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The SEC's response: "Nester explained that before staff can work on an issue that involves a company, they have to sell any holdings of stock in that firm. As a

The SEC's response: "Nester explained that before staff can work on an issue that involves a company, they have to sell any holdings of stock in that firm. As a result, he said, there shouldn't be any surprise that a sale would precede the announcement of an enforcement action." I don't know about anybody else, but this seems pretty plausible to me.

JumpCrisscross 13y ago
This story is more instructive in the perils of jumping to conclusions than anything else.
jey 13y ago
That's extremely amusing, since the probability of a enforcement action conditional on an investigation being started is much higher than the prior probability of an enforcement action. And if an enforcement action occurs, the price is only going to go down. So this is practically an institutionalized version of the insider trading the article is talking about!
- letstryagain 13y ago
  The fair way to handle this is to disallow any buying OR selling of related stocks until the public announcement of the results of the investigation.
  - jpwright 13y ago
    But then you have conflict of interest if you're asking SEC employees to investigate companies they hold stock in. The incentive would be to not investigate or impose milder penalties.
    - 001sky 13y ago
      No, put the stocks in a blind trust.
      - rdl 13y ago
        This would make joining SEC a very expensive career move for a lot of people, especially if they only planned to be there for a year or two, and were heavily into former employers or other specific stocks based on their experience in the stock market.
        SkyMarshal 13y ago
        They have to assign their holdings to a 3rd party financial manager/fund/401k/IRA/etc and recuse themselves from any active management of their own portfolio. Not sure if this is an industry-wide requirement, but I had to do this when I worked for a small bond fund some years ago. Zero trading my own account allowed, and required to disclose all personal holdings and activity to the compliance officer who reported to General Counsel.
        deleted 13y ago
        [deleted]
      - robzyb 13y ago
        That doesn't solve the problem. Employees will still have a conflict of interest because they will still want their stock's value to remain.
        Oculus 13y ago
        Could you expand on this point? I'm under the assumption that employees wouldn't know the portfolio of the blind trust, hence the blind.
      - aspensmonster 13y ago
        How about... just not holding any stocks?
        IgorPartola 13y ago
        Hmm. Given that in order to retire in the US you must invest in the stock market that would be a big requirement. Don't get me wrong, I am all for solving this problem, but simply not allowing the SEC employees to participate in the market would be a pretty good way to ruin their retirement. An alternative would be to instead provide pensions. I don't really see how that happening given the "no handouts at any cost" attitude of the majority party in the House.
  - einhverfr 13y ago
    A better way would be to publically list all investigations for which SEC employees have been required to sell shares. But then that might pose due process issues for the companies. Maybe all SEC employees should be required to have stocks in blind trusts while working there?
nostrademons 13y ago
Yeah, when I looked at the data in the article, the pattern wasn't that SEC employees were systematically selling stocks they were investigating. Rather, it was that they were always selling, and refused to buy stocks under investigation. This is consistent with the SEC's policies, and also makes a lot of sense. I would chalk this up to a quirk of statistics rather than any deliberate malfeasance. (Although, I'd note that the SEC policy that employees sell any stocks of a company that they will be investigating is good for the employees, because those companies are disproportionately likely to suffer a stock price penalty in the near future. Basically, the policy is a way of turning material non-public information into a market advantage without requiring that any individual employee act on that. But this situation exists in a lot of other cases, eg. stock option grants should systematically beat the market because companies that are financially healthy are more likely to hire people, and that financial health usually translates into hiring before it translates into profits.)
- judk 13y ago
  Hiring is basically public information.
- smutticus 13y ago
  Do you see any conflict of interest in an employee at the SEC and buying stock in every SP500 company matching their market cap, then selling them right before the SEC investigates them? If someone did that with the SP500 they could easily beat the index. I think this is the definition of malfeasance.
  - nostrademons 13y ago
    I think it's the definition of "unfair advantage", but I don't think it's the definition of "malfeasance". The individual SEC employees have no agency here: they are required by policy to sell the stock of any companies they are investigating. Moreover, it's not clear if any other policy would better serve the public interest. Requiring or allowing them to not to sell that stock is an even worse conflict of interest; it would incentivize them to never find a company guilty, because then their own holdings would drop. Requiring that they never own stocks would be a prohibitive restriction that would turn away many people who are most qualified for the job. The blind trust idea might work, but adds a lot of overhead for employees, and also requires another level of enforcement to make sure employees are not leaking information to the trustee. A lot of people are really uncomfortable with the idea that someone might have an unfair advantage in financial markets, but oftentimes this is quite unavoidable. It's also pretty small-potatoes compared to the advantages that professional financiers get by being primary dealers for the Fed, or market makers, or having relationships with Wall Street policy makers, or hobnobbing with company CEOs on the golf course.
phoney 13y ago
So this is a job perk? Not only can you sell ahead of bad news based on inside info, as an employer, the SEC forces you to!
tlrobinson 13y ago
If you change "sell any holdings of" to "short" that statement sounds absurd, but they're roughly equivalent. How about not allowing staff to hold stock in companies they might have to deal with?
- pseut 13y ago
  That would be "all companies."
  - tlrobinson 13y ago
    I was thinking certain employees could deal with certain sectors or something.
- jashkenas 13y ago
  For what it's worth, that's exactly what the rule is for journalists at The New York Times. To quote the relevant section from the handbook: "No staff member may own stock or have any other financial interest in a company, enterprise or industry that figures or is likely to figure in coverage that he or she provides, edits, packages or supervises regularly. A book editor, for example, may not invest in a publishing house, a health writer in a pharmaceutical company or a Pentagon reporter in a mutual fund specializing in defense stocks. For this purpose an industry is defined broadly; for example, a reporter responsible for any segment of media coverage may not own any media stock. “Stock” should be read to include futures, options, rights, and speculative debt, as well as “sector” mutual funds (those focused on one industry)."
- pyre 13y ago
  Doesn't that effectively translate into "not allowing staff to hold stock at all?"
samstave 13y ago
So.... if you can monitor the sales of all SEC employees; then you could copy-sell, or buy up their shares en-mass and very rapidly sell them for a profit?

JumpCrisscross 13y ago

This story is more instructive in the perils of jumping to conclusions than anything else.

jey 13y ago

That's extremely amusing, since the probability of a enforcement action conditional on an investigation being started is much higher than the prior probability of an enforcement action. And if an enforcement action occurs, the price is only going to go down. So this is practically an institutionalized version of the insider trading the article is talking about!

letstryagain 13y ago
The fair way to handle this is to disallow any buying OR selling of related stocks until the public announcement of the results of the investigation.
- jpwright 13y ago
  But then you have conflict of interest if you're asking SEC employees to investigate companies they hold stock in. The incentive would be to not investigate or impose milder penalties.
  - 001sky 13y ago
    No, put the stocks in a blind trust.
    - rdl 13y ago
      This would make joining SEC a very expensive career move for a lot of people, especially if they only planned to be there for a year or two, and were heavily into former employers or other specific stocks based on their experience in the stock market.
      - SkyMarshal 13y ago
        They have to assign their holdings to a 3rd party financial manager/fund/401k/IRA/etc and recuse themselves from any active management of their own portfolio. Not sure if this is an industry-wide requirement, but I had to do this when I worked for a small bond fund some years ago. Zero trading my own account allowed, and required to disclose all personal holdings and activity to the compliance officer who reported to General Counsel.
      - deleted 13y ago
        [deleted]
    - robzyb 13y ago
      That doesn't solve the problem. Employees will still have a conflict of interest because they will still want their stock's value to remain.
      - Oculus 13y ago
        Could you expand on this point? I'm under the assumption that employees wouldn't know the portfolio of the blind trust, hence the blind.
    - aspensmonster 13y ago
      How about... just not holding any stocks?
      - IgorPartola 13y ago
        Hmm. Given that in order to retire in the US you must invest in the stock market that would be a big requirement. Don't get me wrong, I am all for solving this problem, but simply not allowing the SEC employees to participate in the market would be a pretty good way to ruin their retirement. An alternative would be to instead provide pensions. I don't really see how that happening given the "no handouts at any cost" attitude of the majority party in the House.
- einhverfr 13y ago
  A better way would be to publically list all investigations for which SEC employees have been required to sell shares. But then that might pose due process issues for the companies. Maybe all SEC employees should be required to have stocks in blind trusts while working there?

nostrademons 13y ago

Yeah, when I looked at the data in the article, the pattern wasn't that SEC employees were systematically selling stocks they were investigating. Rather, it was that they were always selling, and refused to buy stocks under investigation. This is consistent with the SEC's policies, and also makes a lot of sense. I would chalk this up to a quirk of statistics rather than any deliberate malfeasance. (Although, I'd note that the SEC policy that employees sell any stocks of a company that they will be investigating is good for the employees, because those companies are disproportionately likely to suffer a stock price penalty in the near future. Basically, the policy is a way of turning material non-public information into a market advantage without requiring that any individual employee act on that. But this situation exists in a lot of other cases, eg. stock option grants should systematically beat the market because companies that are financially healthy are more likely to hire people, and that financial health usually translates into hiring before it translates into profits.)

judk 13y ago
Hiring is basically public information.
smutticus 13y ago
Do you see any conflict of interest in an employee at the SEC and buying stock in every SP500 company matching their market cap, then selling them right before the SEC investigates them? If someone did that with the SP500 they could easily beat the index. I think this is the definition of malfeasance.
- nostrademons 13y ago
  I think it's the definition of "unfair advantage", but I don't think it's the definition of "malfeasance". The individual SEC employees have no agency here: they are required by policy to sell the stock of any companies they are investigating. Moreover, it's not clear if any other policy would better serve the public interest. Requiring or allowing them to not to sell that stock is an even worse conflict of interest; it would incentivize them to never find a company guilty, because then their own holdings would drop. Requiring that they never own stocks would be a prohibitive restriction that would turn away many people who are most qualified for the job. The blind trust idea might work, but adds a lot of overhead for employees, and also requires another level of enforcement to make sure employees are not leaking information to the trustee. A lot of people are really uncomfortable with the idea that someone might have an unfair advantage in financial markets, but oftentimes this is quite unavoidable. It's also pretty small-potatoes compared to the advantages that professional financiers get by being primary dealers for the Fed, or market makers, or having relationships with Wall Street policy makers, or hobnobbing with company CEOs on the golf course.

phoney 13y ago

So this is a job perk? Not only can you sell ahead of bad news based on inside info, as an employer, the SEC forces you to!

tlrobinson 13y ago

If you change "sell any holdings of" to "short" that statement sounds absurd, but they're roughly equivalent. How about not allowing staff to hold stock in companies they might have to deal with?

pseut 13y ago
That would be "all companies."
- tlrobinson 13y ago
  I was thinking certain employees could deal with certain sectors or something.
jashkenas 13y ago
For what it's worth, that's exactly what the rule is for journalists at The New York Times. To quote the relevant section from the handbook: "No staff member may own stock or have any other financial interest in a company, enterprise or industry that figures or is likely to figure in coverage that he or she provides, edits, packages or supervises regularly. A book editor, for example, may not invest in a publishing house, a health writer in a pharmaceutical company or a Pentagon reporter in a mutual fund specializing in defense stocks. For this purpose an industry is defined broadly; for example, a reporter responsible for any segment of media coverage may not own any media stock. “Stock” should be read to include futures, options, rights, and speculative debt, as well as “sector” mutual funds (those focused on one industry)."
pyre 13y ago
Doesn't that effectively translate into "not allowing staff to hold stock at all?"

samstave 13y ago

So.... if you can monitor the sales of all SEC employees; then you could copy-sell, or buy up their shares en-mass and very rapidly sell them for a profit?