[Federal Register Volume 89, Number 40 (Wednesday, February 28, 2024)]
[Rules and Regulations]
[Pages 14563-14576]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-04062]



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Rules and Regulations
                                                Federal Register
________________________________________________________________________

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. 

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

[[Page 14563]]



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.

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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.
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    \1\ See 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.
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    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\
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    \2\ See 75 FR 42273, July 20, 2010, as amended at 76 FR 19902, 
Apr. 11, 2011.
    \3\ 88 FR 7891, February 7, 2023 (``Proposing Release'').
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    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 Sec.  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

[[Page 14564]]

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 Sec.  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.
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    \4\ 5 CFR 4401.102(c)(1).
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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.
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    \5\ See, 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.
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    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\
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    \6\ See Fox Letter.
    \7\ Id.
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    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\
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    \8\ See Gillmore Letter.
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    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\
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    \9\ See UNLV Letter.
    \10\ Id.
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    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\
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    \11\ See, 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.
    \12\ See, e.g., Anonymous 3/10 Letter 2; Anonymous 3/9 Letter 1.
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    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\
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    \13\ See Anonymous 3/9 Letter 1.
    \14\ Id.
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    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\
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    \15\ See Anonymous 3/10 Letter 1.
    \16\ Id.
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    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

[[Page 14565]]

a potential taxable gain or pay such a tax immediately.\17\
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    \17\ Id.
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2. Final Rule
    The Commission has carefully considered the comments received and 
is adopting Sec.  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\
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    \18\ See 5 CFR 2635.403.
    \19\ See OGE Legal Advisory LA-11-07 (Oct. 31, 2011).
    \20\ See OGE Legal Advisory LA-20-02, att. 2 (Mar. 3, 2020).
    \21\ See, 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).
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    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.
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    \22\ See 17 CFR 200.1.
    \23\ 5 CFR 4401.102(c)(1).
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    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\
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    \24\ See 26 U.S.C. 1043; 5 CFR 2634.1004.
    \25\ See 5 CFR 2634.1005.
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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 closed-end 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

[[Page 14566]]

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\
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    \26\ See, e.g., Letter from Anonymous, dated Mar. 30, 2023 
(``Anonymous 3/30 Letter 1''), available at 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.
    \27\ See Letter from Anonymous, dated Mar. 7, 2023 (``Anonymous 
3/7 Letter'').
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    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\
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    \28\ See Cornell Letter.
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    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\
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    \29\ See, 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.
    \30\ See Gillmore Letter.
    \31\ Id.
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2. Final Rule
    The Commission has carefully considered the comments received and 
is adopting Sec.  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 pre-clearance 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.
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    \32\ See 5 CFR 2640.201(a), (d).
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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

[[Page 14567]]

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\
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    \33\ See, 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.
    \34\ See UNLV Letter.
    \35\ Id.
    \36\ Id.
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    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\
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    \37\ See Freeland Letter.
    \38\ Id.
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    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\
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    \39\ See Fox Letter.
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    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\
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    \40\ See, e.g., Letter from Anonymous, dated Feb. 26, 2023 
(``Anonymous 2/26 Letter''); Letter from Anonymous, dated Mar. 20, 
2023 (``Anonymous 3/20 Letter'').
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    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.
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    \41\ See Anonymous 2/26 Letter.
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    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\
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    \42\ See Anonymous 3/20 Letter.
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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\
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    \43\ See, 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'').
---------------------------------------------------------------------------

    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\
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    \44\ See Anonymous 2/26 Letter.
    \45\ See, 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.
    \46\ See Anonymous 3/30 Letter.
    \47\ See, 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.
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    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\
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    \48\ See Letter from Anonymous, dated Mar. 6, 2023 (``Anonymous 
3/6 Letter'').
    \49\ Id.
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    Some commenters expressed skepticism in the ability of a contractor 
to appropriately safeguard sensitive financial information,\50\ while 
others

[[Page 14568]]

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\
---------------------------------------------------------------------------

    \50\ See, e.g., Letter from Anonymous, dated Mar. 3, 2023 
(``Anonymous 3/3 Letter'').
    \51\ See, e.g., Letter from Rob Redford, dated Feb. 23, 2023 
(``Redford Letter'').
    \52\ See, 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.
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    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\
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    \53\ See Anonymous 3/10 Letter 3.
    \54\ Id.
    \55\ Id.
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    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.
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    \56\ See 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

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

    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\
---------------------------------------------------------------------------

    \58\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \60\ See Anonymous 3/10 Letter 3.
    \61\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \62\ See Anonymous 3/24 Letter 1.
---------------------------------------------------------------------------

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 third-party 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 third-
party 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.
---------------------------------------------------------------------------

    \63\ See, e.g., Letter from Ryan Luther, dated Mar. 8, 2023 
(``Luther Letter'').
---------------------------------------------------------------------------

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

[[Page 14569]]

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\
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    \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.
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    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.
---------------------------------------------------------------------------

    \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.
    \68\ See 5 CFR 2634.601(c). See also Sec.  2634.901(b).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \69\ Relevant 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).
    \70\ See, 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).
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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.
---------------------------------------------------------------------------

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

    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 
Sec.  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]

[[Page 14570]]

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.
---------------------------------------------------------------------------

    \72\ 5 U.S.C. 13109(a)(2); 5 CFR 2634.901(d).
    \73\ Concepcion v. F.B.I., 606 F. Supp. 2d 14, 33 (D.D.C. 2009) 
(quoting 5 CFR 2634.901(d)).
    \74\ OGE/GOVT-2, 84 FR 47301 (2019).
    \75\ Id.
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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 role-based 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

[[Page 14571]]

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\
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    \76\ See, e.g., UNLV Letter; Cornell Letter; Fox Letter.
    \77\ See Fox Letter.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \78\ See Freeland Letter.
---------------------------------------------------------------------------

    No commenters opposed this proposed amendment.
2. Final Rule
    The Commission has carefully considered the comments received and 
is adopting Sec.  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 Sec.  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\
---------------------------------------------------------------------------

    \79\ 5 U.S.C. 553(b)(3)(A).
    \80\ As 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.
---------------------------------------------------------------------------

    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.
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    \83\ Anonymous (Mar. 31, 2023).
    \84\ Agency Employee (Mar. 10, 2023)
    \85\ Anonymous (Mar. 28, 2023).
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    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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    \86\ 44 U.S.C. 3501 et seq.; 44 U.S.C. 3502(3).
    \87\ See 5 CFR 1320.3(c)(4).

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[[Page 14572]]

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.
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    \88\ Section 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).
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    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\
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    \89\ See UNLV Letter; Cornell Letter; Freeland Letter; Fox 
Letter.
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    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 broader-
based 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.
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    \90\ See Anonymous 3/9 Letter 1.
    \91\ See 5 CFR 2634.1001.
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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.

[[Page 14573]]

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\
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    \92\ See, e.g., Anonymous 3/10 Letter 3.
    \93\ See UNLV Letter; Cornell Letter; Freeland Letter; Fox 
Letter.
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    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 opt-in) provision 
for Commission employees from the third-party automated electronic 
system.\99\
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    \94\ See, e.g., UNLV Letter.
    \95\ See, e.g., UNLV Letter.
    \96\ See, 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.
    \97\ As 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.
    \98\ See, e.g., Anonymous 3/15 Letter.
    \99\ See, e.g., Redford Letter; Anonymous 3/15 Letter.
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    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

[[Page 14574]]

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.
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    \100\ Relatedly, upon separation from the Commission, former 
Commission employees will need to make arrangements to curtail 
reporting.
---------------------------------------------------------------------------

    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.
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    \101\ See Redford Letter.
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    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.
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    \102\ See Letter from Anonymous, dated Mar. 13, 2023, available 
at https://www.sec.gov/comments/s7-02-23/s70223-327570.htm.
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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

0
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.


0
2. Revise Sec.  4401.102 to read as follows:


Sec.  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.

[[Page 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.

[[Page 14576]]

    (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