Banned Stocks Held by SEC Employees Trigger Agency Ethics Review

Securities and Exchange Commission attorneys are reviewing the stock holdings of about 3,400 employees after some New York staffers were found to own securities prohibited by ethics rules.

The agency’s ethics office has begun an examination of all personal financial disclosures to ensure that employees don’t have a financial interest in companies they regulate or investigate, SEC ethics counsel Shira Pavis Minton said in an interview.

The ethics review raises questions about the effectiveness of SEC programs for ensuring compliance with its trading rules, which bar workers from owning shares of most Wall Street firms, including Bank of America Corp. and BlackRock Inc. (BLK) The agency relies on employees to disclose their investments and doesn’t have a tool to automatically scan employee holdings for violations.

“Given the extensive nature of the SEC’s restrictions on stock ownership that go well beyond government requirements, it only makes sense to help staff comply,” Minton said. “Having an extra set of eyes on these filings is a proactive way to help staff ensure the forms are completed correctly.”

The ethics office’s review isn’t considered an investigation, Minton said. The ethics attorneys advise SEC employees on how to follow internal rules with the goal of preventing conflicts of interest; investigations of violations are handled by the SEC Inspector General.

November Arrest

Minton said previous reviews have identified assets that needed to be divested. She declined to speculate on how widespread the problem might be or discuss whether recent reviews of New York-based employees turned up improper holdings.

The change follows the arrest in November of Steven Gilchrist, a New York-based SEC examiner, charged with misleading investigators about bank stocks he owned. In addition, several other employees in the New York regional office were recently told that their personal holdings violated trading rules, according to a person familiar with the situation, who asked to not be named because the matter is private.

One case was mentioned in a December report by the SEC’s Inspector General, who wrote that a senior employee failed to properly report stock owned by a spouse; U.S. attorneys declined to prosecute the case, according to the report.

Bolstering Confidence

Michael Smallberg, an investigator for the nonpartisan Project on Government Oversight, a nonprofit that promotes government accountability, said the SEC has done more than other federal agencies to guard against employees’ abilities to profit from nonpublic information. At the same time, the agency is justified in expanding its compliance effort, he said.

“The recent episodes in the New York office make you wonder how many other employees are failing to comply with the rules,” Smallberg said in a phone interview. “Even if the abuses aren’t systemic or deliberate, conducting a full review would bolster public confidence in the agency’s work.”