This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents.

Rules and Regulations Federal Register

14563 

Vol. 89, No. 40 

Wednesday, February 28, 2024 

1See 57 FR 35006–35067, as corrected at 57 FR 

48557, 57 FR 52483, and 60 FR 51167, with 

additional grace period extensions for certain 

existing provisions at 59 FR 4779–4780, 60 FR 

6390–6391, and 60 FR 66857–66858. 

2See 75 FR 42273, July 20, 2010, as amended at 

76 FR 19902, Apr. 11, 2011. 

3 88 FR 7891, February 7, 2023 (‘‘Proposing 

Release’’). 

SECURITIES AND EXCHANGE 

COMMISSION 

5 CFR Part 4401 

[Release No. 34–99582; File No. S7–02–23] 

RIN 3209–AA15 

Supplemental Standards of Ethical 

Conduct for Members and Employees 

of the Securities and Exchange 

Commission 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’ 

or ‘‘we’’), with the concurrence of the 

Office of Government Ethics (‘‘OGE’’), is 

adopting jointly issued amendments to 

the Commission’s existing 

Supplemental Standards of Ethical 

Conduct for Members and Employees of 

the Securities and Exchange 

Commission (‘‘Supplemental 

Standards’’). This rule amends the 

existing Supplemental Standards jointly 

issued by SEC and OGE, supplements 

the Standards of Ethical Conduct for 

Employees of the Executive Branch 

(‘‘OGE Standards’’) issued by OGE, and 

is necessary and appropriate to address 

ethical issues unique to the SEC. 

Specifically, the Commission is 

prohibiting employee ownership of 

sector funds that have a stated policy of 

concentrating their investments in 

entities directly regulated by the 

Commission; revising transaction and 

reporting requirements for certain assets 

that pose a low risk of conflicts of 

interest or appearance concerns; 

permitting employees to comply with 

reporting obligations by authorizing 

their financial institutions to transmit 

information on behalf of employees 

about their covered securities 

transactions and holdings data through 

an approved automated compliance 

system; clarifying that the limitation on 

purchasing securities that are part of an 

initial public offering (IPO) until seven 

days after the IPO also applies to direct 

listings of securities; correcting certain 

technical matters; and adjusting its 

transaction and reporting requirements 

to provide the flexibility necessary to 

implement an automated compliance 

system. 

DATES: This final rule is effective March 

29, 2024. 

FOR FURTHER INFORMATION CONTACT: Jay 

Bragga, Office of the Ethics Counsel, 

(202) 551–5170, Securities and 

Exchange Commission, 100 F Street NE, 

Washington, DC 20549–1050. 

SUPPLEMENTARY INFORMATION: The 

Commission is adopting amendments to 

5 CFR 4401.102 (Rule 102), its 

Supplemental Standards. 

I. Background 

On August 7, 1992, OGE published 

the OGE Standards.1 The OGE 

Standards, codified at 5 CFR part 2635, 

effective February 3, 1993, established 

uniform standards of ethical conduct 

that apply to all executive branch 

personnel. 

Section 2635.105 of the OGE 

Standards authorizes an agency, with 

the concurrence and joint issuance of 

OGE, to adopt agency-specific 

supplemental regulations that are 

necessary and appropriate to properly 

implement its ethics program. The 

Commission previously adopted 

supplemental regulations—found at 5 

CFR part 4401—in 2010 with the 

concurrence and joint issuance of OGE.2

On February 7, 2023, the Commission, 

with OGE’s concurrence, proposed to 

amend those existing supplemental 

regulations.3

As discussed in the Proposing 

Release, the Commission, with OGE’s 

concurrence, has determined that the 

following revisions to the supplemental 

regulations are necessary and 

appropriate for successful 

implementation of the SEC’s ethics 

program considering its unique 

programs and operations. The 

Commission, with the concurrence of 

OGE, proposed to amend its 

Supplemental Standards to (1) prohibit 

employee ownership of sector funds 

that have a stated policy of 

concentrating investments in entities 

directly regulated by the Commission 

(referred to herein as ‘‘Financial 

Industry Sector Funds’’), (2) eliminate 

pre-clearance, reporting, and holding 

period requirements for certain 

diversified investments (referred to 

herein as ‘‘Permissible Diversified 

Investment Funds’’), (3) enhance 

consistency, timeliness, and 

accountability in employee reporting of 

purchases, sales, acquisitions, and 

dispositions of securities through 

automated reporting by having 

employees authorize their financial 

institutions to transmit information on 

behalf of employees about their covered 

securities transactions and holdings 

data through a third-party automated 

compliance application, (4) clarify that 

the limitation on purchasing securities 

that are part of an initial public offering 

(‘‘IPO’’) until seven days after the IPO 

also applies to direct listings of 

securities, and (5) make other structural 

and technical corrections to the 

regulations. The Proposing Release 

invited public comments, to be 

submitted on or before March 31, 2023. 

The Commission received 

approximately ninety comment letters. 

After carefully considering the 

comments received on the proposal, the 

Commission, with the concurrence of 

OGE, is adopting the proposal with 

certain modifications. 

II. Description of Final Rule 

Amendments 

A. Prohibited Ownership of Financial 

Industry Sector Funds 

The Commission proposed amending 

§ 4401.102(c)(1) to explicitly prohibit 

employee ownership of certain 

Financial Industry Sector Funds by 

expanding the scope of ‘‘entities directly 

regulated by the Commission’’ to 

include registered investment 

companies, common investment trusts 

of a bank, companies exempt in part or 

in total from registration under the 

Investment Company Act of 1940, or 

other pooled investment vehicles that 

have a stated policy of concentrating 

their investments in entities directly 

regulated by the Commission. 

As discussed in the Proposing 

Release, the existing rule prohibits 


ddrumheller on DSK120RN23PROD with RULES1
14564 Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 / Rules and Regulations 

4 5 CFR 4401.102(c)(1). 

5See, e.g., Letter from University of Nevada, Las 

Vegas (UNLV) William S. Boyd School of Law 

Public Policy Clinic, on behalf of the Consumer 

Federation of America, dated Mar. 29, 2023 (‘‘UNLV 

Letter’’); Letter from Cornell University Law School, 

Cornell Securities Law Clinic, dated Mar. 31, 2023 

(‘‘Cornell Letter’’); Letter from Nakai Freeland, 

dated Mar. 31, 2023 (‘‘Freeland Letter’’); Letter from 

Leo Fox, dated Apr. 1, 2023 (‘‘Fox Letter’’); Letter 

from Jacob Gillmore, dated Feb. 24, 2023 (‘‘Gillmore 

Letter’’). Copies of all comment letters received by 

the Commission are available at https://

www.sec.gov/comments/s7-02-23/s70223.htm. For 

those letters from anonymous commenters, we cite 

to specific internet addresses to help readers locate 

the comment. 

6See Fox Letter. 

7 Id. 

8See Gillmore Letter. 

9See UNLV Letter. 

10 Id. 

11See, e.g., Letter from Anonymous, dated Mar. 

10, 2023 (‘‘Anonymous 3/10 Letter 1’’), available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

327223.htm; Letter from Anonymous, dated Mar. 

10, 2023 (‘‘Anonymous 3/10 Letter 2’’), available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

327169.htm; Letter from Anonymous, dated Mar. 9, 

2023 (‘‘Anonymous 3/9 Letter 1’’), available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

327218.htm. 

12See, e.g., Anonymous 3/10 Letter 2; 

Anonymous 3/9 Letter 1. 

13See Anonymous 3/9 Letter 1. 

14 Id. 

15See Anonymous 3/10 Letter 1. 

16 Id. 

employees from purchasing or owning 

any ‘‘security or other financial interest 

in an entity directly regulated by the 

Commission,’’ such as registered broker 

dealers and investment advisers.4 In 

order to avoid conflicts and appearance 

concerns with employee ownership of 

sector funds that invest in entities the 

SEC directly regulates, the Commission 

proposed to amend § 4401.102(c)(1) to 

explicitly prohibit employee ownership 

of certain Financial Industry Sector 

Funds by expanding the scope of 

‘‘entities directly regulated by the 

Commission’’ to include investment 

funds that have a stated policy of 

concentrating their investments in 

entities directly regulated by the 

Commission. 

1. Comments Received 

The Commission received numerous 

comments in favor of the proposal to 

prohibit ownership of Financial 

Industry Sector Funds.5 In general, 

comments in support of this amendment 

focused on the fact that the prohibition 

would mitigate any actual or perceived 

conflicts and appearance concerns and 

would ensure employees of the SEC 

maintain the utmost trust and 

transparency with the public. 

For example, one commenter noted 

that because the SEC regulates the 

industry in which Financial Industry 

Sector Funds predominately invest, an 

SEC employee who invests in these 

funds could be seen as having a 

financial interest in the success of the 

very companies they are tasked with 

regulating, which could potentially lead 

to bias in regulatory decision-making or 

the perception of such bias.6 The 

commenter expressed the view that 

‘‘there is the same threat to 

independence’’ if an SEC employee 

owns ‘‘sector funds that specifically 

deal in entities that are regulated by the 

agency,’’ as that ‘‘has the same financial 

attachment as owning securities in a 

SEC regulated entity.’’ 7

Another commenter called the 

amendment ‘‘an essential step in 

ensuring that employees of the SEC can 

maintain the utmost trust and 

transparency with the public,’’ agreeing 

that the amendment would ‘‘help avoid 

conflicts and appearance concerns with 

employee ownership of sector funds 

that invest in entities the SEC directly 

regulates,’’ and ‘‘mitigate any actual or 

perceived conflicts and appearance 

concerns.’’ 8

Another commenter stated that the 

amendment appropriately brings 

Financial Industry Sector Funds within 

the definition of ‘‘entities directly 

regulated by the Commission’’ to 

account for the high risk of conflict 

posed by Financial Industry Sector 

Funds, noting that the amendment 

‘‘recognizes that Commission employees 

owning financial industry sector funds 

may pose a substantial risk of 

conflicting with Commission work,’’ 

and pointing out that ‘‘Commission 

employees are uniquely situated to 

obtain material nonpublic information 

about the Commission’s activities.’’ 9

The commenter stated that the 

Commission’s regulatory and 

enforcement actions frequently move 

financial markets, so employee trading 

restrictions ‘‘should be effectively 

tailored to limit the opportunity for 

abusing non-public information or the 

risk that Commission staff will face an 

incentive to tilt the Commission’s 

activities in any particular way because 

they hold a financial industry sector 

fund.’’ 10

The Commission received several 

comments opposing the Financial 

Industry Sector Fund prohibition. In 

general, commenters argued that the risk 

of conflict is not so substantial as to 

impact the mission of the agency, that 

the proposal does not mitigate any 

known risk, that the requirement to 

divest should depend on the employee’s 

role at the Commission, and that absent 

actual conflict, ‘‘optics’’ is not an 

appropriate rationale to prohibit 

employee ownership of such funds.11

Commenters also expressed doubt that 

such a prohibition is legally authorized 

and concern over the tax implications of 

required divestiture.12

For example, one commenter stated 

that the proposal does not mitigate any 

known risks and called the 90-day 

divesture requirement outlined in the 

Code of Federal Regulations ‘‘an 

unreasonably short time frame’’ that is 

likely to result in significant tax 

consequences and disrupt the diversity 

of investment portfolios.’’ 13 The 

commenter stated that the amendment 

would set an alarming precedent. The 

commenter claimed that the proposal 

does not explain why employees would 

be required to sell their holdings in such 

a short time frame despite the fact that 

employees have long been permitted to 

hold financial ETFs. The commenter 

further claimed that the risk identified 

in the proposal ‘‘is already somewhat 

mitigated as staff are currently 

prohibited from holding an excessive 

amount of sector ETF holdings. . . .’’ 14

Another commenter echoed similar 

concerns, arguing that the SEC’s 

proposal to ban Financial Industry 

Sector Funds ‘‘isn’t mitigating any 

known risk.’’ 15 The commenter further 

noted that the Commission has already 

taken steps to minimize the risks posed 

by Financial Industry Sector Funds by 

imposing a limit on the quantity of 

sector funds, including those in the 

financial sector, that an employee is 

permitted to own. The commenter 

stated that the proposed ban is 

unnecessary because there has been no 

publicly reported issue linked to SEC 

employees including a small portion of 

Financial Industry Sector funds in their 

portfolios. The commenter described the 

amendments as ‘‘about so-called 

‘optics’ ’’ and stated that optics are not 

an appropriate rationale for an ethics 

rule.16

Another commenter suggested that 

the prohibition on owning Financial 

Industry Sector Funds be more narrowly 

tailored and questioned why the 

Commission applies uniform personal 

trading regulations to employees in 

different divisions and roles. The 

commenter also asked why the trading 

restrictions are applied to spouses. The 

commenter disagreed with being 

‘‘forced to sell a sector ETF that 

numerous other Chairs and Ethics 

Offices didn’t find problematic,’’ and 

found it puzzling that they would have 

to divest and be faced with the choice 

of either hiring an accountant to manage 


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Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 / Rules and Regulations 14565 

17 Id. 

18See 5 CFR 2635.403. 

19See OGE Legal Advisory LA–11–07 (Oct. 31, 

2011). 

20See OGE Legal Advisory LA–20–02, att. 2 (Mar. 

3, 2020). 

21See, e.g., 5 CFR 3101.108(a) (prohibiting 

employees of the Office of the Comptroller of the 

Currency from investing in collective investment 

funds that have a stated policy of investing in the 

financial services or banking industries); 5 CFR 

3201.103(a) and (b) (prohibiting employees of the 

Federal Deposit Insurance Corporation from 

investing in collective investment funds if thirty 

percent or more of the underlying holdings are 

banks or related assets); 5 CFR 6801.103(a) and (b) 

(prohibiting employees of the Federal Reserve 

Board from investing in depository institutions and 

government securities dealers, including through 

mutual funds with a stated policy of investing in 

the financial services industry); 5 CFR 

9401.106(a)(2) (prohibiting employees of the 

Consumer Financial Protection Bureau from 

investing in collective investment funds that have 

a stated policy of investing in the financial services 

or banking industries). 

22See 17 CFR 200.1. 

23 5 CFR 4401.102(c)(1). 

24See 26 U.S.C. 1043; 5 CFR 2634.1004. 

25See 5 CFR 2634.1005. 

26See, e.g., Letter from Anonymous, dated Mar. 

30, 2023 (‘‘Anonymous 3/30 Letter 1’’), available at 

Continued 

a potential taxable gain or pay such a 

tax immediately.17

2. Final Rule 

The Commission has carefully 

considered the comments received and 

is adopting § 4401.102(c)(1) as 

proposed. The President, through 

Executive Order 12,674, as modified, 

and OGE through 5 CFR 2635.105, have 

authorized agencies to prohibit 

employees, their spouses and minor 

children from holding certain 

investments based on the agency’s 

determination that the acquisition or 

holding of such financial interests 

would cause a reasonable person to 

question the impartiality and objectivity 

with which agency programs are 

administered.18 Regulatory prohibited 

holdings restrictions must be 

established through an agency’s 

supplemental ethics regulation, issued 

jointly by the agency and OGE.19 To 

date, over twenty other agencies, with 

the concurrence of OGE, have 

established prohibited holdings 

regulations for their employees.20 Many 

of these supplemental agency ethics 

regulations—including those 

established by agencies with regulatory 

oversight responsibilities over portions 

of the financial services industry— 

prohibit, restrict, or limit employee 

ownership of collective investment 

funds with stated policies or practices of 

investing in the sector or industry 

overseen or regulated by the issuing 

agency.21

As described in the Proposing 

Release, the Commission is responsible 

for regulating the trading of securities, 

investigating securities fraud and 

manipulations, requiring registration of 

brokers, dealers, and investment 

advisers, and supervising the activities 

of entities it regulates for compliance 

with the securities laws.22 To ensure 

that the public can have the utmost trust 

in these activities, the Commission has 

long prevented employees from 

purchasing or owning any ‘‘security or 

other financial interest in an entity 

directly regulated by the 

Commission.’’ 23 In this regard, the 

Supplemental Standards help promote 

public confidence that staff are not 

benefiting personally from their 

positions as SEC employees with 

respect to non-public information about 

securities and securities markets. The 

Supplemental Standards also mitigate 

the risk of real or perceived conflicts of 

interest. 

As explained in the Proposing 

Release, the Commission proposed to 

expand the prohibition to Financial 

Industry Sector Funds to avoid conflicts 

and appearance concerns with 

employee ownership of sector funds 

that invest in entities the SEC directly 

regulates such as registered broker 

dealers and investment advisers. Doing 

so will assure the public that 

Commission employees are not profiting 

from the SEC’s unique access to material 

information. The final amendment is 

appropriately tailored to this risk by 

focusing on only investments in the 

financial services industry that are 

regulated by the Commission. 

Moreover, the Commission finds it 

appropriate to extend the current 

prohibited holdings regulation to 

prevent the incongruous result under 

the current rules that an SEC employee 

is prohibited from owning a single share 

of a directly regulated entity but could 

theoretically hold an unlimited value in 

a Financial Industry Sector Fund that 

concentrates holdings in directly 

regulated entities. Both cases present 

similar conflict of interest concerns. The 

final amendment prohibiting employee 

ownership of Financial Industry Sector 

Funds therefore underscores the 

Commission’s commitment to 

upholding the public’s trust to oversee 

the U.S. capital markets and to taking 

appropriate steps to eliminate potential 

conflicts of interest, actual or perceived. 

Finally, as noted in the Proposing 

Release, Congress authorized OGE and 

the Internal Revenue Service to defer 

capital gains taxes that arise because of 

the divestiture of property when it is 

reasonably necessary to comply with 

Federal conflict of interest statutes, 

regulations, rules, or Executive orders, 

including the Supplemental 

Standards.24 As a result, members and 

employees, including spouses and 

minor children, required to divest 

Financial Industry Sector Funds may be 

eligible for a Certificate of Divestiture 

(‘‘CD’’) from OGE to defer taxable gain 

consequences, as is the case for 

employees required to divest prohibited 

holdings under the current rule. 

Affected employees may contact the 

SEC’s Office of the Ethics Counsel 

(‘‘OEC’’) staff for advice and counsel on 

the CD process.25

B. Elimination of Pre-Clearance, 

Reporting, and Holding Period 

Requirements for Certain ‘‘Permissible 

Diversified Investment Funds’’ 

As discussed in the Proposing 

Release, the SEC’s existing 

supplemental regulations require 

employees to pre-clear all securities 

transactions and to confirm securities 

transactions by reporting them to the 

SEC within five business days after 

receipt of confirmation of the 

transaction. This current requirement 

applies to all securities not explicitly 

exempted, including diversified mutual 

funds and other diversified investment 

products that pose little or no conflicts 

of interest for members and employees. 

These diversified investment products, 

referred to herein as ‘‘Permissible 

Diversified Investment Funds,’’ include 

diversified registered investment 

companies (including open and closedend mutual funds and unit investment 

trusts), money market funds, as defined 

in 17 CFR 270.2a–7 (Investment 

Company Act Rule 2a–7), 529 plans, as 

defined in the Internal Revenue Code, 

26 U.S.C. 529, and diversified pooled 

investment funds held in employee 

benefit plans or pension plans. 

In order to shift agency ethics 

compliance resources to better focus on 

relatively higher-risk trading and 

reporting of equities and the detection 

of any prohibited holdings, the 

Commission proposed amending 5 CFR 

4401 by adding a new paragraph 

(g)(1)(vi) to eliminate the pre-clearance, 

reporting, and holding requirements for 

Permissible Diversified Investment 

Funds and to modify existing 

paragraphs (c)(2) and (6), and 

paragraphs (e)(2) and (3), to reflect the 

changes regarding such funds. 

1. Comments Received 

The Commission received several 

comment letters in support of the 

proposed amendment from both 

employees and the general public.26 For 


ddrumheller on DSK120RN23PROD with RULES1
14566 Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 / Rules and Regulations 

https://www.sec.gov/comments/s7-02-23/s70223- 

331590.htm; Letter from Anonymous, dated Mar. 

31, 2023 (‘‘Anonymous 3/31 Letter 1’’), available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

332200.htm; UNLV Letter. 27See Letter from Anonymous, dated Mar. 7, 2023 

(‘‘Anonymous 3/7 Letter’’). 

28See Cornell Letter. 

29See, e.g., Letter from Anonymous, dated Mar. 

31, 2023 (‘‘Anonymous 3/31 Letter 2’’), available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

333047.htm; Letter from Anonymous, dated Mar. 8, 

2023 (‘‘Anonymous 3/8 Letter 1’’ available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

327139.htm. 

30See Gillmore Letter. 

31 Id. 32See 5 CFR 2640.201(a), (d). 

example, one commenter agreed that the 

‘‘proposal to remove the pre-clearance 

requirements for diversified funds is 

welcome, and is correct,’’ because 

‘‘these funds are so diversified that there 

is no reasonable concern that ownership 

of these funds could pose a conflict of 

interest.’’ 27

Another commenter supported the 

change because the amendment 

promotes the efficient allocation of 

resources and because ‘‘these funds 

pose minimal conflict of interest risks,’’ 

and ‘‘the elimination of requirements 

. . . relieves the unnecessary burden of 

the SEC’s members and employees.’’ 28

The Commission received a number 

of comment letters opposing the 

amendments removing requirements as 

to Permissible Diversified Investment 

Funds.29 For example, one commenter 

was concerned about the elimination of 

pre-clearance, reporting, and holding 

requirements for Permissible Diversified 

Investment Funds because ‘‘the current 

pre-clearance and reporting 

requirements serve a crucial role in 

maintaining transparency and 

accountability. Removing these 

requirements could create a perception 

of decreased accountability and increase 

the potential for conflicts of interest to 

arise.’’ 30 The commenter expressed 

concern ‘‘about the potential impact on 

individual investors who rely on the 

SEC’s oversight to protect their 

investments,’’ stating that the proposed 

amendments ‘‘could make it more 

difficult for individual investors to 

assess whether SEC employees are 

acting in their best interests,’’ and urged 

the SEC to maintain ‘‘rigorous reporting 

requirements to ensure that the public 

can trust that the agency is acting in 

their best interests.’’ 31

2. Final Rule 

The Commission has carefully 

considered the comments received and 

is adopting § 4401.102(g)(1)(vi) as 

proposed. The SEC’s existing 

supplemental regulations require 

employees to pre-clear all securities 

transactions and to confirm securities 

transactions by reporting them to the 

SEC within five business days after 

receipt of confirmation of the 

transaction. This current requirement 

applies to all securities not explicitly 

exempted, including diversified mutual 

funds and other diversified investment 

products that pose minimal risk or no 

conflicts of interest for members and 

employees. 

To the extent that such funds qualify 

as diversified mutual funds or 

diversified unit investment trusts in 

accordance with 5 CFR 2640.201(a), 

OGE has already provided broad 

exemptions from the criminal financial 

conflict of interest law, 18 U.S.C. 208, 

that permit employees to participate in 

particular matters that could affect the 

underlying holdings of such funds or 

the funds themselves.32 Other 

Permissible Diversified Investment 

Funds may pose minimal risk or no 

conflicts of interest concerns, such as 

diversified pre-paid college tuition 

plans authorized by States under section 

529 of the Internal Revenue Code and 

diversified collective investment trusts 

that are commonly held in defined 

contribution retirement plans. The 

Commission does not believe that 

eliminating the pre-clearance and 

reporting requirements as to Permissible 

Diversified Investment Funds will lead 

to an increase in the potential for 

conflicts of interest, nor does the 

Commission believe that it will lead to 

a reasonable perception of a decrease in 

ethical accountability for SEC 

employees. As discussed above, these 

Permissible Diversified Investment 

Funds are either exempt from criminal 

financial conflict of interest laws, or 

pose minimal risk or no conflicts of 

interest concerns. As explained in the 

Proposing Release, the SEC’s current 

pre-clearance and reporting 

requirements, as applied to Permissible 

Diversified Investment Funds, have 

proven disproportionately burdensome 

for both SEC employees and the SEC’s 

Office of the Ethics Counsel (‘‘OEC’’) 

staff, given the minimal risks such 

assets pose for most SEC employees. 

The current policy of requiring preclearance and reporting of Permissible 

Diversified Investment Funds 

contributes little to employee 

accountability or mitigation of ethics 

risk because they pose minimal conflicts 

of interest concerns. In order to shift 

agency ethics compliance resources to 

better focus on relatively higher-risk 

trading and reporting of equities and the 

detection of any prohibited holdings, 

the Commission is modifying its rules to 

reduce the emphasis on reporting and 

pre-clearing of Permissible Diversified 

Investment Funds, assets that pose 

substantially lower ethics risk, while 

maintaining the rigorous pre-clearance 

and reporting requirements as to assets 

that do pose the most significant 

potential for conflicts of interest. This 

risk-based approach will appropriately 

tailor compliance activities to address 

trading and holdings that pose the most 

significant potential for conflicts of 

interest. These changes will not apply to 

any sector funds, including Financial 

Industry Sector Funds, as described 

above, or to any other entities directly 

regulated by the Commission, or to any 

private equity, venture capital, hedge 

fund, or similar pooled investment 

instruments. 

C. Automated Reporting of Purchases, 

Sales, Acquisitions, and Dispositions of 

Securities 

Currently, under the Supplemental 

Standards members and employees are 

required to report transactions of 

securities to the Commission within five 

business days after receipt of 

confirmation of the transaction so that 

ethics officials can reconcile precleared 

trades in accordance with 5 CFR 

4401.102(f). Section 4401.102(f) also 

requires employees to submit duplicate 

statements for every account containing 

reportable securities to the Designated 

Agency Ethics Official (‘‘DAEO’’) 

according to such procedures required 

by the DAEO. These requirements 

constitute additional supplemental 

confidential reporting requirements 

authorized by OGE pursuant to the 

Ethics in Government Act of 1978 

(‘‘EIGA’’) (codified at 5 U.S.C. 13109), 

which permits OGE (and agencies, 

subject to OGE approval) to impose 

additional confidential financial 

disclosure requirements on officers and 

employees of the executive branch. 

Reporting is currently conducted by 

members and employees through the 

Commission’s Personal Trading 

Compliance System and relies on 

employees to manually confirm and also 

provide evidence of transactions 

through submission of brokerage or 

other financial institution account 

statements. 

The Commission proposed to 

automate the existing reporting process 

by amending 5 CFR 4401.102(f) to 

authorize OEC to collect covered 

securities transactions and holdings 

data directly from financial institutions 

through a third-party automated 

electronic system to satisfy the 

requirements to report securities 

holdings and transaction information. 

The Commission also proposed to revise 

transaction reporting deadlines to 


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Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 / Rules and Regulations 14567 

33See, e.g., UNLV Letter; Anonymous 3/7 Letter; 

Letter from Anonymous, dated Mar. 8, 2023 

(‘‘Anonymous 3/8 Letter 2’’), available at https://

www.sec.gov/comments/s7-02-23/s70223- 

327142.htm. 

34See UNLV Letter. 

35 Id. 

36 Id. 

37See Freeland Letter. 

38 Id. 

39See Fox Letter. 

40See, e.g., Letter from Anonymous, dated Feb. 

26, 2023 (‘‘Anonymous 2/26 Letter’’); Letter from 

Anonymous, dated Mar. 20, 2023 (‘‘Anonymous 3/ 

20 Letter’’). 

41See Anonymous 2/26 Letter. 

42See Anonymous 3/20 Letter. 

43See, e.g, Letter from Vinyard Cooke, dated Mar. 

8, 2023 (‘‘Cooke Letter’’); Letter from Eileen Parlow, 

dated Mar. 9, 2023 (‘‘Parlow Letter’’); Letter from 

Anonymous, dated Mar. 9, 2023 (‘‘Anonymous 3/ 

9 Letter 2’’), available at https://www.sec.gov/ 

comments/s7-02-23/s70223-327142.htm; Letter 

from Anonymous, dated Mar. 9, 2023 (‘‘Anonymous 

3/9 Letter 3’’), available at https://www.sec.gov/ 

comments/s7-02-23/s70223-327178.htm; Letter 

from David Karasik, dated Mar. 10, 2023 (‘‘Karasik 

Letter’’); Letter from Wil Sias, dated Mar. 31, 2023 

(‘‘Sias Letter’’). 

44See Anonymous 2/26 Letter. 

45See, e.g., Letter from Anonymous, dated Mar. 

27, 2023 (‘‘Anonymous 3/27 Letter 1’’), available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

330621.htm; Letter from Anonymous dated Mar. 31, 

2023 (‘‘Anonymous 3/31 Letter 3’’), available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

20163072-333034.pdf. 

46See Anonymous 3/30 Letter. 

47See, e.g., Letter from Anonymous dated Mar. 

10, 2023 (‘‘Anonymous 3/10 Letter 3’’), available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

20161916-330747.pdf. 

48See Letter from Anonymous, dated Mar. 6, 2023 

(‘‘Anonymous 3/6 Letter’’). 

49 Id. 

50See, e.g., Letter from Anonymous, dated Mar. 

3, 2023 (‘‘Anonymous 3/3 Letter’’). 

provide necessary flexibility to adjust 

for securities transactions and holdings 

data obtained from financial institutions 

through a third-party automated 

compliance system by modifying the 

existing five business day reporting 

requirement to require all employees to 

report transactions in the manner, and 

according to the schedule, required by 

the DAEO. 

1. Comments Received 

The proposal to authorize the SEC to 

collect reportable transactions and 

holdings via a third-party automated 

system elicited numerous responses 

from commenters. 

The Commission received several 

comments in support of the proposal.33

For example, one commenter expressed 

belief ‘‘that this change would increase 

efficiency and reduce the risk of human 

error,’’ noting that the proposed 

amendment ‘‘would eliminate the need 

for employees to manually submit 

brokerage or financial statements and 

instead create a system built on 

automated compliance.’’ 34 The 

commenter expressed appreciation that 

the proposed rule permits an employee 

to comply through other means if they 

cannot obtain consent from their 

brokerage or financial institution, 

ensuring ‘‘all employees can comply 

with the rule regardless of their bank or 

brokerage.’’ 35 The commenter stated 

that the transition ‘‘away from manual 

reporting reflects the widespread, 

modern trend toward efficiency through 

technology,’’ and also stated that the 

change ‘‘would greatly reduce the 

burden on Commission employees and 

compliance staff, increase the accuracy 

and completeness of data, and facilitate 

compliance.’’ 36

Another commenter stated that the 

proposal ‘‘is definitely an enhancement 

compared to manual reporting of 

securities transactions,’’ as ‘‘submitting 

manually has the downside of being a 

burden and is vulnerable to human 

error.’’ 37 The commenter expressed the 

view that ‘‘these benefits are worth the 

change to require automated 

reporting. . . .’’ 38

Yet another commenter supported the 

amendment, noting that ‘‘[i]t just 

eliminates a report that can be done 

either incorrectly or fraudulently,’’ and 

expressed appreciation for ‘‘the 

concessions for the people that would 

experience undue hardship,’’ which 

‘‘make it so much easier to adopt the 

proposed changes.’’ 39

The Commission received numerous 

comments opposing an automated 

compliance system. In general, 

commenters questioned the 

Commission’s legal authority to 

implement such a system, expressed 

concerns over privacy and security, and 

noted the burden it would place on 

employees, their spouses, and their 

minor children. 

i. Legal Authority 

The Commission received several 

comments arguing that the SEC lacks 

the legal authority to implement a direct 

data feed reporting requirement for 

members and employees, as well as 

their spouses and minor children.40

For example, one commenter argued 

that the proposal is ‘‘contrary to the 

law,’’ asserting that 5 U.S.C. 13109 

‘‘simply does not authorize’’ the 

proposed collection of covered 

securities transactions and holdings 

data from financial institutions through 

a third-party automated compliance 

system.41 Additionally, the commenter 

asserted that the EIGA does not cover 

family members or children of staff. 

Another commenter stated that ‘‘[t]he 

proposed rule seeks to require me to 

give an undisclosed third-party direct 

access to my financial accounts,’’ 

arguing that neither 5 U.S.C. 13109 nor 

5 CFR 2634.103 ‘‘appears to give the 

SEC the broad reach it seeks.’’ 42

ii. Privacy and Security 

Many commenters expressed 

concerns regarding cyber security and 

privacy issues such as the collection of 

sensitive Personally Identifiable 

Information (PII), the lack of detail in 

the proposal regarding the information 

security requirements of any third-party 

system used, and the potential for 

breaches of a third-party automated 

system that could result in misuse of 

sensitive financial information of SEC 

employees and their immediate family 

members.43

For example, one commenter 

provided examples of prior government 

data breaches and argued that under the 

proposed rule, staff would lack any 

mechanism to safeguard their 

confidential information and that the 

financial data of Commission employees 

would potentially be susceptible to 

cybersecurity breaches.44 Other 

commenters were concerned that a 

third-party system would likely require 

employees to provide account numbers, 

or other sensitive PII, which employees 

are currently permitted to redact during 

the manual process of uploading 

statements.45 Commenters also stated 

that a third-party provider should not 

have ‘‘unfettered access’’ to their 

information at a brokerage or financial 

institution.46 Several commenters noted 

that the Proposing Release did not 

provide any details concerning the 

cybersecurity requirements or the 

measures that would be taken to protect 

sensitive financial information of 

employees and their immediate family 

members.47

Another commenter questioned the 

necessity of such an automated system 

when employees are already required to 

pre-clear and report securities 

transactions and ‘‘also annually submit 

(with optional account number 

redaction) statements that contain all of 

our securities transactions for ourselves 

and covered family members over the 

preceding years.’’ 48 The commenter 

stated that the Commission is creating 

an unnecessary cybersecurity risk and 

expressed the belief that resources 

‘‘should be spent on bad actors and 

providing SEC staff the necessary 

resources to supervise the securities 

industry, not on this endeavor.’’ 49

Some commenters expressed 

skepticism in the ability of a contractor 

to appropriately safeguard sensitive 

financial information,50 while others 


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14568 Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 / Rules and Regulations 

51See, e.g., Letter from Rob Redford, dated Feb. 

23, 2023 (‘‘Redford Letter’’). 

52See, e.g., Letter from Anonymous dated Mar. 

15, 2023 (‘‘Anonymous 3/15 Letter’’); Letter from 

Anonymous dated Mar. 24, 2023 (‘‘Anonymous 3/ 

24 Letter 1’’), available at https://www.sec.gov/ 

comments/s7-02-23/s70223-330343.htm; Letter 

from Anonymous SEC Employee, dated Mar. 31, 

2023 (‘‘Anonymous 3/31 Letter 4’’), available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

333023.htm; Letter from Anonymous dated Mar. 28, 

2023 (‘‘Anonymous 3/28 Letter 1’’), available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

330733.htm. 

53See Anonymous 3/10 Letter 3. 

54 Id. 

55 Id. 

56See Letter from Anonymous dated Mar. 8, 2023 

(‘‘Anonymous 3/8 Letter 3’’), available at https://

www.sec.gov/comments/s7-02-23/s70223- 

327140.htm. 

57See, e.g., Anonymous 3/24 Letter 1. 

58See Letter from Anonymous, dated Mar. 28, 

2023 (‘‘Anonymous 3/28 Letter 2’’), available at 

https://www.sec.gov/comments/s7-02-23/s70223- 

20161905-330731.pdf. 

59 Id. 

60See Anonymous 3/10 Letter 3. 

61 Id. 

62See Anonymous 3/24 Letter 1. 

63See, e.g., Letter from Ryan Luther, dated Mar. 

8, 2023 (‘‘Luther Letter’’). 

stated the proposal with regard to a 

third-party automated compliance 

system was unclear and/or lacked 

sufficient detail,51 criticizing the 

proposal for lacking information about 

cybersecurity or third-party vendor 

qualifications.52

For example, one commenter asserted 

that the Proposing Release did not 

adequately address how the 

Commission would ensure the security 

of a third-party system.53 The 

commenter stated that given ‘‘the highly 

sensitive nature of the data that would 

be collected by the third-party system, 

the need for effective data-security 

measures to be taken to protect such 

information cannot be overstated.’’ 54

The commenter emphasized the 

importance of cybersecurity by pointing 

out previous cybersecurity incidents 

relating to sensitive personal 

information of Federal government 

employees.55

As another example, one commenter 

expressed concerns about the potential 

security vulnerability of a third-party 

system in light of past incidents 

experienced by Federal agencies, Wall 

Street institutions, and service 

providers.56 The commenter stated that 

the proposed rule created an avoidable 

vulnerability. 

iii. Burden 

Commenters also expressed concerns 

over applicable policies when their 

brokerage firm(s) or other financial 

institution(s) cannot or will not transmit 

transaction and account information 

through a third-party trading 

compliance system. In particular, 

commenters asked whether employees, 

their spouses, or their minor children 

would have to close accounts held at 

those nonparticipating institutions.57

For example, one commenter noted 

the possibility that certain firms, such as 

retirement plans or small brokers, may 

have trouble providing the data for 

employees to comply with this 

requirement.58 The commenter warned 

that without a ‘‘method for people to get 

an exemption and submit paper copies 

of their statements, the rule is going to 

effectively be a prohibition on 

employees’ use of those firms.’’ 59

Another commenter expressed the 

view that it is unreasonable to expect 

Commission employees to ensure that 

any broker-dealer or other relevant 

financial institution takes the steps 

necessary to provide transaction and 

holdings data to OEC.60 The commenter 

stated that Commission employees do 

not possess the leverage to ensure 

financial institutions provide the 

required data directly to the 

Commission through an automated 

system and noted that the Commission’s 

proposal does not explain why any 

broker-dealer or other financial 

institution would choose to participate 

if it is not required to do so under the 

regulation.61

Another commenter asked what the 

policy would be if a brokerage firm does 

not wish to transfer data directly to the 

SEC, stating that employees ‘‘should not 

be forced to close the accounts. Not all 

brokers may have ability to provide data 

to [a] 3rd party on periodic basis.’’ 62

2. Final Rule 

The Commission has carefully 

considered the comments received. In 

consideration of, and to alleviate, the 

concerns numerous commenters 

expressed regarding cybersecurity and 

privacy, the Commission has 

determined not to adopt the proposal 

that would have authorized mandatory 

use of an automated third-party 

compliance system. In a change from 

the proposal, the Commission’s final 

rules (1) authorize the use of either an 

internal or third-party automated 

compliance system, and (2) permit 

rather than require employees to use an 

automated compliance system to 

comply with the reporting requirements 

of paragraphs 5 CFR 4401.102(f)(1) and 

(f)(2), which require employees to report 

and certify securities holdings, 

transactions, and duplicate statements 

for accounts holding covered securities. 

In light of these modifications, the 

Commission is not adopting the 

proposed amendments to the 

transaction reporting deadlines and 

finds it necessary to maintain the 

existing five-day transaction 

certification requirement in paragraph 

4401.102(f)(2), and the existing 

requirement in paragraph 

4401.102(f)(1)(ii) to submit duplicate 

account statements, for employees who 

elect to manually report information to 

the DAEO. 

Specifically, the Commission is not 

adopting the following proposed 

paragraph from proposed section 

4401.102(f)(4): ‘‘The DAEO may require 

members and employees to comply with 

the reporting requirements in this 

section by authorizing their brokerage or 

financial institution(s) to provide 

automatic transmission of brokerage 

statements and transaction information 

through a third-party automated 

compliance system. The DAEO shall 

permit a member or employee to 

provide the required information 

through another means if they cannot 

obtain consent from their brokerage or 

financial institution to use the thirdparty automated compliance system.’’ In 

place of this language, the Commission 

is adopting the following new paragraph 

4401.102(f)(4): ‘‘A member or employee 

may comply with the reporting 

requirements set forth in paragraphs 

(f)(1) and (f)(2) of this section by 

authorizing the transmission of account 

statements, holdings and transaction 

information from an employee’s 

brokerage or financial institution(s) to 

the DAEO through a Commission 

approved, automated internal or thirdparty compliance system.’’ 

These modifications will allow the 

Commission to continue to improve the 

efficiency, accuracy and effectiveness of 

its compliance program by providing 

authority for employees to utilize either 

an internal system, as some commenters 

suggested,63 or a third-party system, to 

automate existing reporting 

requirements in accordance with the 

required security and privacy protocols 

discussed below. These modifications 

will also allow the Commission to gain 

additional experience and data 

regarding the benefits and costs of an 

automated compliance system without 

compelling employees who have 

concerns about security and privacy to 

utilize such a system. 

i. Legal Authority 

a. Collection of Securities Information 

The Commission has consulted with 

OGE regarding the SEC’s authority to 

have members and employees comply 

with the reporting requirements in 5 

CFR 4401.102(f) through an internal or 


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Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 / Rules and Regulations 14569 

64 5 U.S.C. 13102(a); 13122(a) and (b). 

65 5 U.S.C. 13109 (‘‘Each supervising ethics office 

may require officers and employees under its 

jurisdiction (including special Government 

employees as defined in section 202 of title 18) to 

file confidential financial disclosure reports, in 

such form as the supervising ethics office may 

prescribe. The information required to be reported 

under this subsection by the officers and employees 

of any department or agency shall be set forth in 

rules or regulations prescribed by the supervising 

ethics office, and may be less extensive than 

otherwise required by this subchapter, or more 

extensive when determined by the supervising 

ethics office to be necessary and appropriate in light 

of sections 202 through 209 of title 18, regulations 

promulgated under those sections, or the authorized 

activities of such officers or employees.’’). 

66 5 CFR 2634.601. 

67 5 CFR 2634.103 (‘‘The regulation in this part is 

intended to provide uniformity for executive branch 

financial disclosure systems. However, an agency 

may, subject to the prior written approval of the 

Office of Government Ethics (OGE), issue 

supplemental regulations implementing this part, if 

necessary to address special or unique agency 

circumstances. Such regulations: (1) Must be 

consistent with the Act, the STOCK Act, Executive 

Orders 12674 and 12731, and this part; and (2) Must 

not impose additional reporting requirements on 

either public or confidential filers, unless 

specifically authorized by the Office of Government 

Ethics as supplemental confidential reporting.’’); 5 

CFR 2634.905. 

68See 5 CFR 2634.601(c). See also § 2634.901(b). 

69Relevant exceptions include reporting 

‘‘[s]ecurities transactions effected by a member’s or 

employee’s spouse on behalf of an entity or person 

other than the member or employee, the member’s 

or employee’s spouse, the member’s or employee’s 

unemancipated minor child, or any person for 

whom the member or employee serves as legal 

guardian’’ and ‘‘[s]ecurities holdings and 

transactions of a member’s or employee’s legally 

separated spouse living apart from the member or 

employee.’’ 5 CFR 4401.102(g)(1) and (2). 

70See, e.g., 5 CFR 2634.907(a), (h) (requiring 

confidential reporting of the assets, income, 

liabilities, gifts, and reimbursements received by a 

spouse or dependent child); OGE Inf. Adv. Op. 04 

x 16 (2004); OGE Inf. Adv. Op. 96 x 3 (1996); OGE 

Inf. Adv. Op. 93 x 33 (1993). 

71See, e.g., Anonymous 3/27 Letter 1. 

72 5 U.S.C. 13109(a)(2); 5 CFR 2634.901(d). 

73Concepcion v. F.B.I., 606 F. Supp. 2d 14, 33 

(D.D.C. 2009) (quoting 5 CFR 2634.901(d)). 

third-party automated compliance 

system. OGE has advised that an 

automated method of collection is 

consistent with the EIGA at 5 U.S.C. 

13109, which permits OGE (and 

agencies, subject to OGE approval) to 

impose additional confidential financial 

disclosure requirements on officers and 

employees of the executive branch. As 

explained above, in response to 

comments received, the Commission 

will implement the automated reporting 

system on a voluntary basis. 

The EIGA places responsibility on 

OGE as the ‘‘supervising ethics office’’ 

to interpret the EIGA for the executive 

branch.64 The EIGA authorizes OGE to 

‘‘require officers and employees under 

its jurisdiction (including special 

Government employees as defined in 

section 202 of title 18) to file 

confidential financial disclosure reports, 

in such form as the supervising ethics 

office may prescribe.’’ 65 OGE has 

established regulations implementing 

this authority at 5 CFR 2634 subpart I. 

Through regulation, OGE has 

established a baseline set of 

standardized confidential disclosure 

requirements applicable to all executive 

branch agencies. These include use of a 

standard form (OGE Form 450) and 

uniform requirements concerning 

information to be reported on the 

standard form.66

OGE’s regulations also permit 

agencies to establish alternative and 

supplemental confidential disclosures, 

through separate regulations jointly 

issued with OGE, that go beyond the 

requirements imposed under the 

executive-branch wide regulations.67

Pursuant to OGE regulations, an agency 

may require its employees to file 

additional confidential financial 

disclosures if necessary because of 

special or unique agency 

circumstances.68 The existing 

Supplemental Standards, promulgated 

with OGE in 2010, already establish 

supplemental reporting requirements for 

members and employees of the 

Commission. These regulations already 

establish the content, timing, and 

method of reporting information to OEC. 

As noted above, the primary change that 

the Commission is undertaking is to 

permit employees and members to 

transmit to OEC through an approved, 

automated internal or third-party 

compliance system information already 

required to be disclosed. OGE has 

determined that collecting securities 

transaction data directly from an 

employee’s broker, who acts as the 

employee’s agent, is consistent with 5 

U.S.C. 13109. 

The Commission also received 

comments concerning the collection of 

information related to an employee’s 

spouse and unemancipated minor 

children. As set out in the current 

existing Supplemental Standards, 

subject to appropriate exceptions, 

employees are already required to report 

securities transactions and duplicate 

account information for the accounts of 

a spouse or unemancipated minor 

pursuant to 5 CFR 4401.102(f).69 This 

information collection is authorized 

under 5 U.S.C. 13109 and OGE’s 

implementing regulations. As a result, 

OGE (and agencies through jointly 

issued supplemental regulation) have 

long required disclosure of the assets of 

a spouse or dependent child to the 

extent appropriate to avoid conflicts of 

interest.70 The supplemental 

confidential financial disclosures 

required by the SEC’s supplemental 

ethics regulation currently apply to 

spouses and minor children, and the 

final regulation as adopted will 

continue to require disclosure of that 

information. 

b. Collection of Account Identifying 

Information 

The Commission received several 

comments concerning the authority of 

the SEC to collect account information 

such as account numbers and the 

protection of that information once 

collected.71 To effectuate the collection 

of transaction information through an 

automated system, a limited amount of 

biographical and account identifying 

information, such as account numbers, 

account owners, and the relationship of 

the account owner to the employee (if 

the account owner is not the employee) 

is required to be collected. This 

information is necessary to identify the 

appropriate account and, similar to the 

manual filing of duplicate account 

statements, will help to ensure the 

authenticity of the transaction data 

collected. 

While this information must be 

collected for members and employees to 

voluntarily enroll in the system, the 

Commission notes that all information 

collected by the Commission pursuant 

to 5 CFR 4401 is subject to the 

confidentiality restrictions on release set 

out in the EIGA (codified at 5 U.S.C. 

13109), and the Privacy Act, 5 U.S.C. 

552a. First, the Commission notes that 

the information collected pursuant to 

§ 4401.102(f) is subject 5 U.S.C. 13109 

and to the Privacy Act of 1974 (5 U.S.C. 

552a). Section 13109(a)(2) provides that 

reports filed pursuant to section 

13109(a)(1) ‘‘shall be confidential and 

shall not be disclosed to the public.’’ 72

‘‘Section 107(a) [now 13109(a)] leaves 

no discretion on this issue with the 

agencies’’ and thus confidential ‘‘reports 

and the information which they contain 

are, accordingly, exempt from being 

released to the public under [the 

Freedom of Information Act].’’ 73

Confidential financial disclosure reports 

and the information contained in them 

are also subject to the Privacy Act of 

1974 (5 U.S.C. 552a), which provides 

that information maintained by an 

agency about an individual may not be 

disclosed except for under very limited 

circumstances. OGE’s government-wide 

Privacy Act system of records, OGE/ 

GOVT–2, therefore prohibits disclosure 

of confidential financial disclosure 

information—including information 

received ‘‘by a designated person such 

as a[n] . . . Attorney accountant, [or] 


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74OGE/GOVT–2, 84 FR 47301 (2019). 

75 Id. 

banker . . .’’—except under established 

routine uses set out in the system of 

records or as per written consent by the 

employee.74 Moreover, OGE/GOVT–2 

requires that all electronic confidential 

financial disclosure records be 

‘‘protected from unauthorized access 

through password identification 

procedures, limited access, firewalls, 

and other system-based protection 

methods.’’ 75 It should also be noted that 

information that is not necessary to 

authenticate transaction information 

will not be required to be disclosed by 

any member or employee. Finally, this 

final rule does not require any member 

or employee to use the Commission 

approved automated trading compliance 

system. 

ii. Privacy and Security 

The Commission acknowledges 

commenters’ concerns with respect to 

security risks surrounding an automated 

third-party compliance system. As 

noted above, use of an automated 

trading compliance system will be 

voluntary, and any information 

collected is subject to the confidentiality 

restrictions on release set out in 5 U.S.C. 

13109, and the Privacy Act, 5 U.S.C. 

552a. The system itself must comport 

with all applicable privacy and 

cybersecurity standards including, but 

not limited to, the Federal Information 

Security Management Act (‘‘FISMA’’). 

Consistent with those laws, SEC 

employees, ethics officials, and any 

third-party contractor will be limited in 

the information that they can access, 

and account numbers will be accessible 

to only those within the system who 

have appropriately established rolebased permissions. Accordingly, the 

Commission will take steps to ensure 

that such information is not accessible 

to any person other than as necessary 

and appropriate to carry out the 

functions and purposes of an automated 

system, to ensure compliance with the 

ethics rules and regulations that apply 

to members and employees, or as 

permitted by the Privacy Act, OGE/ 

GOVT–2, and other applicable rules and 

regulations. 

While the technical requirements of 

any automated compliance system are 

yet to be determined, establishment of 

the system will need to follow various 

procedural steps and authorization 

processes, such as the Federal 

Acquisition Regulation procedural 

requirements and the FISMA Authority 

to Operate (‘‘ATO’’) security 

authorization processes. 

Implementation of a third-party 

compliance system will depend on the 

system and the third-party vendor 

meeting rigorous authorization, privacy, 

and security protocols to comply with 

multiple Federal Government and SEC 

standards, including but not limited to 

data encryption requirements. Further, 

SEC IT systems must adhere to strict 

FISMA requirements and SEC 

Information Security and Privacy 

Controls, which are based on the 

controls outlined in NIST 800–53 under 

its Risk Management Framework. In 

addition, depending on system 

architecture, the system data provider 

may be required to meet the standards 

of the Federal Risk and Authorization 

Management Program (‘‘FedRAMP’’). A 

FedRAMP authorization is based on the 

same NIST 800–53 controls and yet is 

an even more rigorous process due to its 

standards regulating and monitoring the 

cybersecurity of cloud services. 

FedRAMP is a government-wide 

program that provides a standardized 

approach to security assessment, 

authorization, and continuous 

monitoring for cloud products and 

services. The FedRAMP certification 

process involves a comprehensive 

assessment of the system’s security 

controls, which includes vulnerability 

scans and penetration testing. Once 

certified, a system is continuously 

monitored and audited regularly to 

ensure that it remains in compliance 

with FedRAMP’s stringent security 

standards. 

Information security is a critical 

prerequisite for a third-party automated 

compliance system. Throughout any 

future acquisition process, privacy 

controls and information security will 

be an essential factor in determining 

whether the Commission proceeds with 

such a system. OEC will continue to 

engage with Commission stakeholders, 

including the Office of Information 

Technology and Office of Acquisitions, 

to ensure privacy and security concerns 

are addressed. 

iii. Burden 

The Commission has considered the 

comments reflecting concerns about the 

burdens mandatory use of an automated 

compliance system would impose on 

employees, particularly if an employee’s 

brokerage firm or other financial 

institution is unable or unwilling to 

provide the envisioned data feeds. In 

consideration of the comments, the 

Commission believes voluntary use of 

an automated compliance system will 

mitigate these concerns. 

Because the Commission is adopting 

a rule to permit rather than require 

employees to use an automated 

compliance system, the Commission has 

determined it is necessary to maintain 

the existing requirement under 5 CFR 

4401.102(f)(1)(ii) for members and 

employees to ‘‘submit duplicate 

statements for every account containing 

reportable securities to the DAEO 

according to such procedures required 

by the DAEO,’’ for employees who will 

continue to manually submit required 

information. This modification clarifies 

that employees who choose not to report 

via an automated compliance system 

will still have to submit the required 

account statements to the DAEO 

manually. 

Similarly, the Commission is 

modifying the proposed language of 5 

CFR 4401.102(f)(2) to maintain the 

existing requirement for members and 

employees to report all purchases, sales, 

acquisitions, or dispositions of 

securities ‘‘within five (5) business days 

after receipt of confirmation of the 

transaction,’’ while maintaining the 

DAEO’s discretion to determine the 

manner and schedule of reporting for 

employees who elect to use an 

automated compliance system. This 

adjustment clarifies that employees who 

manually report required information 

remain subject to the existing five 

business day transaction reporting 

deadline, while also providing the 

necessary flexibility for the DAEO to 

adjust reporting schedules as 

appropriate for an automated 

compliance system. 

D. Application of Seven Day IPO 

Waiting Period to Direct Listings of 

Securities 

Members and employees of the 

Commission are currently prohibited 

from purchasing a security in an IPO for 

seven calendar days after the IPO is 

effective, except for IPOs of shares in a 

registered investment company or other 

publicly traded or publicly available 

collective investment fund. The 

Commission proposed to amend 5 CFR 

4401.102(c)(2) to expand the limitation 

on purchasing a security in an IPO for 

seven calendar days after the IPO is 

effective by also prohibiting a member 

or employee from purchasing securities 

that are directly listed to an exchange 

for seven calendar days after the direct 

listing effective date. The Commission 

also proposed to remove the current 

exception to the prohibition on 

purchasing within seven calendar days 

for IPO shares in a registered investment 

company or publicly traded or publicly 

available collective investment fund 

because the Commission’s proposed 

amendment regarding the exception for 

Permissible Diversified Investment 

Funds in paragraph (g) would cover IPO 

shares in a registered investment 


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Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 / Rules and Regulations 14571 

76See, e.g., UNLV Letter; Cornell Letter; Fox 

Letter. 

77See Fox Letter. 

78See Freeland Letter. 

79 5 U.S.C. 553(b)(3)(A). 

80As noted above, Executive Order 12,674, as 

modified by Executive Order 12, 731, requires all 

supplemental regulations ‘‘be prepared as addenda 

to the branch-wide regulations and promulgated 

jointly with the Office of Government Ethics, at the 

agency’s expense, for inclusion in Title 5 of the 

Code of Federal Regulations.’’ Exec. Ord. 12, 674, 

sec. 301(a). This publication requirement is separate 

from the APA. 

81 5 U.S.C. 601 et seq. 

82 44 U.S.C. 3501 et seq. 

83Anonymous (Mar. 31, 2023). 

84Agency Employee (Mar. 10, 2023) 

85Anonymous (Mar. 28, 2023). 

86 44 U.S.C. 3501 et seq.; 44 U.S.C. 3502(3). 

87See 5 CFR 1320.3(c)(4). 

company or publicly traded or publicly 

available collective investment fund. 

1. Comments Received 

Several commenters expressed 

support for the proposed amendment.76

For example, one commenter 

‘‘wholeheartedly agree[d]’’ with this 

amendment, noting that if an ‘‘SEC 

employee is barred from purchasing 

securities in an IPO for seven calendar 

days, it only makes sense to prohibit 

them from purchasing securities in a 

direct listing for seven calendar 

days.’’ 77

Another commenter pointed out the 

‘‘common traits’’ between IPOs and 

direct listings and agreed that direct 

listings ‘‘should be treated with the 

same existing rule’’ applied to IPOs.78

No commenters opposed this 

proposed amendment. 

2. Final Rule 

The Commission has carefully 

considered the comments received and 

is adopting § 4401.102(c)(2) as 

proposed. Members and employees of 

the Commission are currently 

prohibited from purchasing a security in 

an IPO for seven calendar days after the 

IPO is effective, except for IPOs of 

shares in a registered investment 

company or other publicly traded or 

publicly available collective investment 

fund. As noted in the Proposing Release, 

the Commission believes that securities 

that are directly listed on an exchange 

present the same appearance concerns 

and risks as securities offered in a 

traditional IPO, given that direct listings 

are typically accompanied by the filing 

of a registration statement, as in a 

traditional IPO. For that reason, the 

Commission is expanding the limitation 

found at paragraph (c)(2) of the 

regulation to prohibit a member or 

employee from purchasing securities 

that are directly listed to an exchange 

for seven calendar days after the direct 

listing effective date. The seven 

calendar days waiting period for 

purchasing directly listed securities 

ensures that employees do not use, or 

appear to use, material, non-public 

information to their advantage in 

purchasing such securities. 

E. Other Structural or Technical 

Corrections 

The Commission proposed to amend 

§ 4401.102(h) to reflect that the Office of 

the Ethics Counsel is no longer part of 

the Office of General Counsel. We did 

not receive any comment on this 

proposed amendment, and the 

Commission is adopting 5 CFR 

4401.102(h) as proposed. 

Further, the Commission has 

determined to modify the waiver 

provision at 5 CFR 4401.102 (h)(1) and 

(2), as proposed, and is therefore 

adopting 5 CFR 4401.102 (h)(1) and (2) 

with modifications. As a technical 

matter, the Commission finds it 

appropriate to adjust the language of the 

waiver provision to more closely align 

with the language used elsewhere in the 

rule. Currently, the proposal provides 

for ‘‘waiver of the prohibitions or 

limitations that would otherwise apply 

to a securities holding or transaction 

. . .’’ The term ‘‘limitation’’ is not 

found in the text of the rule. The text 

of the rule refers to various prohibitions, 

restrictions and requirements. Thus, to 

more accurately reflect what may be 

eligible for a waiver, the Commission is 

adopting a technical correction to 

remove the word ‘‘limitations’’ from 5 

CFR 4401.102 (h)(1) and (2) and replace 

it with ‘‘restrictions and requirements.’’ 

Further, in order to correct a 

grammatical error in 5 CFR 

4401.102(b)(2), the Commission is 

adding ‘‘any’’ to ‘‘. . . the purchase or 

sale of security:’’ so that the text of 

paragraph (b)(2) reads: ‘‘Members and 

employees are prohibited from 

recommending or suggesting to any 

person the purchase or sale of any 

(emphasis added) security. . . .’’ 

Finally, for clarity and to conform 

with Federal Register style 

requirements, 5 CFR 4401.102(b)(2)(ii) 

has been revised to replace a general 

cross reference to ‘‘this Rule’’ with a 

more specific cross reference to ‘‘this 

section 4401.102.’’ Similarly, 5 CFR 

4401.102(e)(3) has been revised to 

supplement a general cross reference to 

paragraph (c)(1) with a more specific 

cross reference to ‘‘paragraph (c)(1) of 

section 4401.102,’’ and 5 CFR 

4401.102(f)(2) has been revised to 

supplement a general cross reference to 

paragraph (4) to a more specific cross 

reference to ‘‘paragraph (f)(4).’’ 

III. Administrative Law Matters 

The Commission finds, in accordance 

with section 553(b)(3)(A) of the 

Administrative Procedure Act 

(‘‘APA’’),79 that the final amendments 

relate solely to agency organization, 

procedure, or practice. They are 

therefore not subject to the provisions of 

the APA requiring notice and 

opportunity for public comment.80 The 

Regulatory Flexibility Act of 1980 

(‘‘RFA’’) 81 therefore does not apply. 

Nonetheless, the Commission, in 

consultation with OGE, previously 

determined that it would be useful to 

publish the proposed rules for notice 

and comment before adoption. Because 

the final amendments relate to ‘‘agency 

management or personnel’’ and ‘‘agency 

organization, procedure or practice that 

does not substantially affect the rights or 

obligations of non-agency parties,’’ the 

final amendments are not subject to the 

Small Business Regulatory Enforcement 

Fairness Act (5 U.S.C. 804(3)(B–C)) 

(‘‘SBREFA’’). The final amendments do 

not contain any collection of 

information requirements as defined by 

the Paperwork Reduction Act of 1995 

(‘‘PRA’’).82

At least two commenters suggested 

that the APA 83 or PRA 84 would apply 

to the proposed rules, and one of these 

commenters urged the Commission also 

to consider whether the RFA or SBREFA 

applied to the proposed rules.85 As 

discussed above, however, the public 

notice and comment and other relevant 

provisions of the APA, RFA and 

SBREFA do not apply because the final 

amendments relate solely to agency 

management or personnel and agency 

organization, procedure or practice and 

do not substantially affect the rights or 

obligations of non-agency parties. With 

respect to the APA, although the final 

amendments are not subject to the 

APA’s notice and comment 

requirements, as discussed above, the 

Commission did publish the proposed 

amendments for public comment before 

adoption, and the final amendments 

otherwise fully comply with the 

applicable requirements of the APA. 

The PRA imposes certain 

requirements on Federal agencies in 

connection with the conducting or 

sponsoring of any ‘‘collection of 

information.’’ 86 The final amendments 

are not a ‘‘collection of information’’ 

within the meaning of the PRA because 

the information required by the final 

amendments is collected from current 

Federal employees when acting within 

the scope of their employment.87


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14572 Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 / Rules and Regulations 

88Section 2(b) of the Securities Act, section 3(f) 

of the Securities Exchange Act (‘‘Exchange Act’’), 

section 2(c) of the Investment Company Act, and 

section 202(c) of the Investment Advisers Act 

require the Commission, when engaging in 

rulemaking, to consider or determine whether an 

action is necessary or appropriate in (or, with 

respect to the Investment Company Act, consistent 

with) the public interest, and to consider, in 

addition to the protection of investors, whether the 

action will promote efficiency, competition, and 

capital formation. 15 U.S.C. 77b(b), 78c(f), 80a–2(c), 

80b–2(c). In addition, section 23(a)(2) of the 

Exchange Act requires the Commission to consider 

the effects on competition of any rules the 

Commission adopts under the Exchange Act and 

prohibits the Commission from adopting any rule 

that would impose a burden on competition not 

necessary or appropriate in furtherance of the 

purposes of the Exchange Act. 15 U.S.C. 78w(a)(2). 

89See UNLV Letter; Cornell Letter; Freeland 

Letter; Fox Letter. 

90See Anonymous 3/9 Letter 1. 91See 5 CFR 2634.1001. 

IV. Economic Analysis 

The Commission is sensitive to the 

economic effects of its rules, including 

the costs and benefits that result from its 

rules.88 As discussed further below, we 

expect the economic effects of the final 

amendments will be limited. The 

amendments are directed at internal 

procedures that apply only to 

Commission members and employees. 

We expect these changes will not 

impose any costs on parties other than 

the Commission and its members and 

employees, or if there are such costs 

then we expect those costs to be 

negligible. We believe that the changes 

will not have any significant impact on 

the functioning of securities markets 

and will have minimal, if any, effects on 

efficiency, competition, and capital 

formation. We lack data on current 

compliance costs and are accordingly 

not able to quantify the costs, benefits, 

and effects on efficiency, competition, 

and capital formation expected to result 

from the final amendments. 

We discuss below the potential 

benefits, costs, and economic effects of 

the four significant categories of final 

amendments to the Supplemental 

Standards: (1) prohibiting employees 

from holding Financial Industry Sector 

Funds; (2) eliminating the pre-clearance, 

reporting, and holding period 

requirements for Permissible Diversified 

Investment Funds; (3) authorizing the 

use of either an internal or third-party 

automated compliance system and 

permitting employees to use an 

automated compliance system to 

comply with the reporting requirements, 

and maintaining the existing five-day 

transaction certification requirement 

and the existing requirement to submit 

duplicate account statements for 

employees who elect to manually report 

information to the DAEO; and (4) 

prohibiting purchases of direct listed 

assets for seven calendar days after the 

direct listing effective date. In addition, 

the adopted amendments make certain 

definitional and technical changes that 

we believe would not have a substantial 

economic effect. 

A. Amendments Concerning Financial 

Industry Sector Funds 

The Commission is adopting 

amendments to explicitly prohibit 

employee ownership of Financial 

Industry Sector Funds by expanding the 

scope of ‘‘entities directly regulated by 

the Commission,’’ and excluding 

Financial Industry Sector Funds from 

the exception for Permissible 

Diversified Investment Funds. The 

existing rules prohibit members and 

employees from purchasing or holding 

securities of entities directly regulated 

by the Commission, but do not 

expressly prohibit Financial Industry 

Sector Funds focused on entities 

regulated by the Commission. 

The final rule enhances the integrity 

of capital markets by further guarding 

against any perception of improper use 

of nonpublic information by 

Commission members and employees. 

Expanding the prohibition to include 

investments in Financial Industry 

Sector Funds reduces potential conflicts 

of interest and bolsters investor 

confidence in fair, orderly, and efficient 

markets. Commenters agreed that 

prohibiting investment by Commission 

members and employees in Financial 

Industry Sector Funds would reduce the 

risk that nonpublic information could 

be improperly used.89

The primary costs of this amendment 

will be borne mostly by impacted 

members and employees who currently 

hold these funds, as they must sell, or 

otherwise divest, affected assets. We do 

not have sufficient information to 

quantify the total effects associated with 

such divestment. We also expect 

minimal incremental technical or 

administrative costs to implement this 

change under the Commission’s existing 

ethics compliance program. 

Some commenters have expressed 

concerns about the potential costs of 

divestiture to employees or members. 

For example, one commenter stated that 

the divestiture ‘‘will likely cause 

significant tax consequences and also 

alter the diversity of their holdings.’’ 90

The typical 90-day time frame for 

divestiture provides affected employees 

or members a sufficient time to 

gradually unwind positions in a phased 

approach to minimize tax liabilities or 

potential market impacts. During this 

transition period, employees may 

consult with financial and tax 

professionals to develop appropriate 

divestiture plans. In addition, eligible 

employees may seek a Certificate of 

Divestiture from the Office of 

Government Ethics, which can provide 

capital gains tax deferral to alleviate the 

tax burden of complying with the 

divestiture requirements.91 We also 

expect the impact to portfolio diversity 

to be minimal, because many other 

investment options—such as broaderbased index funds or assets in other 

sectors—remain available and do not 

raise ethics concerns. The final 

amendments allow flexibility for 

impacted individuals to re-allocate 

capital in ways that still allow for 

adequate portfolio diversification 

without creating any actual or perceived 

conflicts. 

B. Amendments Concerning Permissible 

Diversified Investment Funds 

The Commission is adopting 

amendments to eliminate certain 

procedural requirements for Permissible 

Diversified Investment Funds by making 

them exempt from pre-clearance, 

reporting, and 30-day holding period 

stipulations under Rule 102(g)(1). 

Currently, Commission members and 

employees are required to pre-clear 

trades in these funds, confirm executed 

transactions, and hold the assets for at 

least 30 days before selling. 

The final amendments reduce 

administrative burdens for members and 

employees, and potentially enable more 

timely execution of investment 

decisions in Permissible Diversified 

Investment Funds. The amendments 

will also allow the Commission to better 

focus resources on monitoring holdings 

and transactions that present more 

significant ethical concerns. The 

magnitude of benefits will depend on 

how the policy change affects 

individuals’ investment choices and 

portfolios, which is impracticable to 

predict. 

We do not anticipate that the 

amendments will impose any material 

costs on the Commission, its members 

and employees, or the public. Because 

these diversified funds already qualified 

for applicable regulatory conflicts 

exemptions, exempting them from 

existing procedural requirements is 

unlikely to meaningfully increase risks 

of actual or perceived conflicts of 

interest. 


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92See, e.g., Anonymous 3/10 Letter 3. 93See UNLV Letter; Cornell Letter; Freeland 

Letter; Fox Letter. 

94See, e.g., UNLV Letter. 

95See, e.g., UNLV Letter. 

96See, e.g., Cornell Letter; Anonymous 3/31 

Letter 3. Some commenters also pointed to the 

potential transmission of structured data under a 

third-party automated electronic system to support 

their view that the probability of a cybersecurity 

incident would be higher than under the current 

internal system, which does not rely on structured 

data. See, e.g., Letter from Anonymous, dated Mar. 

21, 2023, available at https://www.sec.gov/ 

comments/s7-02-23/s70223-329073.htm. 

97As previously noted, under the current system, 

Commission employees have the option to redact 

financial account numbers and other private 

information that appears on their covered securities 

transactions and holdings data. See Anonymous 

3/31 Letter 3. 

98See, e.g., Anonymous 3/15 Letter. 

99See, e.g., Redford Letter; Anonymous 3/15 

Letter. 

100Relatedly, upon separation from the 

Commission, former Commission employees will 

need to make arrangements to curtail reporting. 

C. Amendments Permitting Automated 

Reporting of Covered Holdings and 

Transactions and Related Adjustment of 

Transaction Reporting Deadlines 

Currently, under the Supplemental 

Standards, the process for collecting 

covered securities transactions and 

holdings is internal to the Commission. 

As described in Section II.C, employees 

are required to report transactions of 

securities to the Commission within five 

business days after receipt of 

confirmation of the transaction so that 

ethics officials can reconcile pre-cleared 

trades in accordance with 5 CFR 

4401.102(f). Section 4401.102(f) also 

requires employees to submit duplicate 

statements for every account containing 

reportable securities to the DAEO 

according to such procedures required 

by the DAEO. Reporting is currently 

conducted by employees through the 

Commission’s Personal Trading 

Compliance System and relies on 

employees to manually confirm and 

provide evidence of transactions 

through submission of brokerage or 

other financial institution account 

statements. The DAEO has, through 

internal policy, provided employees 

with the option to redact from these 

documents sensitive PII that is not 

required to be reported. Some 

commenters noted that the proposing 

release characterized the current system 

as ‘‘successful’’ and questioned what, if 

any, additional benefits the proposed 

rule would provide beyond the existing 

requirement.92 The manual nature of the 

reporting can yet be time consuming 

and prone to human error, requiring 

additional time to resolve identified 

issues. Some commenters concurred 

and described qualitatively the time 

costs imposed by the current system, 

both on Commission employees and 

Ethics staff who review these filings for 

compliance issues.93

The Commission proposed to 

automate the existing reporting process 

by amending 5 CFR 4401.102(f) to 

authorize OEC to collect covered 

securities transactions and holdings 

data directly from financial institutions 

through a third-party automated 

electronic system to satisfy the 

requirements to report securities 

holdings and transaction information. 

The Commission also proposed to revise 

transaction reporting deadlines to 

provide necessary flexibility to adjust 

for securities transactions and holdings 

data obtained from financial institutions 

through a third-party automated 

compliance system by modifying the 

existing five business day reporting 

requirement to require all employees to 

report transactions in the manner, and 

according to the schedule, required by 

the DAEO. 

In response to the proposed 

amendments, some commenters noted 

that automation through a third-party 

provider is expected to enhance the 

accuracy of covered securities 

transactions and holdings data made 

available to the DAEO.94 As some 

commenters also noted,95 Commission 

employees who use the third-party 

service provider system are expected to 

benefit from no longer having to 

manually process their covered 

securities transactions and holdings 

data. Many commenters expressed 

concerns over the potential costs to the 

Commission or its employees of a 

cybersecurity incident or breach 

involving the third-party system.96

Many commenters expressed concerns 

that the use of a third-party system will 

require Commission employees to 

disclose sensitive financial PII data 

beyond what is currently required, such 

as account numbers at their financial 

institutions.97 Some commenters noted 

that employees will face potential 

financial losses as well as psychological 

or other recovery costs in response to a 

cybersecurity incident or breach, and 

one commenter warned that the 

Commission would likely suffer 

reputational harm.98 Some commenters 

also suggested including in the 

amendments a voluntary opt-out (or optin) provision for Commission employees 

from the third-party automated 

electronic system.99

In response to the concerns 

commenters expressed regarding 

cybersecurity and privacy, the 

Commission is adopting a new 

paragraph 4401.102(f)(4) that states that 

‘‘a member or employee may comply 

with the reporting requirements set 

forth in paragraphs (f)(1) and (f)(2) of 

this section by authorizing the 

transmission of account statements, 

holdings and transaction information 

from an employee’s brokerage or 

financial institution(s) to the DAEO 

through a Commission approved, 

automated internal or third-party 

compliance system.’’ In other words, the 

Commission will implement the 

automated reporting system on a 

voluntary basis with Commission 

employees deciding whether to use the 

automated system or to continue using 

the current manual system. For 

employees who elect to manually report 

information to the DAEO, the 

Commission will also maintain the 

existing five-day transaction 

certification requirement in paragraph 

4401.102(f)(2), and the existing 

requirement in paragraph 

4401.102(f)(1)(ii) to submit duplicate 

account statements. 

The final amendments will benefit 

Commission employees, and thereby the 

Commission, by providing them with an 

additional approach for complying with 

the Supplemental Standards. 

Specifically, employees will be 

permitted to decide how to comply with 

reporting obligations, either through the 

current manual system (status quo) or 

through a Commission-approved, 

automated internal or third-party 

compliance system, to the extent that an 

employee’s financial institution is able 

and willing to provide the envisioned 

data feeds under an automated system. 

Employees who elect not to report via 

an automated compliance system will 

continue to be required to submit the 

required account statements to the 

DAEO manually. Each employee who 

has both options available will select 

the option that delivers highest net 

benefits to that employee. When 

evaluating whether to comply using an 

automated system, employees will 

weigh the benefits of no longer having 

to manually transmit to the DAEO 

account statements, holdings, and 

transaction information against the costs 

to them of using the automated 

compliance system. These costs to 

employees include initial costs to learn 

about the automated system and to 

authorize their financial institutions to 

transmit covered securities holdings and 

transactions data to the DAEO through 

the automated system.100 Also, 

employees who select the automated 

system will be able to consider the 

cybersecurity risks of that system and 

the privacy risks from having to provide 

account identifying information, such as 


ddrumheller on DSK120RN23PROD with RULES1
14574 Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 / Rules and Regulations 

101See Redford Letter. 

102See Letter from Anonymous, dated Mar. 13, 

2023, available at https://www.sec.gov/comments/ 

s7-02-23/s70223-327570.htm. 

account numbers, which employees 

may otherwise redact under the current 

system. In an automated system, this 

information is necessary to identify the 

appropriate account and ensure the 

authenticity of the transaction data 

collected. 

Under the final amendments, 

Commission employees will continue to 

be responsible for ensuring that their 

covered securities transactions and 

holdings data are reported ‘‘in the 

manner required by the DAEO.’’ Some 

commenters noted 101 that this 

responsibility will continue to impose 

monitoring costs on Commission 

employees within an automated system. 

While employees who use the 

automated system will likely have an 

initial responsibility to enable or 

authorize the automated transmission of 

brokerage statements and transaction 

information from their broker or other 

financial institution, the monitoring 

costs of ensuring the automated system 

is functioning correctly such that data 

provided by financial institutions is 

properly transmitted to OEC will 

primarily be borne by the Commission 

through OEC. Therefore, we expect 

monitoring costs to employees who use 

the automated system to be minimal. 

The final amendments will also 

benefit the Commission by allowing it to 

continue to improve the efficiency, 

accuracy and effectiveness of its 

compliance program by providing 

authority for employees to utilize an 

automated system. The Commission 

will also gain additional experience and 

data regarding the benefits and costs of 

an automated compliance system. As 

described above, an automated system is 

expected to enhance the accuracy and 

timeliness of covered securities 

transactions and holdings data made 

available to the DAEO, enhancing the 

DAEO’s ability to monitor Commission 

employees’ compliance with the 

Supplemental Standards and promptly 

remedy any compliance violations 

detected. 

The Commission will incur direct 

costs from implementing and overseeing 

the new automated system in addition 

to the costs of maintaining the manual 

reporting system. As some commenters 

noted,102 these costs will include the 

costs of developing internally or 

contracting, administering, and 

monitoring the automated system. As 

described in Section II.C, these costs 

will be affected by the various 

procedural steps and authorization 

processes needed to establish an 

automated system, including the need 

for SEC IT systems to adhere to strict 

FISMA requirements and SEC 

Information Security and Privacy 

Controls as well as the need for any 

third-party vendor to meet rigorous 

authorization, privacy, and security 

protocols to comply with multiple 

Federal Government and SEC standards. 

While we are aware of third-party 

providers that supply automated 

reporting services similar to those 

contemplated under the amendment, we 

are not aware of a Federal Government 

agency currently having such an 

automated system or contracting with a 

third-party provider for this purpose. 

Hence, we are unable to ascertain the 

extent to which some third-party 

providers may bid and compete to 

provide this service to the Commission, 

and we cannot quantify the direct costs 

to the Commission of implementing the 

amendment. 

D. Amendments Concerning Prohibiting 

Purchases of Direct Listed Assets 

The Commission is adopting an 

amendment to Rule 102(c)(2) to prohibit 

members and employees from 

purchasing securities directly listed on 

an exchange for seven calendar days 

following the effective date of the direct 

listing. 

The adopted restriction aims to 

further safeguard against any perception 

of improper use of nonpublic 

information by Commission members 

and employees. Expanding the 

prohibition to include directly listed 

securities is intended to reduce 

potential conflicts of interest and bolster 

investor confidence in the integrity of 

markets. 

The primary costs of this amendment 

will be borne by impacted members and 

employees who will be restricted from 

trading these securities during the 

specified period. We do not expect any 

material direct costs to the Commission 

or public because of the rule change. 

V. Statutory Basis 

These amendments to the 

Commission’s ethics rules are being 

adopted pursuant to statutory authority 

granted to OGE and to the Commission. 

These include 5 U.S.C. 7301; 5 U.S.C. 

Ch 131 (Ethics in Government Act of 

1978); E.O. 12674, 54 FR 15159; 3 CFR 

1989 Comp., p. 215, as modified by E.O. 

12731, 55 FR 42547; 3 CFR, 1990 

Comp., p. 306; 5 CFR 2634.103, 5 CFR 

2634.201(f); 5 CFR 2635.905; 5 CFR 

2635.105, 2635.403, 2635.803; 15 U.S.C. 

77s, 78w, 77sss, 80a–37, 80b–11. 

List of Subjects in 5 CFR Part 4401 

Administrative practice and 

procedure, Conflict of interests, Ethical 

conduct, Government employees, 

Government ethics, Securities. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the SEC, with the 

concurrence of OGE, is amending title 5 

of the Code of Federal Regulations, 

chapter XXXIV, part 4401, as follows: 

PART 4401—SUPPLEMENTAL 

STANDARDS OF ETHICAL CONDUCT 

FOR MEMBERS AND EMPLOYEES OF 

THE SECURITIES AND EXCHANGE 

COMMISSION 

■ 1. The authority citation for part 4401 

is revised to read as follows: 

Authority: 5 U.S.C. 7301; 5 U.S.C. Ch 131; 

15 U.S.C. 77s, 78w, 77sss, 80a-37, 80b-11; 

E.O. 12674, 54 FR 15159, 3 CFR 1989 Comp., 

p. 215, as modified by E.O. 12731, 55 FR 

42547, 3 CFR, 1990 Comp., p. 306; 5 CFR 

2634.103, 2634.201(f), 2634.905, 2635.105, 

2635.403, and 2635.803. 

■ 2. Revise § 4401.102 to read as 

follows: 

§ 4401.102 Prohibited and restricted 

financial interests and transactions. 

(a) Applicability. The requirements of 

this section apply to all securities 

holdings or transactions effected, 

directly or indirectly, by or on behalf of 

a member or employee, the member’s or 

employee’s spouse, the member’s or 

employee’s unemancipated minor child, 

or any person for whom the member or 

employee serves as legal guardian. A 

member or employee is deemed to have 

sufficient interest in the securities 

holdings and transactions of his or her 

spouse, unemancipated minor child, or 

person for whom the member or 

employee serves as legal guardian that 

such holdings or transactions are subject 

to all the terms of this part. 

(b) In general. (1) Members and 

employees are prohibited from 

purchasing or selling any security while 

in possession of material nonpublic 

information regarding that security. 

Nonpublic information has the meaning 

as provided in 5 CFR 2635.703(b). 

(2) Members and employees are 

prohibited from recommending or 

suggesting to any person the purchase or 

sale of any security: 

(i) Based on material nonpublic 

information regarding that security; or 

(ii) That the member or employee 

could not purchase or sell because of 

the restrictions contained in this 

section. 


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Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 / Rules and Regulations 14575 

(c) Prohibited and restricted holdings 

and transactions. Members and 

employees are prohibited from: 

(1) Knowingly purchasing or holding 

a security or other financial interest in 

an entity directly regulated by the 

Commission, including a registered 

investment company, common 

investment trust of a bank, company 

exempt in part or in total from 

registration under the Investment 

Company Act of 1940, or other pooled 

investment vehicle that has a stated 

policy of concentrating investments in 

entities directly regulated by the 

Commission. 

(2) Purchasing a security in an initial 

public offering (‘‘IPO’’) or direct listing 

prior to seven calendar days after the 

IPO or direct listing effective date; 

(3) Purchasing or otherwise carrying 

securities on margin; 

(4) Selling securities short as defined 

in 17 CFR 242.200(a); 

(5) Accepting a loan from, or entering 

into any other financial relationship 

with, an entity, institution or other 

person directly regulated by the 

Commission if the loan or financial 

relationship is governed by terms more 

favorable than would be available in 

like circumstances to members of the 

public, except as otherwise permitted by 

5 CFR part 2635, subpart B (Gifts from 

outside sources); 

(6) Engaging in transactions involving 

financial instruments that are 

derivatives of securities (that is, the 

value of the security depends on or is 

derived from, in whole or in part, the 

value of another security, or a group, or 

an index of securities); and 

(7) Purchasing or selling any security 

issued by an entity that is: 

(i) Under investigation by the 

Commission; 

(ii) A party to a proceeding before the 

Commission; or 

(iii) A party to a proceeding to which 

the Commission is a party. 

(d) Prior clearance of transactions in 

securities or related financial interests. 

(1) Except as set forth in paragraph (g) 

of this section, members and employees 

must confirm before entering into any 

security or other related financial 

transaction that the security or related 

financial transaction is not prohibited or 

restricted as to them by clearing the 

transaction in the manner required by 

the Designated Agency Ethics Official 

(‘‘DAEO’’). A member or employee will 

have five (5) business days after 

clearance to effect a transaction. 

(2) Documentation of the clearance of 

any transaction pursuant to paragraph 

(d) of this section shall be prima facie 

evidence that the member or employee 

has not knowingly purchased, sold, or 

held such financial interest in violation 

of the provisions of paragraph (c)(1), (2), 

(6), or (7) of this section. 

(3) The DAEO shall be responsible for 

administering the Commission’s 

clearance systems. The DAEO shall 

maintain a record of securities that 

members and employees may not 

purchase or sell, or otherwise hold, 

because such securities are the subject 

of the various prohibitions and 

restrictions contained in this section. 

(e) Holding periods for securities and 

related financial interests—(1) General 

rule. Except as set forth in paragraphs 

(e) and (g) of this section, members and 

employees must hold a security 

purchased after commencement of 

employment with the Commission for a 

minimum of six (6) months from the 

trade date. 

(2) General exceptions. This holding 

period does not apply to: 

(i) Securities sold for ninety percent 

(90%) or less of the original purchase 

price; and 

(ii) Securities with an initial term of 

less than six (6) months that are held to 

term. 

(3) Exception for shares in sector 

funds. Members and employees must 

hold shares in sector mutual funds and 

sector unit investment trusts as those 

terms are defined at 5 CFR 2640.102(q), 

that are not otherwise prohibited under 

paragraph (c)(1) of this section for a 

minimum of thirty (30) days from the 

purchase date. 

(f) Reporting requirements. (1) Except 

as set forth in paragraph (g) of this 

section, members and employees must: 

(i) Report and certify all securities 

holdings according to the schedule and 

in the manner required by the DAEO; 

and 

(ii) Submit duplicate account 

statements for every account containing 

reportable securities to the DAEO 

according to such procedures required 

by the DAEO. 

(2) Members and employees must 

report all purchases, sales, acquisitions, 

or dispositions of securities within five 

(5) business days after receipt of 

confirmation of the transaction, or if the 

member or employee complies with the 

reporting requirements of this section as 

authorized in paragraph (f)(4) of this 

section, in the manner and according to 

the schedule required by the DAEO. 

(3) Any person who receives a 

conditional offer of employment from 

the Commission must report all 

securities holdings after acceptance of 

that offer and before commencement of 

employment with the Commission on 

the form prescribed by the Commission. 

(4) A member or employee may 

comply with the reporting requirements 

set forth in paragraphs (f)(1) and (2) of 

this section by authorizing the 

transmission of account statements, 

holdings, and transaction information 

from an employee’s brokerage or 

financial institution(s) to the DAEO 

through a Commission-approved, 

automated internal or third-party 

compliance system. 

(g) Exceptions. (1) The following 

holdings and transactions are exempt 

from the requirements of paragraphs (c), 

(d), (e), and (f) of this section: 

(i) Securities transactions effected by 

a member’s or employee’s spouse on 

behalf of an entity or person other than 

the member or employee, the member’s 

or employee’s spouse, the member’s or 

employee’s unemancipated minor child, 

or any person for whom the member or 

employee serves as legal guardian; 

(ii) Securities holdings and 

transactions of a member’s or 

employee’s legally separated spouse 

living apart from the member or 

employee (including those effected for 

the benefit of the member’s or 

employee’s unemancipated minor 

child), provided that the member or 

employee has no control, and does not, 

in fact, control, advise with respect to, 

or have knowledge of those holdings 

and transactions; 

(iii) Securities issued by the United 

States Government or one of its 

agencies; 

(iv) Investments in funds 

administered by the Thrift Savings Plan 

or by any retirement plan administered 

by a Federal Government agency; 

(v) Certificates of deposit or other 

comparable instruments issued by 

depository institutions subject to 

Federal regulation and Federal deposit 

insurance; and 

(vi)(A)(1) Mutual funds and unit 

investment trusts, as those terms are 

defined in 5 CFR 2640.102(k) and (u), 

that are diversified as that term is 

defined in 5 CFR 2640.102(a); 

(2) Money market funds as defined in 

17 CFR 270.2a–7 (Investment Company 

Act Rule under rule 2a-7); 

(3) 529 plans as defined in the 

Internal Revenue Code, 26 U.S.C. 529. 

(4) Diversified pooled investment 

funds held in an employee benefit plan 

as defined at 5 CFR 2640.102(c) or 

pension plan as defined in 5 CFR 

2640.102(n). 

(B) The exemption in this paragraph 

(g)(1)(vi) does not apply to other 

investments in pooled investment funds 

that are exempt from registration under 

the Investment Company Act of 1940, 

including hedge funds, private equity 

funds, venture capital funds, or similar 

non-registered investment funds. 


ddrumheller on DSK120RN23PROD with RULES1
14576 Federal Register / Vol. 89, No. 40 / Wednesday, February 28, 2024 / Rules and Regulations 

(2) The following holdings and 

transactions are exempt from the 

requirements of paragraphs (c), (d), and 

(e) of this section, but these interests 

must be reported in accordance with 

paragraph (f) of this section: 

(i) The holdings of a trust in which 

the member or employee (or the 

member’s or employee’s spouse, the 

member’s or employee’s unemancipated 

minor child, or person for whom the 

member or employee serves as legal 

guardian) is: 

(A) Solely a vested beneficiary of an 

irrevocable trust; or 

(B) Solely a vested beneficiary of a 

revocable trust where the trust 

instrument expressly directs the trustee 

to make present, mandatory 

distributions of trust income or 

principal; provided, the member or 

employee did not create the trust, has 

no power to control, and does not, in 

fact, control or advise with respect to 

the holdings and transactions of the 

trust; 

(ii) Acceptance or reinvestment of 

stock dividends on securities already 

owned; 

(iii) Exercise of a right to convert 

securities; and 

(iv) The acquisition of stock or the 

acquisition or the exercise of employee 

stock options, or other comparable 

instruments, received as compensation 

from an issuer that is: 

(A) The member’s or employee’s 

former employer; or 

(B) The present or former employer of 

the member’s or employee’s spouse. 

(h) Waivers. (1) Members may request 

from the Commission a waiver of the 

prohibitions, restrictions, or 

requirements that would otherwise 

apply to a securities holding or 

transaction on the grounds that 

application of the rule would cause an 

undue hardship. A member requests a 

waiver by submitting a confidential 

written application to the Commission’s 

Office of the Ethics Counsel. The DAEO 

will review the request and provide to 

the Commission a recommendation for 

resolution of the waiver request. In 

developing a recommendation, the 

DAEO may consult, on a confidential 

basis, other Commission personnel as 

the DAEO in his or her discretion 

considers necessary. 

(2) Employees may request from the 

DAEO a waiver of the prohibitions, 

restrictions, or requirements that would 

otherwise apply to a securities holding 

or transaction on the grounds that 

application of the rule would cause an 

undue hardship. An employee requests 

a waiver by submitting a confidential 

written application to the Commission’s 

Office of the Ethics Counsel in the 

manner prescribed by the DAEO. In 

considering a waiver request, the DAEO, 

or his or her designee, may consult with 

the employee’s supervisors and other 

Commission personnel as the DAEO in 

his or her discretion considers 

necessary. 

(3) The Commission or the DAEO, as 

applicable, will provide written notice 

of its determination of the waiver 

request to the requesting member or 

employee. 

(4) The Commission or the DAEO, as 

applicable, may condition the grant of a 

waiver under this provision upon the 

agreement to certain undertakings (such 

as execution of a written statement of 

disqualification) to avoid the 

appearance of misuse of position or loss 

of impartiality, and to ensure 

confidence in the impartiality and 

objectivity of the Commission. The 

Commission or DAEO, as applicable, 

shall note the existence of conditions on 

the waiver and describe them in 

reasonable detail in the text of the 

waiver-request determination. 

(5) The grant of a waiver requested 

pursuant to this section must reflect the 

judgment that the waiver: 

(i) Is necessary to avoid an undue 

hardship and, under the particular 

circumstances, application of the 

prohibition, restriction, or requirement 

is not necessary to avoid the appearance 

of misuse of position or loss of 

impartiality, or otherwise necessary to 

ensure confidence in the impartiality 

and objectivity of the Commission; 

(ii) Is consistent with 18 U.S.C. 208 

(Acts affecting a personal financial 

interest), 5 CFR part 2635 (Standards of 

ethical conduct for employees of the 

executive branch), and 5 CFR part 2640 

(Interpretation, exemptions and waiver 

guidance concerning 18 U.S.C. 208); and 

(iii) Is not otherwise prohibited by 

law. 

(6) The determination of the 

Commission with respect to a member’s 

request for a waiver is final and binding 

on the member. 

(7) The determination of the DAEO 

with respect to an employee’s request 

for a waiver may be appealed to the 

Commission, in accordance with the 

requirements of 17 CFR 201.430 and 

201.431 (Rules 430 and 431 of the 

Commission’s Rule of Practice). The 

determination of the DAEO or, if 

appealed, the Commission, is final and 

binding on the employee. 

(8) Notwithstanding the grant of a 

waiver, a member or employee remains 

subject to the disqualification 

requirements of 5 CFR 2635.402 

(Disqualifying financial interests) and 5 

CFR 2635.502 (Personal and business 

relationships) with respect to 

transactions or holdings subject to the 

waiver. 

(i) Required disposition of securities. 

The DAEO is authorized to require 

disposition of securities acquired as a 

result of a violation of the provisions of 

this section, whether unintentional or 

not. The DAEO shall report repeated 

violations to the Commission for 

appropriate action. 

By the Securities and Exchange 

Commission. 

Dated: February 22, 2024. 

Vanessa A. Countryman, 

Secretary. 

Shelley K. Finlayson, 

Acting Director, Office of Government Ethics. 

[FR Doc. 2024–04062 Filed 2–27–24; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2024–0226; Project 

Identifier MCAI–2024–00069–R; Amendment 

39–22674; AD 2024–02–55] 

RIN 2120–AA64 

Airworthiness Directives; Bell Textron 

Canada Limited Helicopters 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Final rule; request for 

comments. 

SUMMARY: The FAA is adopting a new 

airworthiness directive (AD) for Bell 

Textron Canada Limited Model 505 

helicopters. This AD was prompted by 

reports of cracked vertical stabilizer top 

end cap assemblies. This AD requires an 

initial and recurring inspections of the 

vertical stabilizer top end cap assembly 

and corrective action if a crack is found, 

as specified in a Transport Canada AD, 

which is incorporated by reference. The 

FAA previously sent this AD as an 

emergency AD to all known U.S. owners 

and operators of these helicopters. The 

FAA is issuing this AD to address the 

unsafe condition on these products. 

DATES: This AD is effective March 14, 

2024. Emergency AD 2024–02–55, 

issued on January 26, 2024, which 

contained the requirements of this 

amendment, was effective with actual 

notice. 

The Director of the Federal Register 

approved the incorporation by reference 

of a certain publication listed in this AD 

as of March 14, 2024. 

The FAA must receive comments on 

this AD by April 15, 2024. 


ddrumheller on DSK120RN23PROD with RULES1