The Securities and Exchange Commission is Above the Law

Following up on a theme we’ve discussed before about certain people having access to trading options that you—the retail investor—do not, we figured we’d talk today about the Securities and Exchange Commission and its approved practice of insider trading among its employees.

You see, at the SEC, insider trading is not only allowed; it’s required.

The Rule

Employees at the Sinsider trading SECecurities and Exchange Commission cannot own stock in a company that they are about to investigate. According to the SEC, this creates a conflict of interest that would incentivize the SEC employee to less aggressively conduct the investigation and possible ignore securities law infractions knowing that he or she owns stock in the company and bring such violations to light could possibly cause their stock to go down.

So, to avoid this alleged conflict of interest, the SEC requires that all employees who are about to conduct an investigation on a company, sell any direct ownership they have in the company prior to commencing the investigation.

On its face, this might make sense. We do, after all, want to have attorneys and what have you at the SEC approaching their job as regulators with just as much veracity as they would under any circumstances. However, simply announcing an investigation will almost surely drop a company’s stock price and if you or I knew of a pending SEC investigation in any company in which we owned stock, and we sold prior to the announcement of that investigation, we’d be committing a violation of securities law.

You see, lots of people are in possession of non-public information about a certain company (or several) and we have laws in place that stop them from taking advantage of this privileged information even if pretending like they know nothing is going to cost them money. The SEC should be bound by the same rules we all are.

Others have the Same Predicament

There are other people who have access to non-public information that could be tied to financial incentives and doing their job could be influenced by their financial incentives. Journalists are a good example. For many of these people, the answer to their ethical quandary is to simply not directly own public stock, or make use of blind trusts.

The SEC has claimed that enforcing a rule the prohibits its employees from owning stock in publicly traded companies would place a huge disincentive on working at the SEC and would make requirement more difficult. I’d argue that most SEC employees do it for the employment clout they pick up while working there for a few years but ignoring this for a minute there are other options.

The blind trust option is a good one and one that should be used more commonly among government officials and employees. Surprisingly not many government employees beyond the President actually use one.

The concept is simple. An individual places money into a trust and a trustee (generally with a professional investment background) makes trading decisions based on basic direction from the individual. The SEC could simply set up a service to its employees that would allow them to own public stock without having direction knowledge or influence on those investments.

Ultimately employees are the SEC are not all that unique in their access to insider information. And trading based on that information is illegal as the law the already states. For the SEC to impose an internal rule that is in direct violation of the law under the claim that it avoids conflicts of interest is an imposition of authority not granted to the SEC and such a policy needs revision.


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