U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

i 

Audit of the Office of the Ethics Counsel’s 

Oversight of Employee Securities Holdings 

December 10, 2014

 Report No. 527
 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 WASHINGTON, D.C. 20549

 OFFICE OF

INSPECTOR GENERAL

M E M O R A N D U M

December 10, 2014

TO: Shira Pavis Minton, Ethics Counsel and Designated Agency Ethics Official, Office 

of the Ethics Counsel

Jeffery Heslop, Chief Operating Officer, Office of the Chief Operating Officer

Andrew Ceresney, Director, Division of Enforcement

FROM: Carl W. Hoecker, Inspector General, Office of Inspector General 

SUBJECT: Audit of the Office of the Ethics Counsel’s Oversight of Employee Securities 

Holdings, Report No. 527

Attached is the Office of Inspector General’s (OIG) final report detailing the results of our audit 

of the Office of the Ethics Counsel’s oversight of employee securities holdings. The report 

contains nine recommendations for corrective action that, if fully implemented, should help the 

U.S. Securities and Exchange Commission improve its efforts to review employee securities 

holdings, the functionality of the Personal Trading Clearance System, and the Office of the 

Ethics Counsel’s annual compliance testing. 

On November 19, 2014, we provided management with a draft of our report for review and 

comment. In its December 4, 2014, response, management concurred with our 

recommendations. We have included the response as Appendix II in the final report. 

Management took immediate action to address Recommendations 1 and 2, which we verified 

prior to issuance of the final report. Therefore, those recommendations are closed for 

reporting purposes. The remaining seven recommendations remain open and will be closed 

upon completion and verification of the appropriate corrective action. Within the next 45 days, 

please provide the OIG with a written corrective action plan that addresses the open 

recommendations. The corrective action plan should include information such as the 

responsible official/point of contact, timeframe for completing required actions, and milestones 

identifying how your offices will address the recommendations. 

We appreciate the courtesies and cooperation extended to us during the audit. If you have 

questions, please contact me or Rebecca L. Sharek, Deputy Inspector General for Audits, 

Evaluations, and Special Projects. 

Attachment

cc: Mary Jo White, Chair

Erica Y. Williams, Deputy Chief of Staff, Office of the Chair

Luis A. Aguilar, Commissioner 
Paul Gumagay, Counsel, Office of Commissioner Aguilar

Daniel M. Gallagher, Commissioner 

Benjamin Brown, Counsel, Office of Commissioner Gallagher

Michael S. Piwowar, Commissioner 

Jamie Klima, Counsel, Office of Commissioner Piwowar

Kara M. Stein, Commissioner 

Robert Peak, Advisor to the Commissioner, Office of Commissioner Stein

Anne K. Small, General Counsel, Office of the General Counsel

Timothy Henseler, Director, Office of Legislative and Intergovernmental Affairs

John J. Nester, Director, Office of Public Affairs

Lacey Dingman, Chief Human Capital Officer, Office of Human Resources

Margaret McGuire, Senior Counsel, Division of Enforcement

Darlene L. Pryor, Management and Program Analyst, Office of the Chief Operating 

Officer
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

i

Why We Did This Audit

The U.S. Securities and Exchange 

Commission (SEC) has 

responsibility for oversight of the 

securities industry and the 

protection of investors. To protect

the public interest, it is essential that 

SEC employees maintain high 

standards of conduct. In August 

2010, the SEC adopted a regulation 

that supplemented governmentwide ethics standards. The 

supplemental ethics regulation

addresses what investments SEC 

employees are allowed to make and 

when and how they conduct such

transactions. Within the SEC, the 

Office of the Ethics Counsel (OEC) 

is responsible for advising and 

counseling employees and 

members on personal and financial 

conflicts of interest, financial 

disclosure, and securities holdings. 

We initiated this audit to evaluate 

OEC’s effectiveness in ensuring 

employees comply with ethics 

regulations pertaining to prohibited 

holdings and temporarily-restricted 

trades.

What We Recommended

To improve the SEC’s oversight of 

employee securities holdings, we 

made nine recommendations. The 

recommendations address 

improvements in the review of 

employment candidates’ securities 

holdings, the functionality of the 

Personal Trading Clearance 

System, and OEC’s annual 

compliance testing. Management 

concurred with the 

recommendations. 

 

What We Found

To evaluate OEC’s oversight of employee securities holdings, 

we reviewed SEC policies and procedures, assessed the 

operating effectiveness of OEC’s internal controls, and 

evaluated OEC’s annual compliance testing plan. OEC has 

developed and implemented policies and procedures in 

accordance with Federal laws and regulations, and has 

voluntarily implemented additional compliance processes. 

However, we identified areas for improvement in its oversight of 

employee securities holdings and transactions. 

First, we identified improvements that are needed in OEC’s 

review of Form 682, Employee Filing Form (Form 682). 

Specifically we noted instances of individuals commencing

employment without OEC first reviewing their Form 682 for 

prohibited holdings. In instances when OEC identified prohibited 

holdings, OEC did not always follow up timely with new 

employees to confirm they divested prohibited holdings. 

Moreover, we found that OEC did not require employees to 

submit proof of divestiture and instead relied solely on 

employees’ verbal or written confirmations. 

Second, we found that the SEC’s clearance system lacked

certain functionality to help employees comply with the 

supplemental ethics regulation. For example, the system does 

not have a mechanism to identify and alert all employees who 

hold a certain security in the event that security becomes

prohibited. Moreover, the system relies on incomplete 

information from the Division of Enforcement to process pretrade requests. This increases the risk that the clearance 

system may erroneously approve a pre-trade request. 

Third, we determined improvements are needed in OEC’s 

annual compliance testing. Specifically, OEC’s chosen sampling 

methodology for its 2014 annual compliance review will not allow 

OEC to gauge the compliance of all employees because the 

methodology will not allow the results to be projected. 

During the course of our audit, we also identified other matters of 

interest, such as the need for OEC to update the March 2011 

Ethics Handbook to reflect the new securities clearance system. 

We discussed these matters with OEC. These matters are 

further discussed in the report. 

Executive Summary Audit of the Office of the Ethics Counsel’s

Oversight of Employee Securities Holdings

Report No. 527

December 10, 2014

For additional information, contact the Office of Inspector General at 

(202) 551-6061 or http://www.sec.gov/about/offices/inspector_general.shtml.
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 ii DECEMBER 10, 2014

TABLE OF CONTENTS 

Executive Summary .....................................................................................................i

Background and Objectives.......................................................................................1

Background .................................................................................................................1

Objectives ....................................................................................................................6

Results ........................................................................................................................8

Finding 1: Further Improvements Are Needed in OEC’s Review of 

Form 682, Employee Filing Form............................................................................8

Recommendations, Management’s Response, and Evaluation of Management’s 

Response ............................................................................................................11

Finding 2: The Personal Trading Clearance System Lacks Certain Functionality to 

Help Employees Comply with the Supplemental Ethics Regulation ......................13

Recommendations, Management’s Response, and Evaluation of Management’s 

Response ............................................................................................................18

Finding 3: Improvements Are Needed in Annual Compliance Testing .......................20

Recommendations, Management’s Response, and Evaluation of Management’s 

Response .............................................................................................................22

Other Matters of Interest ..........................................................................................23

Figures, Tables, and Charts

Figure 1: OEC’s Process for Receiving and Reviewing Forms 682..............................3

Figure 2: Process for Pre-clearing, Confirming, and Reporting Securities Holdings.....5

Table 1: Timeframe of OEC’s Follow-up with Employees ..........................................10

Appendices 

Appendix I: Scope and Methodology .........................................................................24

Appendix II: Management Comments........................................................................30

Appendix III: OIG Response to Management Comments...........................................33

ABBREVIATIONS

CFR Code of Federal Regulations

DAEO Designated Agency Ethics Official

Enforcement Division of Enforcement

EPS Ethics Program System

IRA Individual Retirement Account

OEC Office of the Ethics Counsel

OGE Office of Government Ethics

OHR Office of Human Resources
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 iii DECEMBER 10, 2014

OIG Office of Inspector General

PTCS Personal Trading Compliance System

SEC U.S. Securities and Exchange Commission
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 1 DECEMBER 10, 2014

Background and Objectives 

Background 

Because the U.S. Securities and Exchange Commission (SEC) is responsible for 

investor protection and securities industry oversight, SEC members and employees1

(collectively, employees) are prohibited from certain securities holdings and 

transactions. For example, employees cannot own interests in entities that are directly 

regulated by the SEC (prohibited holdings) or transact in securities of entities that are 

under SEC investigation (restricted securities). In addition, SEC employees are 

required to comply with Title 5 of the Code of Federal Regulations (CFR), Part 2635 -

Standards of Ethical Conduct for Employees of the Executive Branch.

Within the SEC, the Office of the Ethics Counsel (OEC)2is responsible for advising and 

counseling employees on personal and financial conflicts of interest, financial 

disclosure, and securities holdings and transactions of employees. The Ethics 

Counsel, also known as the Designated Agency Ethics Official (DAEO), is responsible 

for, among other things: (1) maintaining and updating a record of securities that 

employees may not purchase or sell, or otherwise hold; and (2) administering the 

SEC’s employee securities clearance system.3

In recent years, the SEC Office of Inspector General (OIG) has investigated several 

employees for conducting securities transactions that violate personal trading rules 

and regulations. In one instance, an SEC employee was charged with making false 

statements to the SEC regarding his ownership of various securities. Specifically, the 

employee failed to divest prohibited holdings and instead transferred the securities into 

a new joint brokerage account he shared with a family member and over which he had 

complete control. In another instance, the SEC OIG found that a staff accountant 

purchased shares of a prohibited holding, failed to pre-clear those transactions as 

required, and did not report the prohibited holding on the necessary government 

financial disclosure forms even though the value of the holding exceeded the reporting 

threshold. During the course of these and other investigations related to employees’ 

ownership of prohibited holdings, the SEC OIG’s Office of Investigations identified

potential issues related to the manner in which OEC oversees employee securities

holdings. 

 

1

The term “members” refers to the five SEC Commissioners. For the purpose of this report, the term 

“employee” also encompasses the holdings and transactions of an employee’s spouse and 

unemancipated minor children.

2 OEC was established in 2011 as an independent office reporting directly to the SEC Chair. Prior to that, 

OEC was part of the Office of the General Counsel. 

3

The employee securities clearance system is the SEC’s tool for clearing and tracking employee 

security transactions and holdings. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 2 DECEMBER 10, 2014

Federal Laws and Regulations. The U.S. Office of Government Ethics (OGE) 

established a comprehensive set of executive branch standards of ethical conduct

(codified at 5 CFR Part 2635). OGE also required each U.S. government agency to 

have a DAEO to coordinate and manage the agency’s ethics program and to provide a 

liaison to the OGE regarding all aspects of the program (5 CFR § 2638.201). On 

August 19, 2010, the SEC, with concurrence of OGE, adopted Supplemental Standards 

of Ethical Conduct for Members and Employees of the Securities and Exchange 

Commission, codified at 5 CFR Part 4401 (supplemental ethics regulation). The 

supplemental ethics regulation prohibits SEC employees from, among other things: 

(1) knowingly purchasing or holding a security or other financial interest in an entity 

directly regulated by the SEC; and (2) purchasing or selling any security issued by an 

entity that is under investigation by the SEC, a party to a proceeding before the SEC, 

or a party to a proceeding to which the SEC is a party.

In addition, the supplemental ethics regulation established employees’ responsibilities 

for their security transactions and holdings. Generally, employees are required to:

 pre-clear all securities or related financial transactions and carry out transactions 

within 5 business days after clearance; 

 report all securities purchases and sales within 5 days of receipt of confirmation 

of the transactions; 

 hold a security (equity or fixed income instrument) for a minimum of 6 months 

from the trade date;

 report and certify all securities holdings according to the schedule established by 

the DAEO; and 

 submit to the DAEO duplicate statements for every account containing reportable 

securities. 

Appendix I summarizes other applicable Federal laws and regulations.

SEC Administrative Regulations, Polices, and Procedures. Following the adoption 

of the supplemental ethics regulation, OEC issued to employees a series of ethics 

bulletins that provided guidance on the new supplemental ethics regulation, advice on 

divesting securities that became prohibited under the supplemental ethics regulation, 

and resources available to employees facing the payment of taxes on potential capital 

gains resulting from the required sales of prohibited holdings. In March 2011, the 

DAEO issued an updated Ethics Handbook to reflect, among other things, the new 

policies under the supplemental ethics regulation. The Ethics Handbook included a

chapter on the rules pertaining to securities holdings and transactions. Specifically, it 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 3 DECEMBER 10, 2014

described prohibited holdings and transactions,4pre-clearance and reporting 

requirements, holding periods, exceptions to the supplemental ethics regulation, waiver 

requests, and the process for divesting prohibited holdings. 

Employment Candidates. The supplemental ethics regulation requires any 

person who receives a conditional offer of employment from the SEC to report all 

securities holdings on the form prescribed by the SEC. The SEC April 2011 

Administrative Notice I Have to File What? – A Guide to the Financial Disclosure 

Obligations of SEC Employees further requires that all new employees of all grades 

and all positions list their securities holdings using SEC Form 682, Employee Filing 

Form (Form 682).

In 2011, the responsibility for reviewing Forms 682 transitioned from the Office of 

Human Resources (OHR) to OEC. The following figure details the process by which 

OEC receives and reviews Forms 682, per OEC’s standard operating procedures.

5

Figure 1. OEC’s Process for Receiving and Reviewing Forms 682

Office of the Ethics Counsel Employment Candidate Office of Human Resources Fills out Form 682

Collects Form 682 and emails it to the Office of the Ethics Counsel

Uploads Form 682 into SharePoint and assigns it to an attorney for review Attorney reviews Form 682 for prohibited holdings If prohibited holdings are identified, notifies candidate that he or she must divest

Divests prohibited holdings

Notifies the Office of Human Resources that candidate’s Form 682 was reviewed

Finalizes on- boarding process for candidate

Commences employment at the SEC

Informs the Office of the Ethics Counsel of candidate’s date of entrance

Follows up with new employee to confirm he or she divested prohibited holdings Source: OIG-generated based on interviews of OEC personnel and reviews of standard operating procedures.

 

4 While the supplemental ethics regulation states that employees are prohibited from knowingly 

purchasing or holding a security or other financial transaction in an entity directly regulated by the SEC, it 

does not define what constitutes “an entity directly regulated by the [SEC].” The SEC March 2011 Ethics 

Handbook defines that phrase to include entities such as national securities exchanges; registered 

securities associations; broker-dealers, including banks and insurance companies that have subsidiaries 

that are registered broker-dealers; credit rating agencies; clearing agents; transfer agents; municipal 

advisors; securities information processors; and registered investment advisers.

5 U.S. Securities and Exchange Commission Standard Operating Procedure: Form 682, as of July 2014.
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 4 DECEMBER 10, 2014

As shown in Figure 1 above, once new employees commence employment at the SEC, 

OEC follows up with them to confirm that they divested all prohibited holdings. OEC 

self-imposed a 10-business day timeframe from the date the employee commenced 

employment in which to follow up. 

The SEC Securities Clearance System. In February 2012, the SEC issued 

Administrative Notice Introducing the New Personal Trading Compliance System, which 

requires employees to use the new securities clearance system, Personal Trading 

Compliance System (PTCS), to fulfill their obligations to pre-clear and report securities 

transactions. To assist employees in navigating PTCS, the SEC maintains an updated 

user manual that explains how to access PTCS, submit pre-trade requests, search for 

securities, and confirm transactions.6

Annual Certification. Generally, all employees are required to certify in PTCS 

each year their securities holdings. Also, employees are required to upload year-end

brokerage statements containing reportable holdings.

7

 For 2013, the certification 

language was as follows: “I certify that I held securities as of December 31, 2013, and 

that I have not traded in securities using any confidential or material non-public 

information during calendar year 2013. I also certify that I have complied with the SEC 

Ethics Supplemental Regulation (5 CFR part 4401) including all pre-clearance, reporting 

and holding requirements and the rules regarding prohibited holdings. I have uploaded 

a complete record of my reportable holdings.” 

Financial Disclosure Forms. Employees in certain positions are required to file 

either an OGE Form 450, Confidential Financial Disclosure Report (Form 450),

8

or an 

 

6

Prior to PTCS, the SEC used a securities clearance system called the Ethics Program System (EPS). 

Similar to PTCS, EPS allowed employees to pre-clear and report transactions. On September 16, 2011, 

the SEC discontinued the use of EPS due to a potential data breach. Between September 2011 and

February 2012, employees submitted pre-trade requests to OEC via e-mail. 

7 Reportable holdings include, but are not limited to, stocks; bonds; mutual funds and exchange traded 

funds that are held in brokerage accounts or mutual fund accounts or are the underlying holdings of 

individual retirement accounts (IRA), Roth IRA accounts, 401(k) plans or other former employer or 

spousal retirement plans; and 529 college savings plans. Employees are not required to report Federal 

Deposit Insurance Corporation-insured bank products, U.S. government agency securities, or Thrift 

Savings Plan holdings. 

8

Form 450 must be filed annually by SEC employees in the following covered positions: SK-16 and 

SK-17 employees; SK-14 and SK-15 attorneys, auditors, financial analysts, information technology 

specialists, market surveillance specialists, and investigators; all accountants; examiners; financial 

economists; fellows (unless notified by OEC to file an OGE Form 278, Public Financial Disclosure 

Report); employees with the following Federal Acquisition Certifications (FAC): FAC-C (contracting), 

FAC-COR (Contracting Officer’s Representatives), FAC-P/PM (program/project management); 

employees in the Office of Acquisitions; employees who have procurement authority; and credit card 

holders with purchasing authority. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 5 DECEMBER 10, 2014

OGE Form 278, Public Financial Disclosure Report (Form 278).

9

 The purpose of both 

financial disclosure forms is to identify and prevent potential conflicts of interest by 

providing a systematic review of the financial interests of employees. OEC has further 

expanded the purpose of both forms to include a review for prohibited holdings. 

Generally, OGE requires employees to submit Form 450 and Form 278 to the DAEO by 

February 15 and May 15, respectively, each year. 

Figure 2 below depicts the cycle employees undertake each year when buying or selling 

securities, confirming transactions, certifying their securities holdings, and filing financial 

disclosure forms. 

Figure 2. Process for Pre-clearing, Confirming, and 

Reporting Securities Holdings

Source: OIG-generated based on the SEC Ethics Handbook and OEC standard operating procedures.

To assist employees in becoming familiar and complying with the supplemental ethics 

regulation, OEC provides employees with a variety of tools and resources. For 

example, new employees receive an approximately 1-hour presentation from OEC as 

part of new employee orientation. The presentation covers the supplemental ethics 

regulation, the applicability of the regulation, prohibitions, holding periods, and PTCS. 

New employees also receive an SEC New Employee Guide that contains guidance on 

 

9

Form 278 and Form 278-T, Periodic Transaction Report, must be filed annually by Presidential 

Appointees; Senior Officers; Administrative Law Judges; the DAEO; Schedule C non-exempt appointees;

Administratively Determined Pay System Appointees (who meet the 278 pay criteria); Special 

Government employees (who work a certain number of days and meet the 278 pay criteria);

Intergovernmental Personnel Act Appointees (who are appointed to a covered 278 position); and 

employees acting in, promoted to, or resigning from one of the above positions.
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 6 DECEMBER 10, 2014

reporting and pre-clearing financial interests and transactions. In addition, the new hire 

welcome e-mail contains a link to PTCS and the PTCS Quick Reference Guide. OEC 

has also developed ethics training which all employees are required to complete 

annually. Moreover, OEC maintains a website on the SEC intranet that contains 

examples of prohibited holdings, PTCS quick reference guides, frequently asked 

questions, the SEC Ethics Handbook, and links to various applicable laws. 

Appendix I summarizes other SEC administrative regulations, policies, and procedures 

we reviewed during our audit.

Objectives

Our objective was to evaluate OEC’s effectiveness in ensuring employees comply with 

ethics regulations pertaining to prohibited holdings and temporarily-restricted trades. 

Specifically, we sought to:

 determine whether OEC has developed and implemented policies and 

procedures that are in accordance with Federal laws and regulations, including 

5 CFR § 4401.102, Prohibited and restricted financial interests and transactions; 

 evaluate the operating effectiveness of internal controls10 designed and 

implemented by OEC over the employee securities transactions and holdings 

pre-clearance and reporting processes; and

 determine whether OEC has established a mechanism to ensure employee 

compliance with 5 CFR § 4401.102, Prohibited and restricted financial interests 

and transactions. 

We interviewed the DAEO, Chief Compliance Officer, and other OEC employees to gain 

an understanding of OEC’s program, internal controls, and policies and procedures. 

We reviewed relevant SEC administrative regulations, policies, and procedures and 

compared them to relevant Federal laws and regulations, including 5 CFR § 4401.102, 

to ensure the SEC incorporated all aspects of the Federal laws and regulations. 

Further, we tested key internal controls to assess the effectiveness of processes and 

procedures OEC implemented. Specifically, we reviewed OEC’s process for informing 

employment candidates that they have prohibited holdings which they must divest;

tested the automated and manual controls of the SEC clearance system, which 

employees use to pre-clear trades; and assessed the completeness of information OEC 

relies on to process employees’ pre-trade requests. We also evaluated OEC’s annual 

compliance testing plan, which includes reviewing employees’ financial disclosure forms 

 

10 According to the Office of Management and Budget Circular A-123, Management’s Responsibility for 

Internal Control, an internal control is any method or process implemented by an organization to achieve 

effectiveness and efficiency of operations and compliance with applicable laws and regulations. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 7 DECEMBER 10, 2014

and a sample of employees’ brokerage statements. Specifically, we evaluated OEC’s 

sampling methodology and the efficiency of its review. 

Appendix I includes additional information on our scope and methodology; our review of 

internal controls; prior audit coverage; applicable Federal laws and regulations; and 

SEC regulations, policies, and procedures.
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 8 DECEMBER 10, 2014

Results

Finding 1: Further Improvements Are Needed in OEC’s 

Review of Form 682, Employee Filing Form

To ensure new employees comply with 5 CFR § 4401.102 and do not own prohibited 

holdings when they commence employment at the SEC, the SEC requires employment 

candidates to disclose all securities they own, including underlying securities

holdings,11 regardless of value, on Form 682. Since taking over the responsibility of

reviewing Forms 682 sometime in 2011,12 OEC has worked to improve the process for 

receiving and reviewing the forms by developing and implementing an automated 

workflow using Microsoft SharePoint.13 Specifically, once OEC receives from OHR a 

new employee’s Form 682, the automated workflow allows OEC to upload the form into 

SharePoint and assign an attorney to review it. Within SharePoint, the attorney 

indicates whether any prohibited holdings were identified. Once the review is complete, 

an automated e-mail is sent to OHR verifying that the form has been reviewed, 

therefore indicating that OHR can continue with the on-boarding process. 

Our audit found that OEC is reviewing Forms 682; however, improvements are needed 

in the review process and in the follow-up with new employees. Specifically, we 

determined the following: 

 since 2011, 9 out of almost 1,000 new hires commenced employment without

OEC first reviewing their Form 682 for prohibited holdings;

 OEC did not always follow up with employees within 10 business days of their 

start date to confirm they divested all prohibited holdings; and

 OEC did not require employees to submit proof of divestiture and instead 

relied solely on employees’ verbal or written confirmations.

According to the DAEO, these conditions occurred because OEC (1) either did not 

receive all Forms 682 from OHR or, in one instance, did not review the form that was 

received; (2) did not receive timely or accurate information from OHR; and (3) lacked

adequate human resources. As a result, the SEC lacks effective controls to ensure 

that all new employees comply with the supplemental ethics regulation.

 

11 Underlying securities holdings are the assets that comprise an account, such as a 401(k) account or 

IRA.

12 OEC could not provide the exact date it became responsible for reviewing Form 682. For the purpose 

of our audit, we used January 1, 2011, as a baseline date. 

13 Microsoft SharePoint is a web application platform that integrates intranet, content management, and 

document management, among other things. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 9 DECEMBER 10, 2014

OEC Did Not Review Form 682 for All New Employees Since 2011. Between

January 2011 and June 201414– since OEC took over the responsibility of reviewing 

Forms 682 – nearly 1,000 employees joined the SEC. We reviewed OEC’s records 

to gain reasonable assurance that it had reviewed a Form 682 for each new 

employee during that period. Because OEC did not begin uploading Forms 682 into 

SharePoint until December 2012 and did not finalize the automated workflow in 

SharePoint until February 2014, during our audit, OEC was still in the process of 

uploading into SharePoint Forms 682 it had reviewed prior to December 2012. We

found that OEC did not have a record of reviewing a Form 682 for 9 of the nearly 

1,000 new employees. For eight of the nine employees (including a Senior Officer), 

OEC informed us that it did not have a record of ever receiving a Form 682 from 

OHR. According to the DAEO, tracking of Forms 682 prior to the use of SharePoint 

was “not nearly as good” and OEC had not yet established a coordinated system for 

Form 682 transmission and review. We confirmed all eight employees joined the 

SEC before December 2012. We were informed that one of the eight employees, 

who joined the SEC in January 2011, held prohibited securities acquired prior to 

commencing employment at the SEC. OEC only identified these prohibited holdings

after the employee contacted OEC in January 2013 to ask about the particular 

securities.

15

 Based on a review of their most recent brokerage statements as of the 

date of our audit, the DAEO confirmed that the other seven employees did not hold 

any prohibited securities. 

Although we found that eight of the nine employees for whom OEC did not have a 

record of reviewing Form 682 joined the SEC before December 2012, we found that 

the remaining employee commenced employment with the SEC in April 2014 – after 

the SharePoint automated workflow was finalized. According to the DAEO, OEC 

received the employee’s Form 682 from OHR but did not upload it to SharePoint. As 

a result, an OEC attorney was never assigned to review the form. Nevertheless, 

OHR continued with the on-boarding process even though it did not receive 

confirmation from OEC that the employee’s Form 682 had been reviewed. According 

to OHR, this was due to human error. We did not identify any other similar

instances.

16

OEC Did Not Always Timely Follow up to Confirm New Employees Divested 

Prohibited Holdings. Since October 2012, OEC has identified prohibited holdings in 

its review of Form 682 for 125 new employees. We selected a random sample of 20 of 

those employees to determine whether OEC followed up within 10 business days from 

the employees’ first day of work to confirm they divested the prohibited holdings. We 

were able to independently confirm that OEC followed up with 18 of the 20 employees

 

14 Our testing period was between January 1, 2011, and June 9, 2014.

15 On January 18, 2013, OEC referred this matter to the OIG. 

16 After being alerted to the situation, OEC obtained and reviewed the employee’s Form 682 and found no 

prohibited securities. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 10 DECEMBER 10, 2014

via e-mail.

17

 Of the 18 we confirmed, OEC did not follow up with 14 employees within 

the established 10-business day period. Table 1 shows the range of business days 

from the 18 employees’ start dates to the dates of OEC’s follow up. 

Table 1. Timeframe of OEC’s 

Follow-up with Employees

No. of Business Days from 

Employee’s Start Date

No. of 

Instances

0-10 4

11-30 4

31-100 8

More than 100 2

Source: OIG’s review of OEC’s e-mail correspondence

with employees.

In two instances it took OEC 206 and 292 business days (or about 10 months and 

14 months, respectively) after the employees began working at the SEC to follow up 

with them.

18

 We found this occurred because OEC relied on the annual Form 450 

review process to follow up with these employees. 

According to the DAEO, OEC has found it impossible to consistently meet its own 

requirement of following up with employees within 10 business days due to the difficulty 

in identifying an employee’s start date. As of August 2014, OEC received lists of new 

employees from OHR every 2 weeks. However, according to OEC, there is often a lag 

of up to a month between an employee’s start date and his or her inclusion on the list. 

In addition, OEC stated that employees’ start dates as reflected in the lists may be

inaccurate. As such, in September 2014 OEC removed the 10 business day period

from its standard operating procedures and is instead working to verify divestiture “as 

soon as practicable;” however, the term “practicable” is undefined.

At the time of our audit, OEC was working with OHR to improve the frequency and 

accuracy of employee on-boarding lists to improve OEC’s follow-up processes. During 

an August 12, 2014, meeting between OHR and OEC, OHR agreed to send OEC lists 

from its Workforce Transformation Tracking System, which monitors hiring activity with 

automated interfaces to the Federal Personnel Payroll System, USA Staffing, Enter on 

Duty System, and the Electronic Official Personnel Folder. 

 

17 OEC told us that it followed up via telephone with one of the two employees whom we were unable to 

confirm. However, because OEC does not maintain phone logs, we were unable to verify that this 

occurred or that the employee confirmed divestiture. In the case of the second employee, OEC was 

unable to provide evidence that it followed up because, prior to the implementation of SharePoint, OEC

stored data in different places and follow-ups were not always coordinated among OEC personnel. We 

confirmed that the SharePoint automated workflow now allows OEC attorneys who review Forms 682 to 

check a field labeled “divestiture required” to indicate which employees OEC must follow up with to 

confirm prohibited holdings have been divested.

18 In the other 12 instances, OEC’s follow up occurred between 12 and 64 business days after the 

employees began working at the SEC.
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 11 DECEMBER 10, 2014

OEC Did Not Require Employees to Submit Proof of Divestiture. Prior to 

September 2014, OEC did not require employees to submit proof that they divested 

prohibited holdings. As part of our review of OEC’s follow up with employees, we found 

that all 18 employees with whom OEC followed up confirmed via e-mail to OEC that 

they divested their prohibited holdings. In two instances, the employees offered to 

provide OEC proof of divestiture. However, OEC did not collect proof and instead relied

on the employees’ verbal or written confirmation. The DAEO stated that, in the past, 

OEC did not have adequate human resources to obtain proof of divestiture. According 

to OEC, beginning in September 2014, its standard operating procedures require proof 

of divestiture.

The SEC Lacks Effective Controls to Ensure that All New Employees 

Comply With the Supplemental Ethics Regulation

Although OEC has worked to significantly improve the process for receiving and 

reviewing Forms 682 since it took over this responsibility, we found that further 

improvements can be made to ensure new employees comply with the supplemental 

ethics regulation. Because OEC is supposed to review Form 682 for all candidates 

regardless of position or grade level, we believe this process represents the most ideal 

opportunity to ensure all new employees divested prohibited holdings. We recognize 

that in some instances, new employees may not be able to divest prohibited holdings 

until after they commence employment. Therefore, it is critical that OEC follow up with 

new employees timely to confirm divestiture, or as a second reminder of their 

requirement to comply with the supplemental ethics regulation. As such, we believe 

OEC’s new guidelines – which require follow-up to be completed “as soon as 

practicable” – are indefinite and could allow an employee to retain known prohibited 

securities beyond a reasonable time. By not reviewing Forms 682 for all employment 

candidates, following up timely with employees to confirm they divested prohibited 

holdings, and requiring proof of that divestiture, OEC cannot ensure that new 

employees are complying with the supplemental ethics regulation, which is the goal of 

OEC’s process.

Recommendations, Management’s Response, and Evaluation of 

Management’s Response

To improve the process by which the Office of the Ethics Counsel receives and reviews 

Forms 682 to help employees comply with the supplemental ethics regulation, we 

recommend that:

Recommendation 1: The Office of Human Resources update its policies and 

procedures for on-boarding new staff to require confirmation from the Office of Ethics 

Counsel regarding its review of an employment candidate’s Form 682 prior to

completing the on-boarding process. 

Management’s Response. The Office of Human Resources concurred with the 

recommendation and, along with the Office of the Ethics Counsel, developed 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 12 DECEMBER 10, 2014

joint standard operating procedures for processing Forms 682. The standard 

operating procedures require the Office of Human Resources to receive 

confirmation from the Office of the Ethics Counsel regarding its review of 

Form 682 prior to completing the on-boarding process. 

OIG’s Evaluation of Management’s Response. The recommendation is 

resolved and closed based on verification of management’s corrective action. 

Recommendation 2: The Office of the Ethics Counsel document a process with the 

Office of Human Resources to obtain timely and accurate information regarding new 

employees that allows follow-up to occur within a prescribed timeframe. 

Management’s Response. The Office of the Ethics Counsel and the Office of 

Human Resources concurred with this recommendation. The Directors of the 

Office of the Ethics Counsel and the Office of Human Resources issued a joint 

memorandum to their respective staff documenting the process they should 

follow for obtaining timely and accurate information from new employees that will 

assist with follow-up occurring within a prescribed timeframe. 

OIG’s Evaluation of Management’s Response. The recommendation is 

resolved and closed based on verification of management’s corrective action. 

Recommendation 3: The Office of the Ethics Council update SEC policies and 

procedures and inform employees of the requirement to submit proof that they have 

divested prohibited holdings.

Management’s Response. The Office of the Ethics Counsel concurred with this 

recommendation and updated its standard operating procedures for processing 

Forms 682 to include a requirement that employees submit proof of divestiture. 

Attorneys from the Office of the Ethics Counsel track required divestiture in an 

electronic database and do not close out the entry until proof is received. 

OIG’s Evaluation of Management’s Response. Management’s proposed 

actions are responsive; however, management should also update the Ethics 

Handbook to inform all employees – not just new employees – of the requirement 

to submit proof when divesting prohibited holdings. The recommendation is 

resolved and will be closed upon completion and verification of the action taken. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 13 DECEMBER 10, 2014

Finding 2: The Personal Trading Clearance System Lacks 

Certain Functionality to Help Employees Comply with the 

Supplemental Ethics Regulation

In February 2012, the SEC launched an in-house securities clearance system called 

PTCS. As previously mentioned, all employees are required to use PTCS to pre-clear 

and report all securities transactions. PTCS utilizes Microsoft technologies to provide 

users with the ability to initiate, process, comment on, and submit pre-trade requests, 

confirmations, and annual certifications of holdings to the SEC. PTCS processes pretrade requests based on programmatic business rules and criteria identified by OEC. 

Specifically, PTCS compares the data in the pre-trade request to lists of prohibited and 

restricted securities. In some instances, PTCS requires OEC employees to manually 

process pre-trade requests, such as when it identifies a security to be potentially 

restricted based on the list of potentially restricted securities OEC receives from the 

Division of Enforcement (Enforcement). 

Our audit found that PTCS lacks certain functionality that would help employees comply 

with the supplemental ethics regulation. Specifically, we determined that: 

 PTCS cannot readily identify employees who hold securities that become 

prohibited; 

 ticker information from Enforcement’s case management system, which OEC 

relies on to process pre-trade requests, is incomplete and creates a risk that pretrade requests may be erroneously approved;

 the securities data feed from the current external provider is incomplete and has 

resulted in manual data entry for almost 3,000 securities; and

 PTCS does not use existing information to verify required securities holding 

periods when employees submit pre-trade requests to sell securities. 

These conditions occurred because OEC relies on mitigating controls; the SEC has not 

formalized Enforcement’s role in identifying and rejecting requested trades of prohibited 

securities; and the agency has not maximized the use of a securities clearance system. 

As a result, the SEC cannot fully rely on PTCS to help employees comply with the 

supplemental ethics regulation.

PTCS Cannot Readily Identify Employees Who Hold Securities that Become 

Prohibited. Generally, employees are required each year to upload into PTCS yearend brokerage statements and certify that they have complied with the supplemental 

ethics regulation. However, at the time of our audit, PTCS did not have optical 

character recognition capability and as such could not use employees’ uploaded 

brokerage statements to identify prohibited holdings. As a result, when securities 

become prohibited, PTCS cannot identify all employees who hold that security and 

automatically notify them to divest or seek a waiver. PTCS also functions as a 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 14 DECEMBER 10, 2014

repository for confirmed transactions; however, even though technically feasible, OEC 

did not search those confirmed transactions to identify employees who had purchased 

securities that later became prohibited. 

When asked about PTCS’s capability to help employees comply with the supplemental 

ethics regulation, OEC officials told us that it is the responsibility of each employee to 

know if the securities he or she holds become prohibited. Further, OEC officials believe 

that actions taken by OEC help employees identify holdings that may become 

prohibited. Such actions include: 

(1) publishing a list of prohibited securities so that employees can review their own 

holdings and take necessary action; 

(2) reviewing employees’ annual financial disclosure forms to identify prohibited 

holdings; and 

(3) conducting annual compliance testing of selected employee holdings to identify

any that are prohibited.

However, these controls do not necessarily ensure that prohibited holdings will be 

identified. 

First, to assist employees, OEC publishes a list of prohibited holdings on its intranet 

site. OEC updates the list periodically (usually monthly) and highlights new additions to 

the list. However, the list is not all-inclusive and OEC includes the following disclosure 

at the top of the list: “This is not an exhaustive list – it is possible that a holding may be 

prohibited, but may not appear on this list.”

Second, as stated in footnotes 8 and 9, only employees in certain covered positions are 

required to file annual financial disclosure forms. Although as of June 2014, about 

80 percent of the SEC’s employees were required to do so, the remaining 20 percent 

were not. Moreover, because the financial disclosure forms only require employees to 

report assets over a certain dollar threshold, prohibited holdings under those thresholds 

would go undetected. 

Third, OEC’s 2014 annual compliance testing was designed to review brokerage 

statements for only 10 percent of employees from selected offices. Because OEC 

selects employees from those offices randomly, the possibility exists that some 

employees will not undergo any type of review from OEC. This issue is further 

discussed in Finding 3 on page 20.

OEC Relies on Incomplete Ticker Information from Enforcement’s Case 

Management System to Process Pre-trade Requests. Under the supplemental 

ethics regulation, employees are prohibited from purchasing or selling any security 

issued by an entity that is under investigation by the SEC, a party to a proceeding 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 15 DECEMBER 10, 2014

before the SEC, or a party to a proceeding to which the SEC is a party.19 OEC 

developed an internal control within PTCS to identify and reject requested trades on 

securities that meet this definition using ticker information reflected in Enforcement’s 

case tracking system, the Hub. However, we determined that ticker information in the 

Hub is incomplete and the SEC has not formalized Enforcement’s role in helping OEC 

identify and reject requested trades of prohibited securities. 

Specifically, officials from OEC and Enforcement determined in 2010 that information 

from the Hub was the best source for identifying entities that are related to an SEC 

investigation. To assist OEC in obtaining information needed to review employee trade 

requests, Enforcement added a ticker field to the Hub and developed a data feed of 

ticker information from active matters20 that is submitted daily to OEC. This list, which 

OEC calls the Watch List, is then manually uploaded into PTCS by OEC. Each time an 

employee submits a pre-trade request, PTCS attempts to match the security in question 

to the Watch List based on pre-determined matching criteria. If a match exists, an OEC 

employee manually processes the pre-trade request by reviewing case details in the 

Hub.

Because there is no secondary source for this information, OEC must rely on the Watch 

List to identify possibly restricted securities. As such, the Watch List must be complete. 

However, as designed, the Watch List only includes entities that have ticker symbols in 

the Hub and the Hub does not include a system control that requires information in the 

ticker symbol field. Rather, Enforcement employees have been required by their 

management to use the ticker symbols search feature when entering in the Hub entities 

that are public companies.21 In 2010, Enforcement’s Managing Executive informed 

employees that doing so provides a reliable means to identify each public company 

through its ticker symbol, and that such information is needed as part of OEC’s 

oversight of employee securities holdings. Despite management’s requirements, 

according to Enforcement officials, as of September 24, 2014, there were at least

144 entities labeled as issuers22 in the Hub for which no ticker symbol was present. 

Although Enforcement did not provide the total number of entities listed as issuers in the 

Hub, Enforcement informed us these 144 entities are contained within 50 active matters 

out of the 1,913 total active matters as of that date. Therefore, approximately 3 percent 

 

19 5 CFR § 4401.102(c)(7).

20 “Active matters” are Enforcement investigations or Matters Under Inquiry that have a status other than 

void or closed completely.

21 A September 2009 Hub Release Guide required Enforcement staff to use the ticker search feature 

when entering in the Hub related parties that are public companies. The guide further explains how 

entering a public entity includes incorporation of the ticker symbol. 

22 “Issuers” in the Hub may include issuers of publicly-traded or non-publicly traded securities, entities that 

ceased issuing publicly-traded securities within the time a matter was open, and entities improperly 

assigned this label.
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 16 DECEMBER 10, 2014

of total active matters contain at least one entity labeled as an issuer for which no ticker 

symbol was present.23

While the DAEO acknowledges that the Watch List may be incomplete and there are 

risks to relying on this source of information, we believe that OEC does not have any 

alternative for obtaining this information.

An example of the potential impact of incomplete Watch List information was 

documented in a February 2014 draft academic study titled Stock Picking Skills of SEC 

Employees conducted by a professor at Emory University and a PhD student at Georgia 

State University. The study stated that 87 trades were executed by SEC employees in 

advance of an enforcement action against the security’s issuer – presumed by the 

study’s authors to be the period in which the issuers were under investigation –

suggesting violations of the supplemental ethics regulation. However, we found that 

8 of the 87 trades were executed during an open investigation of the security’s issuer

due to failure of the Watch List as an internal control.24 We found that each of the 

8 trades was automatically approved by EPS (replaced by PTCS in February 2012)

because the data feed did not identify the entity as an issuer due to a lack of ticker

information in the Hub. The employees were not in violation of the supplemental ethics 

regulation because they obtained approval for the trades. 

Securities Data Feed from External Data Provider is Incomplete. When entering a 

pre-trade request in PTCS, employees can search for a security using the ticker symbol,

security name, or CUSIP number25 and the system’s “Search for Security” auto-fill 

search function. Selecting a security from the search results automatically populates 

the security information in the pre-trade request. If an employee is unable to locate a 

specific security, he or she has to manually enter the security’s information and, as a 

result, an OEC employee is required to manually process the pre-trade request. 

As noted above, the supplemental ethics regulation requires the DAEO to administer 

the SEC’s employee securities clearance systems. To do so, OEC obtains the 

securities data that drives PTCS’ auto-fill search function from an SEC contract with an 

external vendor. This vendor’s data is used agency-wide. However, the securities data 

did not allow PTCS to function as automatically as designed. According to SEC 

employees, the current data feed often abbreviates company names and excludes 

international securities. As a result, securities for which employees seek pre-trade 

clearance may not appear as an auto-fill option, requiring employees to type in the 

 

23 These figures were provided to us by Enforcement, without independent validation. 

24 Our review of the remaining 79 trades found no violation of the supplemental ethics regulation. For 

example, most were executed before the implementation of the supplemental ethics regulation, while 

others were the subject of waivers. 

25 A CUSIP [Committee on Uniform Securities Identification Procedures] number is a nine-digit 

alphanumeric code that identifies a North American financial security for the purposes of facilitating 

clearing and settlements of trades. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 17 DECEMBER 10, 2014

security’s information. Since the inception of PTCS, employees have had to manually 

enter information for many securities when submitting pre-trade requests. Each 

requested trade manually entered by an employee seeking clearance has to be

manually processed by OEC staff. To provide a more robust security feed and reduce 

the number of manually processed trades, in 2013 OEC employees voluntarily 

supplemented the external data feed by manually entering into PTCS information for 

nearly 3,000 securities. In our opinion, the incompleteness of the securities data feed 

unnecessarily increases OEC’s staff workload – both by requiring staff to manually enter 

securities information into PTCS and to manually process pre-trade requests. 

Because the securities data feed used by other SEC offices does not meet OEC’s 

needs, OEC is procuring a new, more complete data feed that will improve the 

effectiveness and efficiency of the pre-clearance process. OEC anticipates 

implementing the new feed by January 2015. The new data feed should reduce or 

eliminate the need for OEC employees to manually enter security information into PTCS

and should reduce the number of manually processed trades.

PTCS Does Not Verify Securities Holding Periods Using Existing System 

Information. The supplemental ethics regulation requires that employees hold a 

security purchased after commencement of employment with the SEC for a minimum of 

6 months from the trade date.26 When employees submit a pre-trade request to sell a 

security, PTCS requires employees to enter the purchase date for that security. If the 

period between the purchase date and the pre-trade request date does not meet 

holding period requirements, PTCS rejects the pre-trade request. While OEC has 

created this system control to help ensure employees comply with holding period

requirements, the control is effective only to the extent that employees enter and certify 

the correct purchase date. We found that PTCS does not have the capability to 

independently verify the purchase date by comparing the security associated with the 

pre-trade request to the employee’s current securities in PTCS. We note that PTCS 

was launched in February 2012 and only maintains securities purchased by employees 

since its implementation. Because data from the previous system was not migrated, 

PTCS would be unable to verify initial purchase dates for securities purchased prior to 

February 2012. However, for securities purchased after February 2012, PTCS contains 

but does not use purchase date information to automatically ensure employees comply 

with holding period requirements.

The SEC Cannot Fully Rely On PTCS to Support Employees In 

Complying With the Supplemental Ethics Regulation

Although OEC implemented and maintains a securities clearance system that allows 

employees to pre-clear, confirm, and report securities transactions and holdings, we 

 

26 This holding period does not apply to securities sold for 90 percent or less of the original purchase 

price, securities with an initial term of less than 6 months that are held to term, and money market funds. 

Moreover, employees are required to hold shares in registered investment companies for a minimum of 

only 30 days. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 18 DECEMBER 10, 2014

found that PTCS lacks certain functionality to help employees fully comply with the 

supplemental ethics regulation. Because PTCS has been operational for over 2 years 

and given the ample resources OEC provides employees on how to use PTCS, we 

believe employees have had sufficient time and have been provided sufficient 

information to become familiar with the system. However, by not ensuring PTCS has 

the capability to readily identify employees with prohibited holdings, process pre-trade 

requests based on a complete Watch List, provide employees with complete securities 

data, or use information already in the system to confirm that employees have met 

minimum holding periods; the SEC has not maximized its use of a securities clearance 

system. As a result, PTCS has limited capability to help employees comply with the 

supplemental ethics regulation. 

Recommendations, Management’s Response, and Evaluation of 

Management’s Response

To improve PTCS and help employees comply with the supplemental ethics regulation,

we recommend that:

Recommendation 4: The Office of the Ethics Counsel develop a method to use 

employee brokerage statements to identify all employees holding prohibited securities.

Management’s Response. The Office of the Ethics Counsel concurred with this 

recommendation and has partnered with the Office of Information Technology to 

procure an optical character recognition tool in the Personal Trading Compliance 

System. The Office of the Ethics Counsel and the Office of Information 

Technology are testing a trial offer. 

OIG’s Evaluation of Management’s Response. Management’s proposed 

actions are responsive; therefore, the recommendation is resolved and will be 

closed upon completion and verification of the action taken. 

Recommendation 5: The Division of Enforcement establish an internal control or 

mechanism to ensure ticker symbols are included in the Hub and remind its employees 

of the current requirement. Additionally, the Division of Enforcement and the Office of 

the Ethics Counsel should determine the viability of using related name information in 

the Personal Trading Compliance System to identify potentially restricted securities. 

Management’s Response. The Division of Enforcement concurred with this 

recommendation and has undertaken work to improve the relevant data quality in 

the Hub. The Division of Enforcement reviewed the information provided to the 

Office of Inspector General detailing the relevant population of issuer entities and 

the specific entities where no ticker was present. The Division of Enforcement 

identified a subset of the specific entities where a ticker exists, and added the 

ticker information in the Hub. In a division-wide message sent on December 1, 

2014, staff was reminded of the requirement to use the ticker search feature 

when entering public companies in the Hub. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 19 DECEMBER 10, 2014

Moreover, the Division of Enforcement has also begun development of an 

enhanced report that provides the names of all relevant entities in the Hub to 

supplement the ticker information provided daily to the Office of the Ethics 

Counsel. The Division of Enforcement will coordinate with the Office of the 

Ethics Counsel on the viability of using the enhanced report, or other means of 

drawing on entity name information, in the Office of the Ethics Counsel’s 

identification of securities where employees are potentially prohibited from 

trading.

OIG’s Evaluation of Management’s Response. Management’s proposed 

actions are responsive; therefore, the recommendation is resolved and will be 

closed upon completion and verification of the action taken. 

Recommendation 6: The Office of the Ethics Counsel obtain a securities data feed for 

the Personal Trading Compliance System that reduces the risk that pre-trade requests 

will have to be manually processed. 

Management’s Response. The Office of the Ethics Counsel concurred with this 

recommendation. As stated in the report, the Office had identified this issue and 

has been diligently working to correct it. In September 2014, a contract was 

awarded to a vendor that can provide a more robust securities master list. It is 

currently being tested by the Office of Information Technology. 

OIG’s Evaluation of Management’s Response. Management’s proposed 

actions are responsive; therefore, the recommendation is resolved and will be 

closed upon completion and verification of the action taken. 

Recommendation 7: The Office of the Ethics Counsel consider the feasibility of using

all data available in the Personal Trading Compliance System to confirm that employees 

have met minimum holding period requirements. 

Management’s Response. The Office of the Ethics Counsel concurred with this 

recommendation and will consider the feasibility of using existing data to confirm 

that employees have met the minimum holding period requirements. 

OIG’s Evaluation of Management’s Response. Management’s proposed 

actions are responsive; therefore, the recommendation is resolved and will be 

closed upon completion and verification of the action taken. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 20 DECEMBER 10, 2014

Finding 3: Improvements Are Needed in Annual Compliance 

Testing

Although not required by regulation, OEC implemented a compliance testing program in 

May 2012 with the stated objective of ensuring employees are complying with the 

supplemental ethics regulation with respect to holdings, transactions, and reporting of 

personal securities. Since then, OEC has submitted annually a written compliance 

testing plan to the SEC Chair detailing its methodology for that particular year. 

Generally, OEC has selected employees from various SEC offices and divisions for 

testing, which includes reviewing employees’ brokerage statements or financial 

disclosure forms to identify instances of failure to pre-clear trades or holding prohibited 

securities. In 2012, OEC randomly selected 166 employees from 25 SEC offices and 

divisions and identified 29 violations (or about 17 percent). In 2013, OEC conducted 

similar testing but instead selected 1,296 employees from 10 SEC offices and divisions 

and found 43 violations (or about 3 percent).

OEC submitted its 2014 testing plan to the SEC Chair in November 2013. According to 

its plan, OEC intended to begin testing in April 2014 with the following goals: 

(1) to test 100 percent of employees using Form 450 or Form 278 to identify 

prohibited holdings; and 

(2) to test a minimum of 10 percent of employees using their brokerage statements 

to identify prohibited holdings and employees’ failure to pre-clear trades. 

Although OEC’s compliance testing program has allowed OEC to identify and address

violations,27 its 2014 testing plan may preclude OEC from meeting its stated objective of 

ensuring employees comply with the supplemental ethics regulation in at least two 

ways. 

First, as of October 2014, OEC was at risk of not meeting its target date of year’s end to 

complete its review of Forms 450, which OEC informed us it relies on, in part, to 

conduct its sample testing.

28

 Because OEC did not have in 2014 the human resources 

to review financial disclosure forms, brokerage statements, and PTCS transactions to 

identify prohibited holdings for each employee, it determined that the highest level of 

assurance could be gained by reviewing 100 percent of Forms 450. However, OEC 

was only able to assign one attorney to review the over 3,200 Forms 450 that were filed 

 

27 Violations, or non-compliance with the supplemental ethics regulation, were generally cleared by 

counseling employees, instructing employees to divest or seek a waiver, or referring the violations to the 

OIG. 

28 Our scope of testing was 2014 Forms 450 that were due to OEC on February 18, 2014, and reviewed 

by OEC as of October 2014.
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 21 DECEMBER 10, 2014

by SEC employees in 2014. As of October 2014, OEC had reviewed just over 

50 percent of all Forms 450 for prohibited holdings.29 

Second, as in 2012 and 2013, OEC’s use of a non-statistical sample in 2014 will 

prevent OEC from concluding that violations identified are representative of an agencywide rate of violations and, therefore, no conclusion or trend analysis may be made over 

time based on these results. In 2014, OEC’s testing plan stated that OEC would test 

10 percent of employees from 9 SEC offices and divisions.

30

 As of June 2014, this 

equated to 146 employees. As of that same date, there were over 4,100 employees at 

the SEC. This means that OEC’s testing sample will assess employee compliance with 

the supplemental ethics regulation for only about 4 percent of all employees. 

By not being able to timely determine the degree to which all of its employees are in 

compliance with the supplemental ethics regulation, the SEC cannot adjust its approach 

to compliance accordingly. During our audit, the DAEO recognized the benefit of a 

representative sample and agreed to develop a testing plan for 2015 that would allow 

OEC to conclude on agency-wide compliance with the supplemental ethics regulation.

OEC’s Compliance Testing Program May Not Achieve Its Objective

Although OEC has voluntarily implemented an annual compliance testing program that 

exceeds the requirements of the supplemental ethics regulation, we found that OEC can 

improve the program’s effectiveness and efficiency in order to better ensure employee 

compliance with the supplemental ethics regulation. Because employees are required 

annually to certify their securities holdings, submit brokerage statements and report all 

purchases and sales of securities, and file Forms 450 and Forms 278 (as applicable), 

we believe OEC has the necessary information to determine whether employees hold 

any prohibited securities or have failed to pre-clear transactions. We acknowledge that 

performing an in-depth review using all information available for all employees is not 

feasible given OEC’s resources. However, by not implementing a well-developed 

compliance testing plan that simultaneously ensures efficient use of resources and 

sufficient agency coverage, OEC cannot gauge employee compliance agency-wide or 

compare results from year to year in order to adjust its operations. 

 

29 On November 12, 2014, the DAEO stated that additional resources, including a new OEC attorney, 

were assigned to assist with the review of Forms 450. Consequently, the DAEO believes the review will 

be completed by the stated deadline. 

30 Over the 3 years, OEC has attempted to select different offices and divisions for its annual compliance 

testing. For example, offices and divisions selected for 2014 included those not selected for testing in 

2013. In 2014, the selected offices and divisions were as follows: Fort Worth Regional Office, Los 

Angeles Regional Office, Philadelphia Regional Office, Salt Lake Regional Office, San Francisco 

Regional Office, Division of Corporation Finance, Division of Investment Management, Division of Trading 

and Markets, and the Office of International Affairs. OEC will test 10 percent of randomly selected 

employees from each of these offices and divisions. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 22 DECEMBER 10, 2014

Recommendations, Management’s Response, and Evaluation of 

Management’s Response

To improve the efficiency and effectiveness of its annual compliance testing program, 

we recommend that:

Recommendation 8: The Office of the Ethics Counsel develop a statistical sampling 

plan for its compliance testing program to be able to assess agency-wide compliance

with the supplemental ethics regulation.

Management’s Response. The Office of the Ethics Counsel concurred with this 

recommendation and has partnered with the Division of Economic and Risk 

Analysis to determine a testing sampling protocol for all future compliance 

testing. The Office of the Ethics Counsel expects to deploy the new sampling 

method in 2015. 

OIG’s Evaluation of Management’s Response. Management’s proposed 

actions are responsive; therefore, the recommendation is resolved and will be 

closed upon completion and verification of the action taken. 

Recommendation 9: The Office of the Ethics Counsel combine its review of 

Forms 450 with the current compliance testing.

Management’s Response. The Office of the Ethics Counsel concurred with this 

recommendation and will implement it in the compliance testing starting in 2015. 

OIG’s Evaluation of Management’s Response. Management’s proposed 

actions are responsive; therefore, the recommendation is resolved and will be 

closed upon completion and verification of the action taken. 
U.S. SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL

REPORT NO. 527 23 DECEMBER 10, 2014

Other Matters of Interest

During the course of our audit, we identified other matters of interest that did not warrant 

recommendations. We discussed these matters with OEC. 

SEC and OEC Policies and Procedures Incorporate All Aspects of Applicable 

Federal Laws and Regulations. As part of our audit objectives, we reviewed relevant 

SEC policies and procedures and compared them to relevant Federal laws and 

regulations, including 5 CFR § 4401.102, to ensure the SEC incorporated all aspects of 

the Federal laws and regulations. We found that the SEC has developed and 

implemented policies and procedures in accordance with Federal laws and regulations, 

including the supplemental ethics regulation. Therefore, we have no findings or 

recommendations related to this audit objective.

OEC Should Determine the Propriety of Sharing its Prohibited Holdings List 

Outside the SEC and Include Its Qualifying Statement on All Pages of the List. 

OEC periodically updates a list of prohibited holdings and makes it available to 

employees for their reference. However, OEC has not issued guidance to employees 

regarding whether employees may share this list with spouses or investment advisors. 

OEC should work with the Office of General Counsel to determine the propriety of 

sharing this list outside of the SEC.

Additionally, we recognize that OEC’s list of prohibited holdings includes a qualifying 

statement reminding employees that the list is not exhaustive and that a holding may be 

prohibited but not included on the list (see page 14 of this report). However, this 

statement appears only on the first page of the list. If an employee were to print only 

one page of the list, there is a risk that the qualifying statement would be missed and an 

employee could over-rely on the completeness of the list. OEC should include the 

qualifying statement on each page of the list.

The Ethics Handbook Does Not Reference the New Clearance System. The SEC’s 

Ethics Handbook effective at the time of our audit was dated March 2011 and referred 

to EPS, which was replaced by PTCS in February 2012. OEC should update this 

manual. 
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REPORT NO. 527 24 DECEMBER 10, 2014

Appendix I. Scope and Methodology

We conducted this performance audit from April 2014 through December 2014 in 

accordance with generally accepted government auditing standards. Those standards 

require that we plan and perform the audit to obtain sufficient, appropriate evidence to 

provide a reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives. 

Scope. The audit covered the period of August 2010 to September 2014,31 and our

objective was to evaluate OEC’s effectiveness in ensuring that employees comply with 

ethics regulations pertaining to prohibited holdings and temporarily-restricted trades. 

Specifically, we sought to:

 determine whether OEC has developed and implemented policies and 

procedures that are in accordance with Federal laws and regulations, including 

5 CFR § 4401.102, Prohibited and restricted financial interests and transactions; 

 evaluate the operating effectiveness of internal controls designed and 

implemented by OEC over the employee security transactions and holdings preclearance and reporting processes; and

 determine whether OEC has established a mechanism to ensure employee 

compliance with 5 CFR § 4401.102, Prohibited and restricted financial interests 

and transactions. 

We conducted fieldwork at the SEC’s headquarters in Washington, D.C. While our 

focus was on OEC, we also considered OHR and Enforcement processes and how 

these processes were incorporated into OEC’s oversight of employee securities

holdings and transactions.

Methodology. To determine whether OEC has developed and implemented policies 

and procedures that are in accordance with Federal laws and regulations, we

interviewed the DAEO, Chief Compliance Officer, and other OEC personnel to gain an 

understanding of the office, its policies and procedures, and overall management style. 

Additionally, we reviewed relevant Federal laws and regulations and focused on the 

sections of the laws and regulations that address employees' and the DAEO's 

responsibilities regarding securities holdings. To determine whether the SEC has 

incorporated all required aspects of these Federal laws and regulations (particularly,

those of 5 CFR Part 4401) into its agency-wide policies and procedures, and to 

determine if OEC policies and procedures are aligned with the SEC-wide policies and 

 

31 We reviewed OEC’s policies, procedures, and practices as of August 2010 as compared to the 

supplemental ethics regulation. We reviewed the operating effectiveness of internal controls designed 

and implemented by OEC as of October 1, 2012. 
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REPORT NO. 527 25 DECEMBER 10, 2014

procedures, we conducted a crosswalk of SEC and OEC policies and procedures to the 

relevant Federal laws and regulations. 

To evaluate the operating effectiveness of OEC’s internal controls over employee 

security transactions, we interviewed OEC personnel and reviewed OEC procedures. 

With OEC management, we identified and discussed inherent risks to OEC’s program 

related to the oversight of employee securities holdings and the mitigating internal 

controls. We assessed the design and implementation of internal controls and identified 

and tested key internal controls. Specifically, we reviewed the process by which OEC 

reviews securities holdings of employment candidates to determine whether they hold

prohibited securities; tested the automated and manual controls of the SEC clearance 

system, which employees use to pre-clear trades; and assessed the completeness of 

information OEC relies on to process employees’ pre-trade requests. 

To determine whether OEC has established a mechanism to ensure employee 

compliance with the supplemental ethics regulations, we interviewed personnel and 

reviewed data concerning the 87 trades mentioned in the study The Stock Picking Skills 

of SEC Employees. We gained an understanding of how the study identified the trades, 

and reviewed the trades identified by the SEC to assess the study’s claims that the 

trades were made in violation of the supplemental ethics regulation. Further, we 

evaluated training of, and communication to, employees regarding the supplemental 

ethics regulation. Additionally, we evaluated OEC’s annual compliance testing plan. 

The Federal laws and guidance, as well as the SEC administrative regulations, policies, 

and procedures we reviewed included: 

Federal Laws and Regulations:

 United States Code, Section 106, Title 5, Appendix, Ethics in Government Act of 

1978, Review of Reports, October 26, 1978.

 5 CFR Part 4401, Supplemental Standards of Ethical Conduct for Members and 

Employees of the Securities and Exchange Commission, August 19, 2010.

 17 CFR Part 200 Subpart M, Regulation Concerning Conduct of Members and 

Employees and Former Members and Employees of the Commission, as 

amended, August 19, 2010.

 5 CFR Part 2635, Standards of Ethical Conduct for Employees of the Executive 

Branch, February 3, 1993.

 5 CFR Part 2634, Executive Branch Financial Disclosure, Qualified Trusts, and 

Certificates of Divestiture, April 7, 1992.

 5 CFR Part 2638, Office of Government Ethics and Executive Agency Ethics 

Program Responsibilities, June 10, 1997.
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REPORT NO. 527 26 DECEMBER 10, 2014

 Office of Management and Budget Circular No. A-123, Management’s 

Responsibility for Internal Control, December 21, 2004.

SEC Administrative Regulations, Policies, and Procedures:

 U.S. Securities and Exchange Commission Ethics Handbook, March 2011. 

 Administrative Notice, I Have to File What? A Guide to the Financial Disclosure 

Obligations of SEC Employees, April 2011. 

 Administrative Notice, Introducing the New Personal Trading Compliance System 

(PTCS), February 2012. 

 SharePoint 2010: Personal Trading Compliance System (PTCS) v4.0.0.2 Admin 

Guide, March 10, 2014. 

 OEC Standard Operating Compliance Procedures, April 9, 2014. 

 OEC Standard Operating Procedures for Confidential Financial Disclosure 

Reports. 

 OEC Standard Operating Procedures for Public Financial Disclosure Reports 

(278) and periodic Transaction Reports (278-T). 

 SEC Administrative Regulations, SECR 30-1, Management Accountability and 

Control Program, June 10, 1996.

Internal Controls. We gained an understanding of OEC’s oversight of employee 

securities holdings and transactions and identified key internal controls. We then tested 

the operating effectiveness of those internal controls using random and judgmental 

samples. Although test results were not projected, negative results allowed the audit 

team to identify the root causes for the exceptions. 

Computer-processed Data. The Government Accountability Office’s Assessing the 

Reliability of Computer-Processed Data (GAO-09-680G, July 2009) states that “data 

reliability refers to the accuracy and completeness of computer-processed data, given 

the uses they are intended for. Computer-processed data may be data (1) entered into 

a computer system or (2) resulting from computer processing.” The OIG identified the 

following computer-processed data that would have a material impact on the audit's 

findings, conclusions, or recommendations: (1) Enforcement Watch List, (2) the 

Cardinal feed, and (3) the OHR new employee lists. 

We conducted interviews to understand how the Watch List and Cardinal List are

compiled and used. We also reviewed the database structure of the source of the 

Cardinal feed. Based on data provided by Enforcement, we determined that the Watch 

List is not complete. (See finding 2.) Additionally, we assessed OHR new employee 

lists as part of Report No. 528, Audit of the Representation of Minorities and Women in 
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REPORT NO. 527 27 DECEMBER 10, 2014

the SEC’s Workforce.

32 We relied solely on employees’ start dates and we deemed this

specific data to be sufficiently reliable. Therefore, we concluded that for the purposes of 

the audit, the computer-processed data that had a material impact on the audit findings, 

conclusions, or recommendations is sufficiently reliable.

Prior Coverage. On March 3, 2009, the SEC OIG issued a report on its investigation 

into two Enforcement attorneys’ securities transactions during a 2 year period. The 

investigation sought to determine whether the attorneys engaged in insider trading, 

traded on non-public information, or violated the SEC’s Rule 5 of the Conduct 

Regulation (17 CFR § 200.735-5). The OIG determined that the SEC had essentially no 

compliance system in place to ensure that employees, with the tremendous amount of

non-public information they had at their disposal, did not engage in insider trading 

themselves. The report noted that the disclosure requirements and compliance system 

were based on the honor system, and there was no way to determine if an employee 

failed to report a securities transaction. Moreover, there were no spot checks 

conducted and the SEC did not obtain duplicate brokerage account statements. In 

addition, there was little to no oversight or checking of the reports that employees filed 

to determine their accuracy, or even whether an employee had reported at all. 

To improve the SEC’s monitoring of employees’ compliance with 17 CFR § 200.735-5, 

the OIG made 11 recommendations. Specific recommendations are summarized 

below:

 one office have primary responsibility for ensuring compliance with Rule 5; 

 there be an integrated, computerized system for every facet of 

Rule 5 compliance;

 the SEC give serious consideration to obtaining duplicate copies of brokerage 

record confirmations for each securities transaction for every SEC employee;

and

 the office primarily responsible for Rule 5 compliance conduct regular, thorough 

spot checks for Rule 5 compliance for randomly selected employees each 

quarter.

 

32 U.S. Securities and Exchange Commission, Office of the Inspector General, Audit Report No. 528, 

Audit of the Representation of Minorities and Women in the SEC’s Workforce, November 20, 2014. The 

report can be accessed at: http://www.sec.gov/oig/reportspubs/528.pdf.
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REPORT NO. 527 28 DECEMBER 10, 2014

As of March 2014, all 11 recommendations have been closed.33 

On September 16, 2011, the SEC OIG issued a report of investigation of the facts and 

circumstances surrounding the SEC’s former General Counsel and Senior Policy 

Director’s participation in Bernard L. Madoff-related matters. In its report, the OIG 

recommended that:

 the SEC Ethics Counsel should report directly to the Chairman, rather than to 

the General Counsel;

 the SEC Ethics Office should take all necessary steps, including the 

implementation of appropriate policies and procedures, to ensure that all advice 

provided by the Ethics Office is well-reasoned, complete, objective, and 

consistent, and that Ethics officials ensure that they have all the necessary 

information in order to properly determine if an employee’s proposed actions 

may violate rules or statutes or create an appearance of impropriety; and

 the SEC Ethics Office should take all necessary actions to ensure that all ethics 

advice provided in significant matters, such as those involving financial conflict 

of interest, is documented in an appropriate and consistent manner.34

In 2013, OGE released a report (No.13-18) on its November 2012 review of the SEC’s 

ethics program. OGE concluded that the SEC’s program appeared to be effectively 

administered and in compliance with laws, regulations, and policies. Although OGE 

reviewed both the public and confidential financial disclosure forms for timeliness of 

filing and review, its audit scope did not include a review of OEC’s policies or 

procedures regarding the prohibited and restricted holdings lists; pre-employment or 

transaction clearances; annual submission of statements or attestations of compliance; 

or any other SEC-specific financial matters. The report did state that the review team 

noted extensive evidence of ethics officials’ analysis and research of public disclosure 

forms and communication with public report filers. No substantive recommendations 

 

33 U.S. Securities and Exchange Commission, Office of the Inspector General, Report of Investigation 

No. 481, Employee’s Securities Transactions Raise Suspicions of Insider Trading and Create 

Appearances of Impropriety; Violations of Financial Reporting Requirements; and Lack of SEC Employee 

Securities Transactions Compliance System, March 3, 2009. Rule 5 has now been effectively replaced 

by the supplemental ethics regulation, and 17 CFR § 200.735-5 now states that, “[s]ecurities transactions 

by members and employees must comply with the provisions of 5 CFR 4401.102 (Prohibited and 

restricted financial interests and transactions).”

34 U.S. Securities and Exchange Commission, Office of the Inspector General, Report of Investigation 

No. 560, Investigation of Conflict of Interest Arising from Former General Counsel’s Participation in 

Madoff-Related Matters, September 16, 2011. The report can be accessed at:

http://www.sec.gov/about/offices/oig/reports/investigations/2011/oig-560.pdf
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REPORT NO. 527 29 DECEMBER 10, 2014

were made; however, the report suggested the SEC continue efforts to improve the late 

certifications of confidential disclosure reports.

35

 

35 U.S. Office of Government Ethics, Compliance Division, Ethics Program Review Report No. 13-18, U.S. 

Securities and Exchange Commission, April 2013. The report can be accessed at:

http://www.oge.gov/Program-Management/Program-Review/Program-Review-Reports/Program-ReviewReports/
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REPORT NO. 527 30 DECEMBER 10, 2014

Appendix II. Management Comments
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REPORT NO. 527 31 DECEMBER 10, 2014
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REPORT NO. 527 32 DECEMBER 10, 2014
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REPORT NO. 527 33 DECEMBER 10, 2014

Appendix III. OIG Response to Management 

Comments 

We are pleased that SEC management concurred with all nine recommendations for 

corrective action. Management’s proposed actions are responsive to the 

recommendations; therefore, the recommendations are resolved. Management took 

immediate action to address Recommendations 1 and 2, which we verified prior to 

issuance of our final report. Therefore, those recommendations are closed for reporting 

purposes. The remaining seven recommendations will be closed upon completion and 

verification of the appropriate corrective action. Full implementation of our 

recommendations should help the agency in its efforts to oversee employee securities 

holdings. 
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REPORT NO. 527 34 DECEMBER 10, 2014

Major Contributors to the Report

Kelli Brown-Barnes, Audit Manager

Scott Harmon, Audit Manager

Juan Figueroa, Lead Auditor

Elizabeth Palmer Gontarek, Auditor

Carrie Fleming, Auditor

To Report Fraud, Waste, or Abuse, Please Contact:

Web: www.reportlineweb.com/sec_oig

E-mail: oig@sec.gov

Telephone: 1-877-442-0854

Fax: (202) 772-9265

Address: U.S. Securities and Exchange Commission

Office of Inspector General

100 F Street, N.E.

Washington, DC 20549-2736

Comments and Suggestions 

If you wish to comment on the quality or usefulness of this report or suggest ideas for 

future audits, please contact Rebecca Sharek, Deputy Inspector General for Audits, 

Evaluations, and Special Projects at sharekr@sec.gov or call (202) 551-6061. 

Comments, suggestions, and requests can also be mailed to the attention of the Deputy 

Inspector General for Audits, Evaluations, and Special Projects at the address listed 

above.