Mar. 7, 2023
March 7, 2023
Dear Secretary Countryman,
Thank you for the opportunity to submit comments on Release No. 34-96768, which proposes to amend the supplemental standards of conduct applicable to Commission employees. Parts of the rule are a welcome acknowledgment that, for most members of the staff, securities investing is just about saving for retirement and the investment products we choose reflect this. But the automated reporting requirement is likely to seriously limit employees' ability to invest if the regulation is not regularly amended to keep pace with market changes (which is likely -- just look at how long it took to propose these amendments to reflect that investing has moved away from stock picking and most employees are just buying mutual funds and ETFs).
The proposal to remove the pre-clearance requirements for diversified funds is welcome, and is correct. As noted in the release, these funds are so diversified that there is no reasonable concern that ownership of these funds could pose a conflict of interest. I also support the proposed specific exemption of CITs and portfolios held in 529 plans, both of which are extremely unlikely to pose a conflict of interest for a staff member.
The Commission may wish to clarify, how the exception in subparagraph (g)(iv) relating to investments in the TSP applies mutual funds purchased through the brokerage window. Even though those mutual funds are not actually administered by the TSP (i.e., they probably are not covered by the exemption), it would be easy to misread, especially for the nonlawyer staff. An employee might incorrectly think they can buy a non-diversified mutual fund in the TSP without reporting or preclearance. It may be worth nipping any potential future problems in the bud. While the Commission could make this clarification either in reg text or in the adopting release, it would be more user-friendly if it is made in the reg text itself. To the extent the Commission instead elects to clarify in the release text, OEC should reiterate it in an FAQ that is periodically highlighted on SEC Today.
On the other hand, the proposal for automated reporting needs work if it is going to be adopted. I support the goal of paragraph (f) and understand the importance of reporting both for actual compliance and for maintaining the public trust but this could be accomplished in better ways. As drafted, the requirements are not evergreen and will result in new problems for OEC staff and for other employees.
As drafted, paragraph (f) would permit the Commission to collect automated securities transactions, permit OEC to require an employee to use these automated means, and permit (but not require) targeted exemptions. While this could seem good for now, it is likely that investing practices will change over time. It is likely that services will arise that do not automatically report transactions. Maybe they are startups, maybe they are not able to put the data in the format the SEC needs, or maybe there is some other reason the firm would not be able to comply. I know that OEC staff are dedicated public servants, but their incentive structure is not set up to reward making exemptions from ethics requirements in a situation like this, even if the exemptions are reasonable. Over time a requirement that requires OEC staff to make exemptions is going to result in more and more staff being prevented from using these new services. This is arbitrary. Even if the Commission is ok with people bei
ng prevented from using new services on a pretty arbitrary basis, OEC staff is going to have to field constant questions about exemptions, which would suck up the time they could use to do more important parts of their job and also undercut one of the justifications offered for this proposal.
I believe it is likely that I personally would be negatively affected by the reporting requirements if they are adopted as written. My spouse works for a small company that uses a weird 401(k) provider that I had never heard of. I doubt they have the automatic functionality to report 401(k) holdings and I think there is no chance they will build this functionality just for me. If OEC staff does not make an exemption, my spouse would be effectively prevented from saving for retirement. It is arbitrary and unreasonable to require me to seek an exemption in these circumstances, especially since there is no guarantee that I will be able to do so. I am sure I will not be the only person affected.
In order to address this problem, paragraph (f)(4) should be revised to read (new text in caps):
The DAEO may CREATE A SYSTEM FOR members and employees to comply with the reporting requirements in this section by authorizing their brokerage or financial institution(s) to provide automatic transmission of brokerage statements and transaction information through a third-party automated compliance system. AN EMPLOYEE SHALL BE REQUIRED TO CERTIFY NO MORE FREQUENTLY THAN ANNUALLY THAT, TO THE BEST OF THE EMPLOYEES KNOWLEDGE, EITHER (i) ALL THE EMPLOYEES SECURITIES TRADES ARE AUTOMATICALLY REPORTED TO THE DAEO USING SUCH SYSTEM OR (ii) THE EMPLOYEE HAS PROVIDED STATEMENTS SHOWING ANY PURCHASES, SALES, ACQUISITIONS AND DISPOSITIONS THAT WERE NOT AUTOMATICALLY REPORTED.
It is important that the certification be knowledge-qualified because an employee can not reasonably be expected to know if their broker had a tech hiccup that messed up their ability to report trades. Making the certification annual is an appropriate compromise between more frequent reporting and the burden that would be required from doing it more often. More frequent certification would also impose a cost on the government since it would be during business time.
Not making the change could impose significant costs by hampering recruiting and retention, since people in the private sector generally are not subject to these requirements and an employee who is not able to save for retirement is probably going to quit. This would impose costs on the agency, who could be stuck with less-effective employees, and also impose costs on employees who miss out on investments. It would also impose costs on brokers who are required to build automated reporting systems that may be different from the ones they already use for the private sector. In addition, there is not a benefit from requiring the system and not creating a self-executing exemption, since it doesn't prevent an employee who is committed from breaking the law can already simply lie, and this will not deter that sort of misconduct.
It is important to reiterate that, even though the automatic reporting requirement was clearly modeled on what is done in the private sector, generally private sector exemptions from automated reporting are self-executing and do not require the exceptional circumstances contemplated in the release. Even at my previous job in a financial services firm where I was required to do electronic reporting, I was given the alternative of uploading statements manually once per quarter and I did not have to get an exemption from compliance to do so. If the rule is not revised to provide a self-executing exemption, over time, the incentives in government are going to result in nobody getting an exemption. This would be an arbitrary, unjustified result and would affect the ability of the Commission to attract talented employees without an associated public benefit.
I confirm that though this is being submitted during business hours, it was not written on government time and was not submitted using a government computer.
Best,
SEC Staff Member