
(5) Accepting a loan from, or entering into any other financial
relationship with, an entity, institution or other person directly
regulated by the Commission if the loan or financial relationship is
governed by terms more favorable than would be available in like
circumstances to members of the public, except as otherwise permitted
by 5 CFR part 2635, subpart B (Gifts from outside sources);
(6) Engaging in transactions involving financial instruments that
are derivatives of securities (that is, the value of the security
depends on or is derived from, in whole or in part, the value of
another security, or a group, or an index of securities); and
(7) Purchasing or selling any security issued by an entity that is:
(i) Under investigation by the Commission;
(ii) A party to a proceeding before the Commission; or
(iii) A party to a proceeding to which the Commission is a party.
(d) Prior clearance of transactions in securities or related
financial interests. (1) Except as set forth in paragraph (g) of this
section, members and employees must confirm before entering into any
security or other related financial transaction that the security or
related financial transaction is not prohibited or restricted as to
them by clearing the transaction in the manner required by the
Designated Agency Ethics Official (``DAEO''). A member or employee will
[[Page 7896]]
have five business days after clearance to effect a transaction.
(2) Documentation of the clearance of any transaction pursuant
paragraph (d) of this section shall be prima facie evidence that the
member or employee has not knowingly purchased, sold, or held such
financial interest in violation of the provisions of paragraph (c)(1),
(2), (6), or (7) of this section.
(3) The DAEO shall be responsible for administering the
Commission's clearance systems. The DAEO shall maintain a record of
securities that members and employees may not purchase or sell, or
otherwise hold, because such securities are the subject of the various
prohibitions and restrictions contained in this section.
(e) Holding periods for securities and related financial
interests--(1) General rule. Except as set forth in paragraphs (e) and
(g) of this section members and employees must hold a security
purchased after commencement of employment with the Commission for a
minimum of six (6) months from the trade date.
(2) General exceptions. This holding period does not apply to:
(i) Securities sold for ninety percent (90%) or less of the
original purchase price; and
(ii) Securities with an initial term of less than six (6) months
that are held to term.
(3) Exception for shares in sector funds. Members and employees
must hold shares in sector mutual funds and sector unit investment
trusts as those terms are defined at 5 CFR 2640.102(q), that are not
otherwise prohibited under paragraph (c)(1), for a minimum of thirty
(30) days from the purchase date.
(f) Reporting requirements. (1) Except as set forth in paragraph
(g) of this section, members and employees must report and certify all
securities holdings according to the schedule and in the manner
required by the DAEO;
(2) Members and employees must report all purchases, sales,
acquisitions, or dispositions of securities in the manner and according
to the schedule required by the DAEO.
(3) Any person who receives a conditional offer of employment from
the Commission must report all securities holdings after acceptance of
that offer and before commencement of employment with the Commission on
the form prescribed by the Commission.
(4) The DAEO may require members and employees to comply with the
reporting requirements in this section by authorizing their brokerage
or financial institution(s) to provide automatic transmission of
brokerage statements and transaction information through a third-party
automated compliance system. The DAEO may permit a member or employee
to provide the required information through another means if they
cannot obtain consent from their brokerage or financial institution to
use the third-party automated compliance system.
(g) Exceptions. (1) The following holdings and transactions are
exempt from the requirements of paragraphs (c), (d), (e), and (f) of
this section:
(i) Securities transactions effected by a member's or employee's
spouse on behalf of an entity or person other than the member or
employee, the member's or employee's spouse, the member's or employee's
unemancipated minor child, or any person for whom the member or
employee serves as legal guardian;
(ii) Securities holdings and transactions of a member's or
employee's legally separated spouse living apart from the member or
employee (including those effected for the benefit of the member's or
employee's unemancipated minor child), provided that the member or
employee has no control, and does not, in fact, control, advise with
respect to, or have knowledge of those holdings and transactions;
(iii) Securities issued by the United States Government or one of
its agencies;
(iv) Investments in funds administered by the Thrift Savings Plan
or by any retirement plan administered by a Federal Government agency;
(v) Certificates of deposit or other comparable instruments issued
by depository institutions subject to Federal regulation and Federal
deposit insurance; and
(vi)(A)(1) Mutual funds and unit investment trusts, as those terms
are defined in 5 CFR 2640.102(k) and (u), that are diversified as that
term is defined in 5 CFR 2640.102(a);
(2) Money market funds as defined in 17 CFR 270.2a-7 (Investment
Company Act Rule under rule 2a-7);
(3) 529 plans as defined in the Internal Revenue Code, 26 U.S.C.
529.
(4) Diversified pooled investment funds held in an employee benefit
plan as defined at 5 CFR 2640.102(c) or pension plan as defined in 5
CFR 2640.102(n).
(B) The exemption in this paragraph (g)(1)(vi) does not apply to
other investments in pooled investment funds that are exempt from
registration under the Investment Company Act of 1940, including hedge
funds, private equity funds, venture capital funds, or similar non-
registered investment funds.
(2) The following holdings and transactions are exempt from the
requirements of paragraphs (c), (d), and (e) of this section, but these
interests must be reported in accordance with paragraph (f) of this
section:
(i) The holdings of a trust in which the member or employee (or the
member's or employee's spouse, the member's or employee's unemancipated
minor child, or person for whom the member or employee serves as legal
guardian) is:
(A) Solely a vested beneficiary of an irrevocable trust; or
(B) Solely a vested beneficiary of a revocable trust where the
trust instrument expressly directs the trustee to make present,
mandatory distributions of trust income or principal; provided, the
member or employee did not create the trust, has no power to control,
and does not, in fact, control or advise with respect to the holdings
and transactions of the trust;
(ii) Acceptance or reinvestment of stock dividends on securities
already owned;
(iii) Exercise of a right to convert securities; and
(iv) The acquisition of stock or the acquisition or the exercise of
employee stock options, or other comparable instruments, received as
compensation from an issuer that is:
(A) The member's or employee's former employer; or
(B) The present or former employer of the member's or employee's
spouse.
(h) Waivers. (1) Members may request from the Commission a waiver
of the prohibitions or limitations that would otherwise apply to a
securities holding or transaction on the grounds that application of
the rule would cause an undue hardship. A member requests a waiver by
submitting a confidential written application to the Commission's
Office of the Ethics Counsel. The DAEO will review the request and
provide to the Commission a recommendation for resolution of the waiver
request. In developing a recommendation, the DAEO may consult, on a
confidential basis, other Commission personnel as the DAEO in his or
her discretion considers necessary.
(2) Employees may request from the DAEO a waiver of the
prohibitions or limitations that would otherwise apply to a securities
holding or transaction on the grounds that application of the rule
would cause an undue hardship. An employee requests a waiver by
submitting a confidential written application to the Commission's
Office of the Ethics Counsel in the manner prescribed by the DAEO. In
considering a waiver request, the DAEO, or his or her designee, may
consult with the
[[Page 7897]]
employee's supervisors and other Commission personnel as the DAEO in
his or her discretion considers necessary.
(3) The Commission or the DAEO, as applicable, will provide written
notice of its determination of the waiver request to the requesting
member or employee.
(4) The Commission or the DAEO, as applicable, may condition the
grant of a waiver under this provision upon the agreement to certain
undertakings (such as execution of a written statement of
disqualification) to avoid the appearance of misuse of position or loss
of impartiality, and to ensure confidence in the impartiality and
objectivity of the Commission. The Commission or DAEO, as applicable,
shall note the existence of conditions on the waiver and describe them
in reasonable detail in the text of the waiver-request determination.
(5) The grant of a waiver requested pursuant to this section must
reflect the judgment that the waiver:
(i) Is necessary to avoid an undue hardship; and, under the
particular circumstances, application of the prohibition or restriction
is not necessary to avoid the appearance of misuse of position or loss
of impartiality, or otherwise necessary to ensure confidence in the
impartiality and objectivity of the Commission;
(ii) Is consistent with 18 U.S.C. 208 (Acts affecting a personal
financial interest), 5 CFR part 2635 (Standards of ethical conduct for
employees of the executive branch), and 5 CFR part 2640
(Interpretation, exemptions and waiver guidance concerning 18 U.S.C.
208); and
(iii) Is not otherwise prohibited by law.
(6) The determination of the Commission with respect to a member's
request for a waiver is final and binding on the member.
(7) The determination of the DAEO with respect to an employee's
request for a waiver may be appealed to the Commission, in accordance
with the requirements of 17 CFR 201.430 and 201.431 (Rules 430 and 431
of the Commission's Rule of Practice). The determination of the DAEO
or, if appealed, the Commission, is final and binding on the employee.
(8) Notwithstanding the grant of a waiver, a member or employee
remains subject to the disqualification requirements of 5 CFR 2635.402
(Disqualifying financial interests) and 5 CFR 2635.502 (Personal and
business relationships) with respect to transactions or holdings
subject to the waiver.
(i) Required disposition of securities. The DAEO is authorized to
require disposition of securities acquired as a result of a violation
of the provisions of this section, whether unintentional or not. The
DAEO shall report repeated violations to the Commission for appropriate
action.
By the Securities and Exchange Commission.
Dated: January 30, 2023.
Vanessa A. Countryman,
Secretary.
Emory A. Rounds, III,
Director, Office of Government Ethics.
[FR Doc. 2023-02235 Filed 2-6-23; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on February 7, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.