Rule2024-04062
Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 28, 2024
Effective
March 29, 2024
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("SEC" or "Commission" or "we"), with the concurrence of the Office of Government Ethics ("OGE"), is adopting jointly issued amendments to the Commission's existing Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission ("Supplemental Standards"). This rule amends the existing Supplemental Standards jointly issued by SEC and OGE, supplements 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. Specifically, the Commission is prohibiting employee ownership of sector funds that have a stated policy of concentrating their investments in entities directly regulated by the Commission; revising transaction and reporting requirements for certain assets that pose a low risk of conflicts of interest or appearance concerns; permitting employees to comply with reporting obligations by authorizing their financial institutions to transmit information on behalf of employees about their covered securities transactions and holdings data through an approved automated compliance system; clarifying 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; correcting certain technical matters; and adjusting its transaction and reporting requirements to provide the flexibility necessary to implement an automated compliance system.
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 40 (Wednesday, February 28, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 40 (Wednesday, February 28, 2024)]
[Rules and Regulations]
[Pages 14563-14576]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-04062]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
========================================================================
Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 /
Rules and Regulations
[[Page 14563]]
SECURITIES AND EXCHANGE COMMISSION
5 CFR Part 4401
[Release No. 34-99582; 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: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'' or ``we''), with the concurrence of the Office of
Government Ethics (``OGE''), is adopting jointly issued amendments to
the Commission's existing Supplemental Standards of Ethical Conduct for
Members and Employees of the Securities and Exchange Commission
(``Supplemental Standards''). This rule amends the existing
Supplemental Standards jointly issued by SEC and OGE, supplements 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. Specifically, the Commission
is prohibiting employee ownership of sector funds that have a stated
policy of concentrating their investments in entities directly
regulated by the Commission; revising transaction and reporting
requirements for certain assets that pose a low risk of conflicts of
interest or appearance concerns; permitting employees to comply with
reporting obligations by authorizing their financial institutions to
transmit information on behalf of employees about their covered
securities transactions and holdings data through an approved automated
compliance system; clarifying 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;
correcting certain technical matters; and adjusting its transaction and
reporting requirements to provide the flexibility necessary to
implement an automated compliance system.
DATES: This final rule is effective March 29, 2024.
FOR FURTHER INFORMATION CONTACT: 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 adopting amendments to 5
CFR 4401.102 (Rule 102), its Supplemental Standards.
I. Background
On August 7, 1992, OGE published the OGE Standards.\1\ 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.
---------------------------------------------------------------------------
\1\ 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.
---------------------------------------------------------------------------
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 previously adopted
supplemental regulations--found at 5 CFR part 4401--in 2010 with the
concurrence and joint issuance of OGE.\2\ On February 7, 2023, the
Commission, with OGE's concurrence, proposed to amend those existing
supplemental regulations.\3\
---------------------------------------------------------------------------
\2\ See 75 FR 42273, July 20, 2010, as amended at 76 FR 19902,
Apr. 11, 2011.
\3\ 88 FR 7891, February 7, 2023 (``Proposing Release'').
---------------------------------------------------------------------------
As discussed in the Proposing Release, the Commission, with OGE's
concurrence, has determined that the following revisions to the
supplemental regulations are necessary and appropriate for successful
implementation of the SEC's ethics program considering its unique
programs and operations. The Commission, with the concurrence of OGE,
proposed 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 through automated
reporting by having employees authorize their financial institutions to
transmit information on behalf of employees about their covered
securities transactions and holdings data through a third-party
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 Proposing Release invited public
comments, to be submitted on or before March 31, 2023. The Commission
received approximately ninety comment letters. After carefully
considering the comments received on the proposal, the Commission, with
the concurrence of OGE, is adopting the proposal with certain
modifications.
II. Description of Final Rule Amendments
A. Prohibited Ownership of Financial Industry Sector Funds
The Commission proposed amending 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.
As discussed in the Proposing Release, the existing rule prohibits
[[Page 14564]]
employees from purchasing or owning any ``security or other financial
interest in an entity directly regulated by the Commission,'' such as
registered broker dealers and investment advisers.\4\ In order to avoid
conflicts and appearance concerns with employee ownership of sector
funds that invest in entities the SEC directly regulates, the
Commission proposed 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 investment funds that have a stated policy of
concentrating their investments in entities directly regulated by the
Commission.
---------------------------------------------------------------------------
\4\ 5 CFR 4401.102(c)(1).
---------------------------------------------------------------------------
1. Comments Received
The Commission received numerous comments in favor of the proposal
to prohibit ownership of Financial Industry Sector Funds.\5\ In
general, comments in support of this amendment focused on the fact that
the prohibition would mitigate any actual or perceived conflicts and
appearance concerns and would ensure employees of the SEC maintain the
utmost trust and transparency with the public.
---------------------------------------------------------------------------
\5\ See, e.g., Letter from University of Nevada, Las Vegas
(UNLV) William S. Boyd School of Law Public Policy Clinic, on behalf
of the Consumer Federation of America, dated Mar. 29, 2023 (``UNLV
Letter''); Letter from Cornell University Law School, Cornell
Securities Law Clinic, dated Mar. 31, 2023 (``Cornell Letter'');
Letter from Nakai Freeland, dated Mar. 31, 2023 (``Freeland
Letter''); Letter from Leo Fox, dated Apr. 1, 2023 (``Fox Letter'');
Letter from Jacob Gillmore, dated Feb. 24, 2023 (``Gillmore
Letter''). Copies of all comment letters received by the Commission
are available at <a href="https://www.sec.gov/comments/s7-02-23/s70223.htm">https://www.sec.gov/comments/s7-02-23/s70223.htm</a>.
For those letters from anonymous commenters, we cite to specific
internet addresses to help readers locate the comment.
---------------------------------------------------------------------------
For example, one commenter noted that because the SEC regulates the
industry in which Financial Industry Sector Funds predominately invest,
an SEC employee who invests in these funds could be seen as having a
financial interest in the success of the very companies they are tasked
with regulating, which could potentially lead to bias in regulatory
decision-making or the perception of such bias.\6\ The commenter
expressed the view that ``there is the same threat to independence'' if
an SEC employee owns ``sector funds that specifically deal in entities
that are regulated by the agency,'' as that ``has the same financial
attachment as owning securities in a SEC regulated entity.'' \7\
---------------------------------------------------------------------------
\6\ See Fox Letter.
\7\ Id.
---------------------------------------------------------------------------
Another commenter called the amendment ``an essential step in
ensuring that employees of the SEC can maintain the utmost trust and
transparency with the public,'' agreeing that the amendment would
``help avoid conflicts and appearance concerns with employee ownership
of sector funds that invest in entities the SEC directly regulates,''
and ``mitigate any actual or perceived conflicts and appearance
concerns.'' \8\
---------------------------------------------------------------------------
\8\ See Gillmore Letter.
---------------------------------------------------------------------------
Another commenter stated that the amendment appropriately brings
Financial Industry Sector Funds within the definition of ``entities
directly regulated by the Commission'' to account for the high risk of
conflict posed by Financial Industry Sector Funds, noting that the
amendment ``recognizes that Commission employees owning financial
industry sector funds may pose a substantial risk of conflicting with
Commission work,'' and pointing out that ``Commission employees are
uniquely situated to obtain material nonpublic information about the
Commission's activities.'' \9\ The commenter stated that the
Commission's regulatory and enforcement actions frequently move
financial markets, so employee trading restrictions ``should be
effectively tailored to limit the opportunity for abusing non-public
information or the risk that Commission staff will face an incentive to
tilt the Commission's activities in any particular way because they
hold a financial industry sector fund.'' \10\
---------------------------------------------------------------------------
\9\ See UNLV Letter.
\10\ Id.
---------------------------------------------------------------------------
The Commission received several comments opposing the Financial
Industry Sector Fund prohibition. In general, commenters argued that
the risk of conflict is not so substantial as to impact the mission of
the agency, that the proposal does not mitigate any known risk, that
the requirement to divest should depend on the employee's role at the
Commission, and that absent actual conflict, ``optics'' is not an
appropriate rationale to prohibit employee ownership of such funds.\11\
Commenters also expressed doubt that such a prohibition is legally
authorized and concern over the tax implications of required
divestiture.\12\
---------------------------------------------------------------------------
\11\ See, e.g., Letter from Anonymous, dated Mar. 10, 2023
(``Anonymous 3/10 Letter 1''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-327223.htm">https://www.sec.gov/comments/s7-02-23/s70223-327223.htm</a>; Letter from Anonymous, dated
Mar. 10, 2023 (``Anonymous 3/10 Letter 2''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-327169.htm">https://www.sec.gov/comments/s7-02-23/s70223-327169.htm</a>; Letter from
Anonymous, dated Mar. 9, 2023 (``Anonymous 3/9 Letter 1''),
available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-327218.htm">https://www.sec.gov/comments/s7-02-23/s70223-327218.htm</a>.
\12\ See, e.g., Anonymous 3/10 Letter 2; Anonymous 3/9 Letter 1.
---------------------------------------------------------------------------
For example, one commenter stated that the proposal does not
mitigate any known risks and called the 90-day divesture requirement
outlined in the Code of Federal Regulations ``an unreasonably short
time frame'' that is likely to result in significant tax consequences
and disrupt the diversity of investment portfolios.'' \13\ The
commenter stated that the amendment would set an alarming precedent.
The commenter claimed that the proposal does not explain why employees
would be required to sell their holdings in such a short time frame
despite the fact that employees have long been permitted to hold
financial ETFs. The commenter further claimed that the risk identified
in the proposal ``is already somewhat mitigated as staff are currently
prohibited from holding an excessive amount of sector ETF holdings. . .
.'' \14\
---------------------------------------------------------------------------
\13\ See Anonymous 3/9 Letter 1.
\14\ Id.
---------------------------------------------------------------------------
Another commenter echoed similar concerns, arguing that the SEC's
proposal to ban Financial Industry Sector Funds ``isn't mitigating any
known risk.'' \15\ The commenter further noted that the Commission has
already taken steps to minimize the risks posed by Financial Industry
Sector Funds by imposing a limit on the quantity of sector funds,
including those in the financial sector, that an employee is permitted
to own. The commenter stated that the proposed ban is unnecessary
because there has been no publicly reported issue linked to SEC
employees including a small portion of Financial Industry Sector funds
in their portfolios. The commenter described the amendments as ``about
so-called `optics' '' and stated that optics are not an appropriate
rationale for an ethics rule.\16\
---------------------------------------------------------------------------
\15\ See Anonymous 3/10 Letter 1.
\16\ Id.
---------------------------------------------------------------------------
Another commenter suggested that the prohibition on owning
Financial Industry Sector Funds be more narrowly tailored and
questioned why the Commission applies uniform personal trading
regulations to employees in different divisions and roles. The
commenter also asked why the trading restrictions are applied to
spouses. The commenter disagreed with being ``forced to sell a sector
ETF that numerous other Chairs and Ethics Offices didn't find
problematic,'' and found it puzzling that they would have to divest and
be faced with the choice of either hiring an accountant to manage
[[Page 14565]]
a potential taxable gain or pay such a tax immediately.\17\
---------------------------------------------------------------------------
\17\ Id.
---------------------------------------------------------------------------
2. Final Rule
The Commission has carefully considered the comments received and
is adopting Sec. 4401.102(c)(1) as proposed. The President, through
Executive Order 12,674, as modified, and OGE through 5 CFR 2635.105,
have authorized agencies to prohibit employees, their spouses and minor
children from holding certain investments based on the agency's
determination that the acquisition or holding of such financial
interests would cause a reasonable person to question the impartiality
and objectivity with which agency programs are administered.\18\
Regulatory prohibited holdings restrictions must be established through
an agency's supplemental ethics regulation, issued jointly by the
agency and OGE.\19\ To date, over twenty other agencies, with the
concurrence of OGE, have established prohibited holdings regulations
for their employees.\20\ Many of these supplemental agency ethics
regulations--including those established by agencies with regulatory
oversight responsibilities over portions of the financial services
industry--prohibit, restrict, or limit employee ownership of collective
investment funds with stated policies or practices of investing in the
sector or industry overseen or regulated by the issuing agency.\21\
---------------------------------------------------------------------------
\18\ See 5 CFR 2635.403.
\19\ See OGE Legal Advisory LA-11-07 (Oct. 31, 2011).
\20\ See OGE Legal Advisory LA-20-02, att. 2 (Mar. 3, 2020).
\21\ See, e.g., 5 CFR 3101.108(a) (prohibiting employees of the
Office of the Comptroller of the Currency from investing in
collective investment funds that have a stated policy of investing
in the financial services or banking industries); 5 CFR 3201.103(a)
and (b) (prohibiting employees of the Federal Deposit Insurance
Corporation from investing in collective investment funds if thirty
percent or more of the underlying holdings are banks or related
assets); 5 CFR 6801.103(a) and (b) (prohibiting employees of the
Federal Reserve Board from investing in depository institutions and
government securities dealers, including through mutual funds with a
stated policy of investing in the financial services industry); 5
CFR 9401.106(a)(2) (prohibiting employees of the Consumer Financial
Protection Bureau from investing in collective investment funds that
have a stated policy of investing in the financial services or
banking industries).
---------------------------------------------------------------------------
As described in the Proposing Release, 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.\22\ 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.'' \23\ In this regard, the Supplemental
Standards help promote public confidence that staff are not benefiting
personally from their positions as SEC employees with respect to non-
public information about securities and securities markets. The
Supplemental Standards also mitigate the risk of real or perceived
conflicts of interest.
---------------------------------------------------------------------------
\22\ See 17 CFR 200.1.
\23\ 5 CFR 4401.102(c)(1).
---------------------------------------------------------------------------
As explained in the Proposing Release, the Commission proposed to
expand the prohibition to Financial Industry Sector Funds 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. Doing so will assure
the public that Commission employees are not profiting from the SEC's
unique access to material information. The final amendment is
appropriately tailored to this risk by focusing on only investments in
the financial services industry that are regulated by the Commission.
Moreover, the Commission finds it appropriate to extend the current
prohibited holdings regulation to prevent the incongruous result under
the current rules that an SEC employee is prohibited from owning a
single share of a directly regulated entity but could theoretically
hold an unlimited value in a Financial Industry Sector Fund that
concentrates holdings in directly regulated entities. Both cases
present similar conflict of interest concerns. The final amendment
prohibiting employee ownership of Financial Industry Sector Funds
therefore underscores the Commission's commitment to upholding the
public's trust to oversee the U.S. capital markets and to taking
appropriate steps to eliminate potential conflicts of interest, actual
or perceived.
Finally, as noted in the Proposing Release, Congress authorized OGE
and the Internal Revenue Service to defer capital gains taxes that
arise because of the divestiture of property when it is reasonably
necessary to comply with Federal conflict of interest statutes,
regulations, rules, or Executive orders, including the Supplemental
Standards.\24\ As a result, members and employees, including spouses
and minor children, required to divest Financial Industry Sector Funds
may be eligible for a Certificate of Divestiture (``CD'') from OGE to
defer taxable gain consequences, as is the case for employees required
to divest prohibited holdings under the current rule. Affected
employees may contact the SEC's Office of the Ethics Counsel (``OEC'')
staff for advice and counsel on the CD process.\25\
---------------------------------------------------------------------------
\24\ See 26 U.S.C. 1043; 5 CFR 2634.1004.
\25\ See 5 CFR 2634.1005.
---------------------------------------------------------------------------
B. Elimination of Pre-Clearance, Reporting, and Holding Period
Requirements for Certain ``Permissible Diversified Investment Funds''
As discussed in the Proposing Release, 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.
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 proposed
amending 5 CFR 4401 by adding a new paragraph (g)(1)(vi) to eliminate
the pre-clearance, 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.
1. Comments Received
The Commission received several comment letters in support of the
proposed amendment from both employees and the general public.\26\ For
[[Page 14566]]
example, one commenter agreed that the ``proposal to remove the pre-
clearance requirements for diversified funds is welcome, and is
correct,'' because ``these funds are so diversified that there is no
reasonable concern that ownership of these funds could pose a conflict
of interest.'' \27\
---------------------------------------------------------------------------
\26\ See, e.g., Letter from Anonymous, dated Mar. 30, 2023
(``Anonymous 3/30 Letter 1''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-331590.htm">https://www.sec.gov/comments/s7-02-23/s70223-331590.htm</a>; Letter from Anonymous, dated
Mar. 31, 2023 (``Anonymous 3/31 Letter 1''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-332200.htm">https://www.sec.gov/comments/s7-02-23/s70223-332200.htm</a>; UNLV Letter.
\27\ See Letter from Anonymous, dated Mar. 7, 2023 (``Anonymous
3/7 Letter'').
---------------------------------------------------------------------------
Another commenter supported the change because the amendment
promotes the efficient allocation of resources and because ``these
funds pose minimal conflict of interest risks,'' and ``the elimination
of requirements . . . relieves the unnecessary burden of the SEC's
members and employees.'' \28\
---------------------------------------------------------------------------
\28\ See Cornell Letter.
---------------------------------------------------------------------------
The Commission received a number of comment letters opposing the
amendments removing requirements as to Permissible Diversified
Investment Funds.\29\ For example, one commenter was concerned about
the elimination of pre-clearance, reporting, and holding requirements
for Permissible Diversified Investment Funds because ``the current pre-
clearance and reporting requirements serve a crucial role in
maintaining transparency and accountability. Removing these
requirements could create a perception of decreased accountability and
increase the potential for conflicts of interest to arise.'' \30\ The
commenter expressed concern ``about the potential impact on individual
investors who rely on the SEC's oversight to protect their
investments,'' stating that the proposed amendments ``could make it
more difficult for individual investors to assess whether SEC employees
are acting in their best interests,'' and urged the SEC to maintain
``rigorous reporting requirements to ensure that the public can trust
that the agency is acting in their best interests.'' \31\
---------------------------------------------------------------------------
\29\ See, e.g., Letter from Anonymous, dated Mar. 31, 2023
(``Anonymous 3/31 Letter 2''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-333047.htm">https://www.sec.gov/comments/s7-02-23/s70223-333047.htm</a>; Letter from Anonymous, dated
Mar. 8, 2023 (``Anonymous 3/8 Letter 1'' available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-327139.htm">https://www.sec.gov/comments/s7-02-23/s70223-327139.htm</a>.
\30\ See Gillmore Letter.
\31\ Id.
---------------------------------------------------------------------------
2. Final Rule
The Commission has carefully considered the comments received and
is adopting Sec. 4401.102(g)(1)(vi) as proposed. 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 minimal risk or no conflicts
of interest for members and employees.
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 the
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.\32\ Other
Permissible Diversified Investment Funds may pose minimal risk or no
conflicts of interest concerns, such as diversified pre-paid college
tuition plans authorized by States under section 529 of the Internal
Revenue Code and diversified collective investment trusts that are
commonly held in defined contribution retirement plans. The Commission
does not believe that eliminating the pre-clearance and reporting
requirements as to Permissible Diversified Investment Funds will lead
to an increase in the potential for conflicts of interest, nor does the
Commission believe that it will lead to a reasonable perception of a
decrease in ethical accountability for SEC employees. As discussed
above, these Permissible Diversified Investment Funds are either exempt
from criminal financial conflict of interest laws, or pose minimal risk
or no conflicts of interest concerns. As explained in the Proposing
Release, 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. The current policy of
requiring pre-clearance and reporting of Permissible Diversified
Investment Funds contributes little to employee accountability or
mitigation of ethics risk because they pose minimal conflicts of
interest concerns. 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 modifying its rules to reduce the emphasis on reporting and pre-
clearing of Permissible Diversified Investment Funds, assets that pose
substantially lower ethics risk, while maintaining the rigorous pre-
clearance and reporting requirements as to assets that do pose the most
significant potential for conflicts of interest. This risk-based
approach will appropriately tailor compliance activities to address
trading and holdings that pose the most significant potential for
conflicts of interest. These changes will 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.
---------------------------------------------------------------------------
\32\ See 5 CFR 2640.201(a), (d).
---------------------------------------------------------------------------
C. Automated Reporting of Purchases, Sales, Acquisitions, and
Dispositions of Securities
Currently, under the Supplemental Standards members and employees
are required to report transactions of securities to the Commission
within five business days after receipt of confirmation of the
transaction so that ethics officials can reconcile precleared trades in
accordance with 5 CFR 4401.102(f). Section 4401.102(f) also requires
employees to submit duplicate statements for every account containing
reportable securities to the Designated Agency Ethics Official
(``DAEO'') according to such procedures required by the DAEO. These
requirements constitute additional supplemental confidential reporting
requirements authorized by OGE pursuant to the Ethics in Government Act
of 1978 (``EIGA'') (codified at 5 U.S.C. 13109), which permits OGE (and
agencies, subject to OGE approval) to impose additional confidential
financial disclosure requirements on officers and employees of the
executive branch. 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.
The Commission proposed to automate the existing reporting process
by amending 5 CFR 4401.102(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. The Commission also proposed to revise transaction
reporting deadlines to
[[Page 14567]]
provide necessary flexibility to adjust for securities transactions and
holdings data obtained from financial institutions through a third-
party automated compliance system by modifying 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.
1. Comments Received
The proposal to authorize the SEC to collect reportable
transactions and holdings via a third-party automated system elicited
numerous responses from commenters.
The Commission received several comments in support of the
proposal.\33\ For example, one commenter expressed belief ``that this
change would increase efficiency and reduce the risk of human error,''
noting that the proposed amendment ``would eliminate the need for
employees to manually submit brokerage or financial statements and
instead create a system built on automated compliance.'' \34\ The
commenter expressed appreciation that the proposed rule permits an
employee to comply through other means if they cannot obtain consent
from their brokerage or financial institution, ensuring ``all employees
can comply with the rule regardless of their bank or brokerage.'' \35\
The commenter stated that the transition ``away from manual reporting
reflects the widespread, modern trend toward efficiency through
technology,'' and also stated that the change ``would greatly reduce
the burden on Commission employees and compliance staff, increase the
accuracy and completeness of data, and facilitate compliance.'' \36\
---------------------------------------------------------------------------
\33\ See, e.g., UNLV Letter; Anonymous 3/7 Letter; Letter from
Anonymous, dated Mar. 8, 2023 (``Anonymous 3/8 Letter 2''),
available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-327142.htm">https://www.sec.gov/comments/s7-02-23/s70223-327142.htm</a>.
\34\ See UNLV Letter.
\35\ Id.
\36\ Id.
---------------------------------------------------------------------------
Another commenter stated that the proposal ``is definitely an
enhancement compared to manual reporting of securities transactions,''
as ``submitting manually has the downside of being a burden and is
vulnerable to human error.'' \37\ The commenter expressed the view that
``these benefits are worth the change to require automated reporting. .
. .'' \38\
---------------------------------------------------------------------------
\37\ See Freeland Letter.
\38\ Id.
---------------------------------------------------------------------------
Yet another commenter supported the amendment, noting that ``[i]t
just eliminates a report that can be done either incorrectly or
fraudulently,'' and expressed appreciation for ``the concessions for
the people that would experience undue hardship,'' which ``make it so
much easier to adopt the proposed changes.'' \39\
---------------------------------------------------------------------------
\39\ See Fox Letter.
---------------------------------------------------------------------------
The Commission received numerous comments opposing an automated
compliance system. In general, commenters questioned the Commission's
legal authority to implement such a system, expressed concerns over
privacy and security, and noted the burden it would place on employees,
their spouses, and their minor children.
i. Legal Authority
The Commission received several comments arguing that the SEC lacks
the legal authority to implement a direct data feed reporting
requirement for members and employees, as well as their spouses and
minor children.\40\
---------------------------------------------------------------------------
\40\ See, e.g., Letter from Anonymous, dated Feb. 26, 2023
(``Anonymous 2/26 Letter''); Letter from Anonymous, dated Mar. 20,
2023 (``Anonymous 3/20 Letter'').
---------------------------------------------------------------------------
For example, one commenter argued that the proposal is ``contrary
to the law,'' asserting that 5 U.S.C. 13109 ``simply does not
authorize'' the proposed collection of covered securities transactions
and holdings data from financial institutions through a third-party
automated compliance system.\41\ Additionally, the commenter asserted
that the EIGA does not cover family members or children of staff.
---------------------------------------------------------------------------
\41\ See Anonymous 2/26 Letter.
---------------------------------------------------------------------------
Another commenter stated that ``[t]he proposed rule seeks to
require me to give an undisclosed third-party direct access to my
financial accounts,'' arguing that neither 5 U.S.C. 13109 nor 5 CFR
2634.103 ``appears to give the SEC the broad reach it seeks.'' \42\
---------------------------------------------------------------------------
\42\ See Anonymous 3/20 Letter.
---------------------------------------------------------------------------
ii. Privacy and Security
Many commenters expressed concerns regarding cyber security and
privacy issues such as the collection of sensitive Personally
Identifiable Information (PII), the lack of detail in the proposal
regarding the information security requirements of any third-party
system used, and the potential for breaches of a third-party automated
system that could result in misuse of sensitive financial information
of SEC employees and their immediate family members.\43\
---------------------------------------------------------------------------
\43\ See, e.g, Letter from Vinyard Cooke, dated Mar. 8, 2023
(``Cooke Letter''); Letter from Eileen Parlow, dated Mar. 9, 2023
(``Parlow Letter''); Letter from Anonymous, dated Mar. 9, 2023
(``Anonymous 3/9 Letter 2''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-327142.htm">https://www.sec.gov/comments/s7-02-23/s70223-327142.htm</a>; Letter from Anonymous, dated
Mar. 9, 2023 (``Anonymous 3/9 Letter 3''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-327178.htm">https://www.sec.gov/comments/s7-02-23/s70223-327178.htm</a>; Letter from David
Karasik, dated Mar. 10, 2023 (``Karasik Letter''); Letter from Wil
Sias, dated Mar. 31, 2023 (``Sias Letter'').
---------------------------------------------------------------------------
For example, one commenter provided examples of prior government
data breaches and argued that under the proposed rule, staff would lack
any mechanism to safeguard their confidential information and that the
financial data of Commission employees would potentially be susceptible
to cybersecurity breaches.\44\ Other commenters were concerned that a
third-party system would likely require employees to provide account
numbers, or other sensitive PII, which employees are currently
permitted to redact during the manual process of uploading
statements.\45\ Commenters also stated that a third-party provider
should not have ``unfettered access'' to their information at a
brokerage or financial institution.\46\ Several commenters noted that
the Proposing Release did not provide any details concerning the
cybersecurity requirements or the measures that would be taken to
protect sensitive financial information of employees and their
immediate family members.\47\
---------------------------------------------------------------------------
\44\ See Anonymous 2/26 Letter.
\45\ See, e.g., Letter from Anonymous, dated Mar. 27, 2023
(``Anonymous 3/27 Letter 1''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-330621.htm">https://www.sec.gov/comments/s7-02-23/s70223-330621.htm</a>; Letter from Anonymous dated
Mar. 31, 2023 (``Anonymous 3/31 Letter 3''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-20163072-333034.pdf">https://www.sec.gov/comments/s7-02-23/s70223-20163072-333034.pdf</a>.
\46\ See Anonymous 3/30 Letter.
\47\ See, e.g., Letter from Anonymous dated Mar. 10, 2023
(``Anonymous 3/10 Letter 3''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-20161916-330747.pdf">https://www.sec.gov/comments/s7-02-23/s70223-20161916-330747.pdf</a>.
---------------------------------------------------------------------------
Another commenter questioned the necessity of such an automated
system when employees are already required to pre-clear and report
securities transactions and ``also annually submit (with optional
account number redaction) statements that contain all of our securities
transactions for ourselves and covered family members over the
preceding years.'' \48\ The commenter stated that the Commission is
creating an unnecessary cybersecurity risk and expressed the belief
that resources ``should be spent on bad actors and providing SEC staff
the necessary resources to supervise the securities industry, not on
this endeavor.'' \49\
---------------------------------------------------------------------------
\48\ See Letter from Anonymous, dated Mar. 6, 2023 (``Anonymous
3/6 Letter'').
\49\ Id.
---------------------------------------------------------------------------
Some commenters expressed skepticism in the ability of a contractor
to appropriately safeguard sensitive financial information,\50\ while
others
[[Page 14568]]
stated the proposal with regard to a third-party automated compliance
system was unclear and/or lacked sufficient detail,\51\ criticizing the
proposal for lacking information about cybersecurity or third-party
vendor qualifications.\52\
---------------------------------------------------------------------------
\50\ See, e.g., Letter from Anonymous, dated Mar. 3, 2023
(``Anonymous 3/3 Letter'').
\51\ See, e.g., Letter from Rob Redford, dated Feb. 23, 2023
(``Redford Letter'').
\52\ See, e.g., Letter from Anonymous dated Mar. 15, 2023
(``Anonymous 3/15 Letter''); Letter from Anonymous dated Mar. 24,
2023 (``Anonymous 3/24 Letter 1''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-330343.htm">https://www.sec.gov/comments/s7-02-23/s70223-330343.htm</a>; Letter from
Anonymous SEC Employee, dated Mar. 31, 2023 (``Anonymous 3/31 Letter
4''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-333023.htm">https://www.sec.gov/comments/s7-02-23/s70223-333023.htm</a>; Letter from Anonymous dated Mar. 28, 2023 (``Anonymous
3/28 Letter 1''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-330733.htm">https://www.sec.gov/comments/s7-02-23/s70223-330733.htm</a>.
---------------------------------------------------------------------------
For example, one commenter asserted that the Proposing Release did
not adequately address how the Commission would ensure the security of
a third-party system.\53\ The commenter stated that given ``the highly
sensitive nature of the data that would be collected by the third-party
system, the need for effective data-security measures to be taken to
protect such information cannot be overstated.'' \54\ The commenter
emphasized the importance of cybersecurity by pointing out previous
cybersecurity incidents relating to sensitive personal information of
Federal government employees.\55\
---------------------------------------------------------------------------
\53\ See Anonymous 3/10 Letter 3.
\54\ Id.
\55\ Id.
---------------------------------------------------------------------------
As another example, one commenter expressed concerns about the
potential security vulnerability of a third-party system in light of
past incidents experienced by Federal agencies, Wall Street
institutions, and service providers.\56\ The commenter stated that the
proposed rule created an avoidable vulnerability.
---------------------------------------------------------------------------
\56\ See Letter from Anonymous dated Mar. 8, 2023 (``Anonymous
3/8 Letter 3''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-327140.htm">https://www.sec.gov/comments/s7-02-23/s70223-327140.htm</a>.
---------------------------------------------------------------------------
iii. Burden
Commenters also expressed concerns over applicable policies when
their brokerage firm(s) or other financial institution(s) cannot or
will not transmit transaction and account information through a third-
party trading compliance system. In particular, commenters asked
whether employees, their spouses, or their minor children would have to
close accounts held at those nonparticipating institutions.\57\
---------------------------------------------------------------------------
\57\ See, e.g., Anonymous 3/24 Letter 1.
---------------------------------------------------------------------------
For example, one commenter noted the possibility that certain
firms, such as retirement plans or small brokers, may have trouble
providing the data for employees to comply with this requirement.\58\
The commenter warned that without a ``method for people to get an
exemption and submit paper copies of their statements, the rule is
going to effectively be a prohibition on employees' use of those
firms.'' \59\
---------------------------------------------------------------------------
\58\ See Letter from Anonymous, dated Mar. 28, 2023 (``Anonymous
3/28 Letter 2''), available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-20161905-330731.pdf">https://www.sec.gov/comments/s7-02-23/s70223-20161905-330731.pdf</a>.
\59\ Id.
---------------------------------------------------------------------------
Another commenter expressed the view that it is unreasonable to
expect Commission employees to ensure that any broker-dealer or other
relevant financial institution takes the steps necessary to provide
transaction and holdings data to OEC.\60\ The commenter stated that
Commission employees do not possess the leverage to ensure financial
institutions provide the required data directly to the Commission
through an automated system and noted that the Commission's proposal
does not explain why any broker-dealer or other financial institution
would choose to participate if it is not required to do so under the
regulation.\61\
---------------------------------------------------------------------------
\60\ See Anonymous 3/10 Letter 3.
\61\ Id.
---------------------------------------------------------------------------
Another commenter asked what the policy would be if a brokerage
firm does not wish to transfer data directly to the SEC, stating that
employees ``should not be forced to close the accounts. Not all brokers
may have ability to provide data to [a] 3rd party on periodic basis.''
\62\
---------------------------------------------------------------------------
\62\ See Anonymous 3/24 Letter 1.
---------------------------------------------------------------------------
2. Final Rule
The Commission has carefully considered the comments received. In
consideration of, and to alleviate, the concerns numerous commenters
expressed regarding cybersecurity and privacy, the Commission has
determined not to adopt the proposal that would have authorized
mandatory use of an automated third-party compliance system. In a
change from the proposal, the Commission's final rules (1) authorize
the use of either an internal or third-party automated compliance
system, and (2) permit rather than require employees to use an
automated compliance system to comply with the reporting requirements
of paragraphs 5 CFR 4401.102(f)(1) and (f)(2), which require employees
to report and certify securities holdings, transactions, and duplicate
statements for accounts holding covered securities. In light of these
modifications, the Commission is not adopting the proposed amendments
to the transaction reporting deadlines and finds it necessary to
maintain the existing five-day transaction certification requirement in
paragraph 4401.102(f)(2), and the existing requirement in paragraph
4401.102(f)(1)(ii) to submit duplicate account statements, for
employees who elect to manually report information to the DAEO.
Specifically, the Commission is not adopting the following proposed
paragraph from proposed section 4401.102(f)(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
shall 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 place of this language, the Commission is
adopting the following new paragraph 4401.102(f)(4): ``A member or
employee may comply with the reporting requirements set forth in
paragraphs (f)(1) and (f)(2) of this section by authorizing the
transmission of account statements, holdings and transaction
information from an employee's brokerage or financial institution(s) to
the DAEO through a Commission approved, automated internal or third-
party compliance system.''
These modifications will allow the Commission to continue to
improve the efficiency, accuracy and effectiveness of its compliance
program by providing authority for employees to utilize either an
internal system, as some commenters suggested,\63\ or a third-party
system, to automate existing reporting requirements in accordance with
the required security and privacy protocols discussed below. These
modifications will also allow the Commission to gain additional
experience and data regarding the benefits and costs of an automated
compliance system without compelling employees who have concerns about
security and privacy to utilize such a system.
---------------------------------------------------------------------------
\63\ See, e.g., Letter from Ryan Luther, dated Mar. 8, 2023
(``Luther Letter'').
---------------------------------------------------------------------------
i. Legal Authority
a. Collection of Securities Information
The Commission has consulted with OGE regarding the SEC's authority
to have members and employees comply with the reporting requirements in
5 CFR 4401.102(f) through an internal or
[[Page 14569]]
third-party automated compliance system. OGE has advised that an
automated method of collection is consistent with the EIGA at 5 U.S.C.
13109, which permits OGE (and agencies, subject to OGE approval) to
impose additional confidential financial disclosure requirements on
officers and employees of the executive branch. As explained above, in
response to comments received, the Commission will implement the
automated reporting system on a voluntary basis.
The EIGA places responsibility on OGE as the ``supervising ethics
office'' to interpret the EIGA for the executive branch.\64\ The EIGA
authorizes OGE to ``require officers and employees under its
jurisdiction (including special Government employees as defined in
section 202 of title 18) to file confidential financial disclosure
reports, in such form as the supervising ethics office may prescribe.''
\65\ OGE has established regulations implementing this authority at 5
CFR 2634 subpart I. Through regulation, OGE has established a baseline
set of standardized confidential disclosure requirements applicable to
all executive branch agencies. These include use of a standard form
(OGE Form 450) and uniform requirements concerning information to be
reported on the standard form.\66\
---------------------------------------------------------------------------
\64\ 5 U.S.C. 13102(a); 13122(a) and (b).
\65\ 5 U.S.C. 13109 (``Each supervising ethics office may
require officers and employees under its jurisdiction (including
special Government employees as defined in section 202 of title 18)
to file confidential financial disclosure reports, in such form as
the supervising ethics office may prescribe. The information
required to be reported under this subsection by the officers and
employees of any department or agency shall be set forth in rules or
regulations prescribed by the supervising ethics office, and may be
less extensive than otherwise required by this subchapter, or more
extensive when determined by the supervising ethics office to be
necessary and appropriate in light of sections 202 through 209 of
title 18, regulations promulgated under those sections, or the
authorized activities of such officers or employees.'').
\66\ 5 CFR 2634.601.
---------------------------------------------------------------------------
OGE's regulations also permit agencies to establish alternative and
supplemental confidential disclosures, through separate regulations
jointly issued with OGE, that go beyond the requirements imposed under
the executive-branch wide regulations.\67\ Pursuant to OGE regulations,
an agency may require its employees to file additional confidential
financial disclosures if necessary because of special or unique agency
circumstances.\68\ The existing Supplemental Standards, promulgated
with OGE in 2010, already establish supplemental reporting requirements
for members and employees of the Commission. These regulations already
establish the content, timing, and method of reporting information to
OEC. As noted above, the primary change that the Commission is
undertaking is to permit employees and members to transmit to OEC
through an approved, automated internal or third-party compliance
system information already required to be disclosed. OGE has determined
that collecting securities transaction data directly from an employee's
broker, who acts as the employee's agent, is consistent with 5 U.S.C.
13109.
---------------------------------------------------------------------------
\67\ 5 CFR 2634.103 (``The regulation in this part is intended
to provide uniformity for executive branch financial disclosure
systems. However, an agency may, subject to the prior written
approval of the Office of Government Ethics (OGE), issue
supplemental regulations implementing this part, if necessary to
address special or unique agency circumstances. Such regulations:
(1) Must be consistent with the Act, the STOCK Act, Executive Orders
12674 and 12731, and this part; and (2) Must not impose additional
reporting requirements on either public or confidential filers,
unless specifically authorized by the Office of Government Ethics as
supplemental confidential reporting.''); 5 CFR 2634.905.
\68\ See 5 CFR 2634.601(c). See also Sec. 2634.901(b).
---------------------------------------------------------------------------
The Commission also received comments concerning the collection of
information related to an employee's spouse and unemancipated minor
children. As set out in the current existing Supplemental Standards,
subject to appropriate exceptions, employees are already required to
report securities transactions and duplicate account information for
the accounts of a spouse or unemancipated minor pursuant to 5 CFR
4401.102(f).\69\ This information collection is authorized under 5
U.S.C. 13109 and OGE's implementing regulations. As a result, OGE (and
agencies through jointly issued supplemental regulation) have long
required disclosure of the assets of a spouse or dependent child to the
extent appropriate to avoid conflicts of interest.\70\ The supplemental
confidential financial disclosures required by the SEC's supplemental
ethics regulation currently apply to spouses and minor children, and
the final regulation as adopted will continue to require disclosure of
that information.
---------------------------------------------------------------------------
\69\ Relevant exceptions include reporting ``[s]ecurities
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'' and ``[s]ecurities holdings and
transactions of a member's or employee's legally separated spouse
living apart from the member or employee.'' 5 CFR 4401.102(g)(1) and
(2).
\70\ See, e.g., 5 CFR 2634.907(a), (h) (requiring confidential
reporting of the assets, income, liabilities, gifts, and
reimbursements received by a spouse or dependent child); OGE Inf.
Adv. Op. 04 x 16 (2004); OGE Inf. Adv. Op. 96 x 3 (1996); OGE Inf.
Adv. Op. 93 x 33 (1993).
---------------------------------------------------------------------------
b. Collection of Account Identifying Information
The Commission received several comments concerning the authority
of the SEC to collect account information such as account numbers and
the protection of that information once collected.\71\ To effectuate
the collection of transaction information through an automated system,
a limited amount of biographical and account identifying information,
such as account numbers, account owners, and the relationship of the
account owner to the employee (if the account owner is not the
employee) is required to be collected. This information is necessary to
identify the appropriate account and, similar to the manual filing of
duplicate account statements, will help to ensure the authenticity of
the transaction data collected.
---------------------------------------------------------------------------
\71\ See, e.g., Anonymous 3/27 Letter 1.
---------------------------------------------------------------------------
While this information must be collected for members and employees
to voluntarily enroll in the system, the Commission notes that all
information collected by the Commission pursuant to 5 CFR 4401 is
subject to the confidentiality restrictions on release set out in the
EIGA (codified at 5 U.S.C. 13109), and the Privacy Act, 5 U.S.C. 552a.
First, the Commission notes that the information collected pursuant to
Sec. 4401.102(f) is subject 5 U.S.C. 13109 and to the Privacy Act of
1974 (5 U.S.C. 552a). Section 13109(a)(2) provides that reports filed
pursuant to section 13109(a)(1) ``shall be confidential and shall not
be disclosed to the public.'' \72\ ``Section 107(a) [now 13109(a)]
leaves no discretion on this issue with the agencies'' and thus
confidential ``reports and the information which they contain are,
accordingly, exempt from being released to the public under [the
Freedom of Information Act].'' \73\ Confidential financial disclosure
reports and the information contained in them are also subject to the
Privacy Act of 1974 (5 U.S.C. 552a), which provides that information
maintained by an agency about an individual may not be disclosed except
for under very limited circumstances. OGE's government-wide Privacy Act
system of records, OGE/GOVT-2, therefore prohibits disclosure of
confidential financial disclosure information--including information
received ``by a designated person such as a[n] . . . Attorney
accountant, [or]
[[Page 14570]]
banker . . .''--except under established routine uses set out in the
system of records or as per written consent by the employee.\74\
Moreover, OGE/GOVT-2 requires that all electronic confidential
financial disclosure records be ``protected from unauthorized access
through password identification procedures, limited access, firewalls,
and other system-based protection methods.'' \75\ It should also be
noted that information that is not necessary to authenticate
transaction information will not be required to be disclosed by any
member or employee. Finally, this final rule does not require any
member or employee to use the Commission approved automated trading
compliance system.
---------------------------------------------------------------------------
\72\ 5 U.S.C. 13109(a)(2); 5 CFR 2634.901(d).
\73\ Concepcion v. F.B.I., 606 F. Supp. 2d 14, 33 (D.D.C. 2009)
(quoting 5 CFR 2634.901(d)).
\74\ OGE/GOVT-2, 84 FR 47301 (2019).
\75\ Id.
---------------------------------------------------------------------------
ii. Privacy and Security
The Commission acknowledges commenters' concerns with respect to
security risks surrounding an automated third-party compliance system.
As noted above, use of an automated trading compliance system will be
voluntary, and any information collected is subject to the
confidentiality restrictions on release set out in 5 U.S.C. 13109, and
the Privacy Act, 5 U.S.C. 552a. The system itself must comport with all
applicable privacy and cybersecurity standards including, but not
limited to, the Federal Information Security Management Act
(``FISMA''). Consistent with those laws, SEC employees, ethics
officials, and any third-party contractor will be limited in the
information that they can access, and account numbers will be
accessible to only those within the system who have appropriately
established role-based permissions. Accordingly, the Commission will
take steps to ensure that such information is not accessible to any
person other than as necessary and appropriate to carry out the
functions and purposes of an automated system, to ensure compliance
with the ethics rules and regulations that apply to members and
employees, or as permitted by the Privacy Act, OGE/GOVT-2, and other
applicable rules and regulations.
While the technical requirements of any automated compliance system
are yet to be determined, establishment of the system will need to
follow various procedural steps and authorization processes, such as
the Federal Acquisition Regulation procedural requirements and the
FISMA Authority to Operate (``ATO'') security authorization processes.
Implementation of a third-party compliance system will depend on the
system and the third-party vendor meeting rigorous authorization,
privacy, and security protocols to comply with multiple Federal
Government and SEC standards, including but not limited to data
encryption requirements. Further, SEC IT systems must adhere to strict
FISMA requirements and SEC Information Security and Privacy Controls,
which are based on the controls outlined in NIST 800-53 under its Risk
Management Framework. In addition, depending on system architecture,
the system data provider may be required to meet the standards of the
Federal Risk and Authorization Management Program (``FedRAMP''). A
FedRAMP authorization is based on the same NIST 800-53 controls and yet
is an even more rigorous process due to its standards regulating and
monitoring the cybersecurity of cloud services. FedRAMP is a
government-wide program that provides a standardized approach to
security assessment, authorization, and continuous monitoring for cloud
products and services. The FedRAMP certification process involves a
comprehensive assessment of the system's security controls, which
includes vulnerability scans and penetration testing. Once certified, a
system is continuously monitored and audited regularly to ensure that
it remains in compliance with FedRAMP's stringent security standards.
Information security is a critical prerequisite for a third-party
automated compliance system. Throughout any future acquisition process,
privacy controls and information security will be an essential factor
in determining whether the Commission proceeds with such a system. OEC
will continue to engage with Commission stakeholders, including the
Office of Information Technology and Office of Acquisitions, to ensure
privacy and security concerns are addressed.
iii. Burden
The Commission has considered the comments reflecting concerns
about the burdens mandatory use of an automated compliance system would
impose on employees, particularly if an employee's brokerage firm or
other financial institution is unable or unwilling to provide the
envisioned data feeds. In consideration of the comments, the Commission
believes voluntary use of an automated compliance system will mitigate
these concerns.
Because the Commission is adopting a rule to permit rather than
require employees to use an automated compliance system, the Commission
has determined it is necessary to maintain the existing requirement
under 5 CFR 4401.102(f)(1)(ii) for members and employees to ``submit
duplicate statements for every account containing reportable securities
to the DAEO according to such procedures required by the DAEO,'' for
employees who will continue to manually submit required information.
This modification clarifies that employees who choose not to report via
an automated compliance system will still have to submit the required
account statements to the DAEO manually.
Similarly, the Commission is modifying the proposed language of 5
CFR 4401.102(f)(2) to maintain the existing requirement for members and
employees to report all purchases, sales, acquisitions, or dispositions
of securities ``within five (5) business days after receipt of
confirmation of the transaction,'' while maintaining the DAEO's
discretion to determine the manner and schedule of reporting for
employees who elect to use an automated compliance system. This
adjustment clarifies that employees who manually report required
information remain subject to the existing five business day
transaction reporting deadline, while also providing the necessary
flexibility for the DAEO to adjust reporting schedules as appropriate
for an automated compliance system.
D. Application of Seven Day IPO Waiting Period to Direct Listings of
Securities
Members and employees of the Commission are currently prohibited
from purchasing a security in an 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. The Commission proposed to amend 5 CFR 4401.102(c)(2)
to expand the limitation on purchasing a security in an IPO for seven
calendar days after the IPO is effective by also prohibiting 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 proposed 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
amendment regarding the exception for Permissible Diversified
Investment Funds in paragraph (g) would cover IPO shares in a
registered investment
[[Page 14571]]
company or publicly traded or publicly available collective investment
fund.
1. Comments Received
Several commenters expressed support for the proposed
amendment.\76\ For example, one commenter ``wholeheartedly agree[d]''
with this amendment, noting that if an ``SEC employee is barred from
purchasing securities in an IPO for seven calendar days, it only makes
sense to prohibit them from purchasing securities in a direct listing
for seven calendar days.'' \77\
---------------------------------------------------------------------------
\76\ See, e.g., UNLV Letter; Cornell Letter; Fox Letter.
\77\ See Fox Letter.
---------------------------------------------------------------------------
Another commenter pointed out the ``common traits'' between IPOs
and direct listings and agreed that direct listings ``should be treated
with the same existing rule'' applied to IPOs.\78\
---------------------------------------------------------------------------
\78\ See Freeland Letter.
---------------------------------------------------------------------------
No commenters opposed this proposed amendment.
2. Final Rule
The Commission has carefully considered the comments received and
is adopting Sec. 4401.102(c)(2) as proposed. Members and employees of
the Commission are currently prohibited from purchasing a security in
an 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. As noted in
the Proposing Release, 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 is
expanding 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 seven calendar days waiting period for
purchasing directly listed securities ensures that employees do not
use, or appear to use, material, non-public information to their
advantage in purchasing such securities.
E. Other Structural or Technical Corrections
The Commission proposed to amend Sec. 4401.102(h) to reflect that
the Office of the Ethics Counsel is no longer part of the Office of
General Counsel. We did not receive any comment on this proposed
amendment, and the Commission is adopting 5 CFR 4401.102(h) as
proposed.
Further, the Commission has determined to modify the waiver
provision at 5 CFR 4401.102 (h)(1) and (2), as proposed, and is
therefore adopting 5 CFR 4401.102 (h)(1) and (2) with modifications. As
a technical matter, the Commission finds it appropriate to adjust the
language of the waiver provision to more closely align with the
language used elsewhere in the rule. Currently, the proposal provides
for ``waiver of the prohibitions or limitations that would otherwise
apply to a securities holding or transaction . . .'' The term
``limitation'' is not found in the text of the rule. The text of the
rule refers to various prohibitions, restrictions and requirements.
Thus, to more accurately reflect what may be eligible for a waiver, the
Commission is adopting a technical correction to remove the word
``limitations'' from 5 CFR 4401.102 (h)(1) and (2) and replace it with
``restrictions and requirements.'' Further, in order to correct a
grammatical error in 5 CFR 4401.102(b)(2), the Commission is adding
``any'' to ``. . . the purchase or sale of security:'' so that the text
of paragraph (b)(2) reads: ``Members and employees are prohibited from
recommending or suggesting to any person the purchase or sale of any
(emphasis added) security. . . .''
Finally, for clarity and to conform with Federal Register style
requirements, 5 CFR 4401.102(b)(2)(ii) has been revised to replace a
general cross reference to ``this Rule'' with a more specific cross
reference to ``this section 4401.102.'' Similarly, 5 CFR 4401.102(e)(3)
has been revised to supplement a general cross reference to paragraph
(c)(1) with a more specific cross reference to ``paragraph (c)(1) of
section 4401.102,'' and 5 CFR 4401.102(f)(2) has been revised to
supplement a general cross reference to paragraph (4) to a more
specific cross reference to ``paragraph (f)(4).''
III. Administrative Law Matters
The Commission finds, in accordance with section 553(b)(3)(A) of
the Administrative Procedure Act (``APA''),\79\ that the final
amendments relate solely to agency organization, procedure, or
practice. They are therefore not subject to the provisions of the APA
requiring notice and opportunity for public comment.\80\ The Regulatory
Flexibility Act of 1980 (``RFA'') \81\ therefore does not apply.
Nonetheless, the Commission, in consultation with OGE, previously
determined that it would be useful to publish the proposed rules for
notice and comment before adoption. Because the final amendments relate
to ``agency management or personnel'' and ``agency organization,
procedure or practice that does not substantially affect the rights or
obligations of non-agency parties,'' the final amendments are not
subject to the Small Business Regulatory Enforcement Fairness Act (5
U.S.C. 804(3)(B-C)) (``SBREFA''). The final amendments do not contain
any collection of information requirements as defined by the Paperwork
Reduction Act of 1995 (``PRA'').\82\
---------------------------------------------------------------------------
\79\ 5 U.S.C. 553(b)(3)(A).
\80\ As noted above, Executive Order 12,674, as modified by
Executive Order 12, 731, requires all supplemental regulations ``be
prepared as addenda to the branch-wide regulations and promulgated
jointly with the Office of Government Ethics, at the agency's
expense, for inclusion in Title 5 of the Code of Federal
Regulations.'' Exec. Ord. 12, 674, sec. 301(a). This publication
requirement is separate from the APA.
\81\ 5 U.S.C. 601 et seq.
\82\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
At least two commenters suggested that the APA \83\ or PRA \84\
would apply to the proposed rules, and one of these commenters urged
the Commission also to consider whether the RFA or SBREFA applied to
the proposed rules.\85\ As discussed above, however, the public notice
and comment and other relevant provisions of the APA, RFA and SBREFA do
not apply because the final amendments relate solely to agency
management or personnel and agency organization, procedure or practice
and do not substantially affect the rights or obligations of non-agency
parties. With respect to the APA, although the final amendments are not
subject to the APA's notice and comment requirements, as discussed
above, the Commission did publish the proposed amendments for public
comment before adoption, and the final amendments otherwise fully
comply with the applicable requirements of the APA.
---------------------------------------------------------------------------
\83\ Anonymous (Mar. 31, 2023).
\84\ Agency Employee (Mar. 10, 2023)
\85\ Anonymous (Mar. 28, 2023).
---------------------------------------------------------------------------
The PRA imposes certain requirements on Federal agencies in
connection with the conducting or sponsoring of any ``collection of
information.'' \86\ The final amendments are not a ``collection of
information'' within the meaning of the PRA because the information
required by the final amendments is collected from current Federal
employees when acting within the scope of their employment.\87\
---------------------------------------------------------------------------
\86\ 44 U.S.C. 3501 et seq.; 44 U.S.C. 3502(3).
\87\ See 5 CFR 1320.3(c)(4).
---------------------------------------------------------------------------
[[Page 14572]]
IV. Economic Analysis
The Commission is sensitive to the economic effects of its rules,
including the costs and benefits that result from its rules.\88\ As
discussed further below, we expect the economic effects of the final
amendments will be limited. The amendments are directed at internal
procedures that apply only to Commission members and employees. We
expect these changes will not impose any costs on parties other than
the Commission and its members and employees, or if there are such
costs then we expect those costs to be negligible. We believe that the
changes will not have any significant impact on the functioning of
securities markets and will have minimal, if any, effects on
efficiency, competition, and capital formation. We lack data on current
compliance costs and are accordingly not able to quantify the costs,
benefits, and effects on efficiency, competition, and capital formation
expected to result from the final amendments.
---------------------------------------------------------------------------
\88\ Section 2(b) of the Securities Act, section 3(f) of the
Securities Exchange Act (``Exchange Act''), section 2(c) of the
Investment Company Act, and section 202(c) of the Investment
Advisers Act require the Commission, 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).
---------------------------------------------------------------------------
We discuss below the potential benefits, costs, and economic
effects of the four significant categories of final amendments to the
Supplemental Standards: (1) prohibiting employees from holding
Financial Industry Sector Funds; (2) eliminating the pre-clearance,
reporting, and holding period requirements for Permissible Diversified
Investment Funds; (3) authorizing the use of either an internal or
third-party automated compliance system and permitting employees to use
an automated compliance system to comply with the reporting
requirements, and maintaining the existing five-day transaction
certification requirement and the existing requirement to submit
duplicate account statements for employees who elect to manually report
information to the DAEO; and (4) prohibiting purchases of direct listed
assets for seven calendar days after the direct listing effective date.
In addition, the adopted amendments make certain definitional and
technical changes that we believe would not have a substantial economic
effect.
A. Amendments Concerning Financial Industry Sector Funds
The Commission is adopting amendments 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 do not expressly prohibit
Financial Industry Sector Funds focused on entities regulated by the
Commission.
The final rule enhances the integrity of capital markets by further
guarding against any perception of improper use of nonpublic
information by Commission members and employees. Expanding the
prohibition to include investments in Financial Industry Sector Funds
reduces potential conflicts of interest and bolsters investor
confidence in fair, orderly, and efficient markets. Commenters agreed
that prohibiting investment by Commission members and employees in
Financial Industry Sector Funds would reduce the risk that nonpublic
information could be improperly used.\89\
---------------------------------------------------------------------------
\89\ See UNLV Letter; Cornell Letter; Freeland Letter; Fox
Letter.
---------------------------------------------------------------------------
The primary costs of this amendment will be borne mostly by
impacted members and employees who currently hold these funds, as they
must sell, or otherwise divest, affected assets. We do not have
sufficient information to quantify the total effects associated with
such divestment. We also expect minimal incremental technical or
administrative costs to implement this change under the Commission's
existing ethics compliance program.
Some commenters have expressed concerns about the potential costs
of divestiture to employees or members. For example, one commenter
stated that the divestiture ``will likely cause significant tax
consequences and also alter the diversity of their holdings.'' \90\ The
typical 90-day time frame for divestiture provides affected employees
or members a sufficient time to gradually unwind positions in a phased
approach to minimize tax liabilities or potential market impacts.
During this transition period, employees may consult with financial and
tax professionals to develop appropriate divestiture plans. In
addition, eligible employees may seek a Certificate of Divestiture from
the Office of Government Ethics, which can provide capital gains tax
deferral to alleviate the tax burden of complying with the divestiture
requirements.\91\ We also expect the impact to portfolio diversity to
be minimal, because many other investment options--such as broader-
based index funds or assets in other sectors--remain available and do
not raise ethics concerns. The final amendments allow flexibility for
impacted individuals to re-allocate capital in ways that still allow
for adequate portfolio diversification without creating any actual or
perceived conflicts.
---------------------------------------------------------------------------
\90\ See Anonymous 3/9 Letter 1.
\91\ See 5 CFR 2634.1001.
---------------------------------------------------------------------------
B. Amendments Concerning Permissible Diversified Investment Funds
The Commission is adopting amendments to eliminate certain
procedural requirements for Permissible Diversified Investment Funds by
making them exempt from pre-clearance, reporting, and 30-day holding
period stipulations under Rule 102(g)(1). Currently, Commission members
and employees are required to pre-clear trades in these funds, confirm
executed transactions, and hold the assets for at least 30 days before
selling.
The final amendments reduce administrative burdens for members and
employees, and potentially enable more timely execution of investment
decisions in Permissible Diversified Investment Funds. The amendments
will also allow the Commission to better focus resources on monitoring
holdings and transactions that present more significant ethical
concerns. The magnitude of benefits will depend on how the policy
change affects individuals' investment choices and portfolios, which is
impracticable to predict.
We do not anticipate that the amendments will impose any material
costs on the Commission, its members and employees, or the public.
Because these diversified funds already qualified for applicable
regulatory conflicts exemptions, exempting them from existing
procedural requirements is unlikely to meaningfully increase risks of
actual or perceived conflicts of interest.
[[Page 14573]]
C. Amendments Permitting Automated Reporting of Covered Holdings and
Transactions and Related Adjustment of Transaction Reporting Deadlines
Currently, under the Supplemental Standards, the process for
collecting covered securities transactions and holdings is internal to
the Commission. As described in Section II.C, employees are required to
report transactions of securities to the Commission within five
business days after receipt of confirmation of the transaction so that
ethics officials can reconcile pre-cleared trades in accordance with 5
CFR 4401.102(f). Section 4401.102(f) also requires employees to submit
duplicate statements for every account containing reportable securities
to the DAEO according to such procedures required by the DAEO.
Reporting is currently conducted by employees through the Commission's
Personal Trading Compliance System and relies on employees to manually
confirm and provide evidence of transactions through submission of
brokerage or other financial institution account statements. The DAEO
has, through internal policy, provided employees with the option to
redact from these documents sensitive PII that is not required to be
reported. Some commenters noted that the proposing release
characterized the current system as ``successful'' and questioned what,
if any, additional benefits the proposed rule would provide beyond the
existing requirement.\92\ The manual nature of the reporting can yet be
time consuming and prone to human error, requiring additional time to
resolve identified issues. Some commenters concurred and described
qualitatively the time costs imposed by the current system, both on
Commission employees and Ethics staff who review these filings for
compliance issues.\93\
---------------------------------------------------------------------------
\92\ See, e.g., Anonymous 3/10 Letter 3.
\93\ See UNLV Letter; Cornell Letter; Freeland Letter; Fox
Letter.
---------------------------------------------------------------------------
The Commission proposed to automate the existing reporting process
by amending 5 CFR 4401.102(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. The Commission also proposed to revise transaction
reporting deadlines to provide necessary flexibility to adjust for
securities transactions and holdings data obtained from financial
institutions through a third-party automated compliance system by
modifying 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.
In response to the proposed amendments, some commenters noted that
automation through a third-party provider is expected to enhance the
accuracy of covered securities transactions and holdings data made
available to the DAEO.\94\ As some commenters also noted,\95\
Commission employees who use the third-party service provider system
are expected to benefit from no longer having to manually process their
covered securities transactions and holdings data. Many commenters
expressed concerns over the potential costs to the Commission or its
employees of a cybersecurity incident or breach involving the third-
party system.\96\ Many commenters expressed concerns that the use of a
third-party system will require Commission employees to disclose
sensitive financial PII data beyond what is currently required, such as
account numbers at their financial institutions.\97\ Some commenters
noted that employees will face potential financial losses as well as
psychological or other recovery costs in response to a cybersecurity
incident or breach, and one commenter warned that the Commission would
likely suffer reputational harm.\98\ Some commenters also suggested
including in the amendments a voluntary opt-out (or opt-in) provision
for Commission employees from the third-party automated electronic
system.\99\
---------------------------------------------------------------------------
\94\ See, e.g., UNLV Letter.
\95\ See, e.g., UNLV Letter.
\96\ See, e.g., Cornell Letter; Anonymous 3/31 Letter 3. Some
commenters also pointed to the potential transmission of structured
data under a third-party automated electronic system to support
their view that the probability of a cybersecurity incident would be
higher than under the current internal system, which does not rely
on structured data. See, e.g., Letter from Anonymous, dated Mar. 21,
2023, available at <a href="https://www.sec.gov/comments/s7-02-23/s70223-329073.htm">https://www.sec.gov/comments/s7-02-23/s70223-329073.htm</a>.
\97\ As previously noted, under the current system, Commission
employees have the option to redact financial account numbers and
other private information that appears on their covered securities
transactions and holdings data. See Anonymous 3/31 Letter 3.
\98\ See, e.g., Anonymous 3/15 Letter.
\99\ See, e.g., Redford Letter; Anonymous 3/15 Letter.
---------------------------------------------------------------------------
In response to the concerns commenters expressed regarding
cybersecurity and privacy, the Commission is adopting a new paragraph
4401.102(f)(4) that states that ``a member or employee may comply with
the reporting requirements set forth in paragraphs (f)(1) and (f)(2) of
this section by authorizing the transmission of account statements,
holdings and transaction information from an employee's brokerage or
financial institution(s) to the DAEO through a Commission approved,
automated internal or third-party compliance system.'' In other words,
the Commission will implement the automated reporting system on a
voluntary basis with Commission employees deciding whether to use the
automated system or to continue using the current manual system. For
employees who elect to manually report information to the DAEO, the
Commission will also maintain the existing five-day transaction
certification requirement in paragraph 4401.102(f)(2), and the existing
requirement in paragraph 4401.102(f)(1)(ii) to submit duplicate account
statements.
The final amendments will benefit Commission employees, and thereby
the Commission, by providing them with an additional approach for
complying with the Supplemental Standards. Specifically, employees will
be permitted to decide how to comply with reporting obligations, either
through the current manual system (status quo) or through a Commission-
approved, automated internal or third-party compliance system, to the
extent that an employee's financial institution is able and willing to
provide the envisioned data feeds under an automated system. Employees
who elect not to report via an automated compliance system will
continue to be required to submit the required account statements to
the DAEO manually. Each employee who has both options available will
select the option that delivers highest net benefits to that employee.
When evaluating whether to comply using an automated system, employees
will weigh the benefits of no longer having to manually transmit to the
DAEO account statements, holdings, and transaction information against
the costs to them of using the automated compliance system. These costs
to employees include initial costs to learn about the automated system
and to authorize their financial institutions to transmit covered
securities holdings and transactions data to the DAEO through the
automated system.\100\ Also, employees who select the automated system
will be able to consider the cybersecurity risks of that system and the
privacy risks from having to provide account identifying information,
such as
[[Page 14574]]
account numbers, which employees may otherwise redact under the current
system. In an automated system, this information is necessary to
identify the appropriate account and ensure the authenticity of the
transaction data collected.
---------------------------------------------------------------------------
\100\ Relatedly, upon separation from the Commission, former
Commission employees will need to make arrangements to curtail
reporting.
---------------------------------------------------------------------------
Under the final amendments, Commission employees will continue to
be responsible for ensuring that their covered securities transactions
and holdings data are reported ``in the manner required by the DAEO.''
Some commenters noted \101\ that this responsibility will continue to
impose monitoring costs on Commission employees within an automated
system. While employees who use the automated system will likely have
an initial responsibility to enable or authorize the automated
transmission of brokerage statements and transaction information from
their broker or other financial institution, the monitoring costs of
ensuring the automated system is functioning correctly such that data
provided by financial institutions is properly transmitted to OEC will
primarily be borne by the Commission through OEC. Therefore, we expect
monitoring costs to employees who use the automated system to be
minimal.
---------------------------------------------------------------------------
\101\ See Redford Letter.
---------------------------------------------------------------------------
The final amendments will also benefit the Commission by allowing
it to continue to improve the efficiency, accuracy and effectiveness of
its compliance program by providing authority for employees to utilize
an automated system. The Commission will also gain additional
experience and data regarding the benefits and costs of an automated
compliance system. As described above, an automated system is expected
to enhance the accuracy and timeliness of covered securities
transactions and holdings data made available to the DAEO, enhancing
the DAEO's ability to monitor Commission employees' compliance with the
Supplemental Standards and promptly remedy any compliance violations
detected.
The Commission will incur direct costs from implementing and
overseeing the new automated system in addition to the costs of
maintaining the manual reporting system. As some commenters noted,\102\
these costs will include the costs of developing internally or
contracting, administering, and monitoring the automated system. As
described in Section II.C, these costs will be affected by the various
procedural steps and authorization processes needed to establish an
automated system, including the need for SEC IT systems to adhere to
strict FISMA requirements and SEC Information Security and Privacy
Controls as well as the need for any third-party vendor to meet
rigorous authorization, privacy, and security protocols to comply with
multiple Federal Government and SEC standards. While we are aware of
third-party providers that supply automated reporting services similar
to those contemplated under the amendment, we are not aware of a
Federal Government agency currently having such an automated system or
contracting with a third-party provider for this purpose. Hence, we are
unable to ascertain the extent to which some third-party providers may
bid and compete to provide this service to the Commission, and we
cannot quantify the direct costs to the Commission of implementing the
amendment.
---------------------------------------------------------------------------
\102\ See Letter from Anonymous, dated Mar. 13, 2023, available
at <a href="https://www.sec.gov/comments/s7-02-23/s70223-327570.htm">https://www.sec.gov/comments/s7-02-23/s70223-327570.htm</a>.
---------------------------------------------------------------------------
D. Amendments Concerning Prohibiting Purchases of Direct Listed Assets
The Commission is adopting an amendment to Rule 102(c)(2) to
prohibit members and employees from purchasing securities directly
listed on an exchange for seven calendar days following the effective
date of the direct listing.
The adopted restriction aims to further safeguard against any
perception of improper use of nonpublic information by Commission
members and employees. Expanding the prohibition to include directly
listed securities is intended to reduce potential conflicts of interest
and bolster investor confidence in the integrity of markets.
The primary costs of this amendment will be borne by impacted
members and employees who will be restricted from trading these
securities during the specified period. We do not expect any material
direct costs to the Commission or public because of the rule change.
V. Statutory Basis
These amendments to the Commission's ethics rules are being adopted
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 2635.905; 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 amending 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), 2634.905, 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 any 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 section.
[[Page 14575]]
(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
have five (5) business days after clearance to effect a transaction.
(2) Documentation of the clearance of any transaction pursuant to
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) of this section 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:
(i) Report and certify all securities holdings according to the
schedule and in the manner required by the DAEO; and
(ii) Submit duplicate account statements for every account
containing reportable securities to the DAEO according to such
procedures required by the DAEO.
(2) Members and employees must report all purchases, sales,
acquisitions, or dispositions of securities within five (5) business
days after receipt of confirmation of the transaction, or if the member
or employee complies with the reporting requirements of this section as
authorized in paragraph (f)(4) of this section, 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) A member or employee may comply with the reporting requirements
set forth in paragraphs (f)(1) and (2) of this section by authorizing
the transmission of account statements, holdings, and transaction
information from an employee's brokerage or financial institution(s) to
the DAEO through a Commission-approved, automated internal or third-
party 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.
[[Page 14576]]
(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, restrictions, or requirements 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, restrictions, or requirements 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 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, restriction,
or requirement 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: February 22, 2024.
Vanessa A. Countryman,
Secretary.
Shelley K. Finlayson,
Acting Director, Office of Government Ethics.
[FR Doc. 2024-04062 Filed 2-27-24; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on February 28, 2024.
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.