SEC Staff May Profit from Non-public Knowledge

Study finds the agency's staff aren't better than other investors at picking stocks, but are better at selling shares before they decline in value.

People working for the U.S. Securities and Exchange Commission (SEC) who owned stock in companies under investigation were more likely to sell shares than other investors in the months before the agency announced it was taking enforcement actions, according to a new academic paper.

SEC employees holding shares of five firms, including JPMorgan Chase & Co. and General Electric Co., in 2010 and 2011 sold stock in 62 percent of the trades they initiated, compared with 50 percent among all the investors who traded those shares in that period, Emory University accounting professor Shivaram Rajgopal reports in the paper.

Beginning in August 2010, the SEC’s ethics rules prohibited employees from buying or selling shares of companies under investigation and generally required them to obtain permission before trading. The rules forbid them from trading in any financial company directly regulated by the SEC, such as a bank-owned broker-dealer. The rules also generally require workers to hold any stock they buy while working at the SEC for six months before selling the shares.

The agency said in January it is reviewing the holdings of about 3,400 employees after some of its New York staff was found to own securities prohibited by ethics rules.

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