Did US regulator staff indulge in insider trading?

Moneycontrol Bureau

A study by an Indian-origin professor and a doctoral student has raised troubling questions about whether employees at the United States Securities and Exchange Commission indulged in trading on insider information, an offence the regulator is in charge of looking into and preventing.

A 52-page report, sarcastically titled 'Stock Picking Skills of SEC Employees' put together by Shivaram Rajgopal, accounting professor at Emory University, and PhD student Roger M White found that several members of the SEC staff sold shares of firms ahead of an enforcement action against them was taken by the regulator.

The duo managed to obtain partial trading information about staff at the regulator under the Freedom of Information Act and the results indicate that "SEC employees continue to take advantage of non-public information to trade profitably in stocks under their regulatory purview," according to the report.

The SEC, however, provided an explanation for the trades. Speaking to the Washington Post, spokesperson John Nester said that before staff take up an issue involving a company, policy dictates that they have to sell any holdings of stock in that firm. "Most of the sales were required by SEC policy. Staff had no choice. They were required to sell," Nester said.

The SEC spokesperson further clarified that "each of the transactions was individually reviewed and approved in advance by the Ethics office."

But many analysts are not convinced by the explanation. "Individual stock ownership obviously creates the possibility of corruption, or the appearance of corruption, at least one of which seems to be represented by this paper," wrote Bloomberg View columnist Matt Levine. "The bigger question is why are so many SEC employees trading stocks in the first place?"

Levine has a point: many reputed brokerage firms in which analysts cover stocks – and where the potential for appearance of conflict of interest exists – disallow the staff to directly own individual stocks, and mandate stock ownership only through mutual funds .

This is not the first time there have been accusations of insider trading against officials of a regulatory agency that is in charge of protecting individual shareholders from market manipulation, taking action against insider-trading violations and promoting fair and efficient markets.

In fact, the SEC started tracking data on its employees' transactions only as late as in 2009 when rules were put in requiring clearance for any individual securities transaction, the Washington Post report says.

But as Levine says, "It's just weird that so many SEC employees fancy themselves as stock-pickers."