SEC Adopts Updated Ethics Rules Enhancing Oversight on Securities Trading by Agency Personnel

The Securities and Exchange Commission (SEC) has announced the adoption of amendments to its ethics rules, aimed at modernizing and strengthening its ethics compliance program. These amendments, adopted in collaboration with the Office of Government Ethics, mark a substantial update to the existing regulations governing securities holdings and transactions of all SEC employees, their spouses, and minor children.

SEC Chair Gary Gensler expressed his satisfaction with the adoption of these rules, emphasizing their role in modernizing the agency's compliance program. Gensler stated, "These amendments modernize our compliance program and will help ensure the SEC honors the trust the public has placed in our agency."

The amendments bring notable changes to the SEC's Supplemental Ethics Rules, specifically in 5 CFR Part 4401.102, Supplemental Standards of Conduct for Members and Employees Securities and Exchange Commission.

Key Highlights of the Amendments:

1. Prohibitions Against Financial Industry Sector Funds:

• While the SEC has historically restricted employees from investing in stocks of entities directly regulated by the Commission, such as broker-dealers and investment advisers, the amendments extend these prohibitions to include financial industry sector funds.
• The rationale behind this expansion is to address the potential conflicts of interest and appearance concerns associated with employee ownership of financial industry sector funds.

2. Enhancements to Data Collection:

• The amendments permit employees to fulfill existing reporting requirements by authorizing financial institutions to transmit data on their covered securities transactions and holdings directly to the SEC through an automated electronic system.
• This enhancement is expected to streamline internal compliance controls, enabling real-time detection and remediation of violations. It also reduces manual processes, offering an independently verifiable source for compliance monitoring and testing.

3. Optimizing Efficient and Effective Use of Agency Resources:

• To optimize resources, the amendments exempt diversified mutual funds from certain Supplemental Ethics Rule requirements. Diversified mutual funds are deemed to pose a lower risk of conflicts of interest and appearance problems compared to other types of securities.
• However, mutual funds concentrating investments in specific sectors, industries, businesses, states, or countries other than the United States will remain subject to the rules.

These updates underscore the SEC's commitment to fostering a culture of integrity, transparency, and trust. The Commission believes that these amendments will not only enhance its ability to monitor compliance effectively but also contribute to the ongoing effort to maintain public confidence in the agency. The modernized ethics requirements reflect the SEC's dedication to adapting to the evolving landscape of securities trading and ethical considerations.

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