Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission

<RULE> SECURITIES AND EXCHANGE COMMISSION <CFR>5 CFR Part 4401</CFR> <DEPDOC>[Release No. 34-99582; File No. S7-02-23]</DEPDOC> <RIN>RIN 3209-AA15</RIN> <SUBJECT>Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Securities and Exchange Commission. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> 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. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> This final rule is effective March 29, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Jay Bragga, Office of the Ethics Counsel, (202) 551-5170, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1050. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> The Commission is adopting amendments to 5 CFR 4401.102 (Rule 102), its Supplemental Standards. <HD SOURCE="HD1">I. Background</HD> On August 7, 1992, OGE published the OGE Standards. <SU>1</SU> <FTREF/> 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. <FTNT> <SU>1</SU>   <E T="03">See</E> 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. </FTNT> 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. <SU>2</SU> <FTREF/> On February 7, 2023, the Commission, with OGE's concurrence, proposed to amend those existing supplemental regulations. <SU>3</SU> <FTREF/> <FTNT> <SU>2</SU>   <E T="03">See</E> 75 FR 42273, July 20, 2010, as amended at 76 FR 19902, Apr. 11, 2011. </FTNT> <FTNT> <SU>3</SU>  88 FR 7891, February 7, 2023 (“Proposing Release”). </FTNT> 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. <HD SOURCE="HD1">II. Description of Final Rule Amendments</HD> <HD SOURCE="HD2">A. Prohibited Ownership of Financial Industry Sector Funds</HD> The Commission proposed amending § 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 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. <SU>4</SU> <FTREF/> 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 § 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. <FTNT> <SU>4</SU>  5 CFR 4401.102(c)(1). </FTNT> <HD SOURCE="HD3">1. Comments Received</HD> The Commission received numerous comments in favor of the proposal to prohibit ownership of Financial Industry Sector Funds. <SU>5</SU> <FTREF/> 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. <FTNT> <SU>5</SU>   <E T="03">See, e.g.,</E> 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 <E T="03">https://www.sec.gov/comments/s7-02-23/s70223.htm.</E> For those letters from anonymous commenters, we cite to specific internet addresses to help readers locate the comment. </FTNT> 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. <SU>6</SU> <FTREF/> 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.”  <SU>7</SU> <FTREF/> <FTNT> <SU>6</SU>   <E T="03">See</E> Fox Letter. </FTNT> <FTNT> <SU>7</SU>   <E T="03">Id.</E> </FTNT> 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.”  <SU>8</SU> <FTREF/> <FTNT> <SU>8</SU>   <E T="03">See</E> Gillmore Letter. </FTNT> 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 t ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 109k characters. 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