[Federal Register Volume 88, Number 25 (Tuesday, February 7, 2023)]
[Proposed Rules]
[Pages 7891-7897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-02235]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 88, No. 25 / Tuesday, February 7, 2023 / 
Proposed Rules  

[[Page 7891]]



SECURITIES AND EXCHANGE COMMISSION

5 CFR Part 4401

[Release No. 34-96768; 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: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission''), with the concurrence of the Office of Government 
Ethics (``OGE''), is jointly issuing with OGE this proposed rule for 
Commission members and employees. This proposed rule would amend the 
existing Supplemental Standards of Ethical Conduct for Members and 
Employees of the Securities and Exchange Commission (``Supplemental 
Standards'') jointly issued by SEC and OGE, would supplement 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. The Commission is proposing to revise 
transaction and reporting requirements for certain assets that pose a 
low risk of conflicts of interest or appearance concerns, and to 
prohibit employee ownership of sector funds that have a stated policy 
of concentrating their investments in entities directly regulated by 
the Commission. Further, the Commission proposes to authorize 
collection of covered securities transactions and holdings data from 
financial institutions through a third-party automated compliance 
system. The Commission also proposes to correct certain technical 
matters and adjust its transaction and reporting requirements to 
provide the flexibility necessary to implement a third-party automated 
compliance system.

DATES: Comments should be received on or before March 31, 2023.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File Number S7-02-23 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-02-23. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's website (https://www.sec.gov/rules/proposed.shtml). 
Comments are also available for website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Operating conditions may limit access to the Commission's Public 
Reference Room. All comments received will be posted without change. 
Persons submitting comments are cautioned that we do not redact or edit 
personal identifying information. You should submit only information 
that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Richard Ufford or 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 proposing to amend 5 CFR 
4401.102 (Rule 102), its Supplemental Standards.

I. Background

    On August 7, 1992, OGE published the OGE Standards. 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. The OGE 
Standards, codified at 5 CFR part 2635, effective February 3, 1993, 
established uniform standards of ethical conduct that apply to all 
executive branch personnel.
    Section 2635.105 of the OGE Standards authorizes an agency, with 
the concurrence and joint issuance of OGE, to adopt agency-specific 
supplemental regulations that are necessary and appropriate to properly 
implement its ethics program. The Commission has previously adopted 
supplemental regulations--found at 5 CFR part 4401--in 2010 with the 
concurrence and joint issuance of OGE. See 75 FR 42273, July 20, 2010, 
as amended at 76 FR 19902, Apr. 11, 2011. The Commission now seeks to 
amend those existing supplemental regulations for the reasons set forth 
below. The Commission, with OGE's concurrence, has determined that the 
following proposed revisions to the supplemental regulations are 
appropriate and necessary for successful implementation of the SEC's 
ethics program in light of its unique programs and operations.

II. Proposed Amendments

    The Commission, with the concurrence of OGE, is proposing 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 by authorizing the Commission to collect such information 
automatically from the employee's brokerage or financial institution(s) 
through a third-party

[[Page 7892]]

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 SEC's revised supplemental rule would retain several important 
compliance controls, which are among the most extensive compliance 
restrictions in the Federal Government, including pre-clearance, 
confirmation, and reporting of covered transactions (such as stocks, 
bonds, and sector mutual funds), required minimum holding periods, and 
mandatory annual certification of compliance.

A. Prohibited Ownership of Financial Industry Sector Funds

    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. 17 CFR 200.1. 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.'' 5 CFR 
4401.102(c)(1). The Commission is proposing 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 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. The purpose of this proposed amendment is 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. The existing rule 
prohibits employees from purchasing or holding securities issued by 
such entities. Investments in mutual funds (including exchange-traded 
funds), however, are permissible, provided employees comply with OGE's 
regulatory exemptions pursuant to 18 U.S.C. 208(b)(2) found in 5 CFR 
2640.201(b), which restrict participation in matters affecting one or 
more holdings of a sector fund. Consistent with the Commission's risk-
based approach, the proposed revision recognizes Financial Industry 
Sector Funds pose a substantial risk of conflicting with SEC work. 
Thus, to guard against actual and perceived conflicts and appearance 
concerns, the Commission proposes to expand the existing prohibition to 
include investments in sector funds that focus on entities directly 
regulated by the agency. In accordance with 5 CFR 2635.403(d), affected 
employees will be given a reasonable period of time to divest Financial 
Industry Sector Funds. Except in cases of unusual hardship, as 
determined by the agency, a reasonable period shall not exceed 90 days 
from the date divestiture is first directed. Affected employees may be 
eligible for a Certificate of Divestiture under section 1043 of the 
Internal Revenue Code and 5 CFR part 2634, subpart J.

B. Eliminating Preclearance, Reporting, and Holding Requirements for 
Permissible Diversified Investment Funds

    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.
    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 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. See 5 CFR 
2640.201(a), (d). Other Permissible Diversified Investment Funds may 
pose little or no conflict of interest concerns, such as pre-paid 
college tuition plans authorized by States under section 529 of the 
Internal Revenue Code and collective investment trusts that are 
commonly held in defined contribution retirement plans. As a result, 
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. 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 proposing to modify its rules to reduce the emphasis 
on reporting and pre-clearing of Permissible Diversified Investment 
Funds, assets that pose substantially lower ethics risk. This risk-
based approach would appropriately tailor compliance activities to 
address trading and holdings that pose the most significant potential 
for conflicts of interest. Based thereon, the SEC is proposing to add a 
new paragraph (g)(1)(vi) to eliminate the preclearance, 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. These changes would 
not apply to any sector funds, including Financial Industry Sector 
Funds, as described above, or to any other entities directly regulated 
by the Commission, or to any private equity, venture capital, hedge 
fund, or similar pooled investment instruments.

C. Automated Reporting of Purchases, Sales, Acquisitions, and 
Dispositions of Securities

    Currently, members and employees are required to report 
transactions of securities to the OEC within five business days after 
receipt of confirmation of the transaction so that ethics officials can 
reconcile precleared trades. This reporting requirement is authorized 
under 5 CFR 4401.102(f) and constitutes an additional supplemental 
confidential reporting requirement authorized by OGE pursuant to 
section 107 of the Ethics in Government Act of 1978, as amended, and 5 
CFR 2634.103. 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. Although this process has

[[Page 7893]]

been successful, requiring employees to manually submit transaction and 
brokerage data is burdensome and presents the opportunity for human 
error. Moreover, OEC is aware that a number of private corporations 
have shifted to automated software systems that provide direct 
notification of securities transactions from an individual's broker or 
other financial institution.
    The Commission therefore proposes to amend paragraph (f) of the 
regulation 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. This amendment would 
reduce the burden on employees and compliance staff, and improve data 
accuracy and completeness, by replacing the requirements for manually 
submitted account statements and manual transaction confirmations. It 
would also facilitate compliance by allowing the OEC to independently 
verify employee holdings and transactions. Further, it would reduce the 
risk of human error or oversight in reporting and reviewing of 
securities holdings and transactions.
    The Commission has consulted with OGE on the proposal to authorize 
OEC to require members and employees to comply with the reporting 
requirements in paragraph (f) through a third-party automated 
compliance system. OGE has advised that the proposed system is 
consistent with section 107 of the Ethics in Government Act, which 
permits OGE (and agencies, subject to OGE approval) to impose 
additional confidential financial disclosure requirements on officers 
and employees of the executive branch. Although the automated 
transmission of brokerage statements and transaction information would 
be effectuated by a member or employee's broker or other financial 
institution, the broker is acting as an agent of the member or employee 
in transmitting the information, and the ultimate responsibility for 
complying with the reporting requirement is that of the employee. To 
ensure that all employees are able to comply with the reporting 
requirement, the Commission is proposing to provide that the Designated 
Agency Ethics Official (DAEO) may 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 exceptional circumstances, 
the DAEO may permit any member or employee to report the required 
holding and transaction information outside of any eventual automated 
personal trading compliance system such as where OEC has determined 
under the specific facts that use of the automated system is not 
possible or would result in significant undue hardship.
    The Commission is also proposing to revise transaction reporting 
deadlines to provide necessary flexibility to adjust for securities 
transactions and holdings data obtained as proposed from financial 
institutions though a third-party automated compliance system. The 
Commission proposes to modify 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. It is OEC's 
hope that any eventual automated third-party compliance system would 
allow for trade notifications sooner than the current five day 
requirement, and this amendment would maintain flexibility for the DAEO 
to require earlier (or permit later) reporting for SEC employees, as 
appropriate, using an automated third-party compliance system.

D. Prohibit Purchases of Direct Listed Assets

    Members and employees of the Commission are currently prohibited 
from purchasing a security in an initial public offering (``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. This restriction ensures 
that employees do not use, or appear to use, material, non-public 
information to their advantage in purchasing such securities.
    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 proposes to expand 
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 Commission also proposes 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 
exception for Permissible Diversified Investment Funds in paragraph (g) 
would cover IPO shares in a registered investment company or publicly 
traded or publicly available collective investment fund.

E. Technical Corrections

    Finally, the Commission is proposing to make certain definitional 
and technical changes to its rules, which include updating language to 
reflect that the Office of the Ethics Counsel is no longer part of the 
Office of General Counsel.

III. Request for Public Comment

    We request and encourage any interested person to submit comments 
on any aspect of the proposed amendments, other matters that might have 
an impact on the proposed amendments, and suggestions for additional 
changes. Comments are of particular assistance if accompanied by 
analysis of the issues addressed in those comments and any data that 
may support the analysis. We urge commenters to be as specific as 
possible.

IV. Administrative Law Matters

    The Commission finds, in accordance with section 553(b)(3)(A) of 
the Administrative Procedure Act (``APA''),\1\ that the proposed 
amendments relate solely to agency organization, procedure, or 
practice. They are therefore not subject to the provisions of the APA 
requiring notice, opportunity for public comment, and publication. The 
Regulatory Flexibility Act of 1980 \2\ therefore does not apply. 
Nevertheless, we have determined that it would be useful to publish the 
proposed amendments for notice and comment before adoption. Because the 
proposed rule relates to ``agency organization, procedure or practice 
that does not substantially affect the right or obligations of non-
agency parties,'' the proposed rule is not subject to the Small 
Business Regulatory Enforcement Fairness Act (5 U.S.C. 804(3)(C)). The 
proposed rule does not contain any collection of information 
requirements as defined by the Paperwork Reduction Act of 1995.\3\
---------------------------------------------------------------------------

    \1\ 5 U.S.C. 553(b)(3)(A).
    \2\ 5 U.S.C. 601 et seq.
    \3\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

V. Economic Analysis

    The Commission is sensitive to the economic effects of its rules, 
including the costs and benefits that result from its

[[Page 7894]]

rules.\4\ As discussed further below, we expect the economic effects of 
the proposed amendments would be limited. The amendments do not 
substantially alter preexisting requirements and are directed at 
internal procedures that apply only to Commission members and 
employees. Thus, we expect these changes would not impose any costs on 
parties other than the Commission and its members and employees, or if 
there are any such costs, we expect those costs to be negligible. We 
further believe that the changes would not have any significant impact 
on the functioning of securities markets, and so would have minimal, if 
any, effects on efficiency, competition, and capital formation. Where 
possible, we have attempted to quantify the costs, benefits, and 
effects on efficiency, competition, and capital formation expected to 
result from the proposed amendments.
---------------------------------------------------------------------------

    \4\ Section 2(b) of the Securities Act, section 3(f) of the 
Exchange Act, section 2(c) of the Investment Company Act, and 
section 202(c) of the Advisers Act require us, 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).
---------------------------------------------------------------------------

    As explained above, the proposed amendments would allow the DAEO 
flexibility to adjust transaction and reporting requirements for 
securities and holdings data obtained as proposed from financial 
institutions through a third-party automated compliance system and 
eliminate disproportionately burdensome compliance requirements for 
assets that pose minimal ethics risk, while expanding the scope of the 
Supplemental Standards to include certain funds that pose relatively 
higher ethics risk. We discuss below the potential benefits, costs, and 
economic effects of three significant categories of proposed amendments 
to the Supplemental Standards: (1) prohibiting employees from holding 
Financial Industry Sector Funds; (2) eliminating the preclearance, 
reporting, and holding period requirements for Permissible Diversified 
Investment Funds; (3) authorizing OEC to collect covered securities 
transactions data directly from financial institutions through a third-
party automated electronic system and adjusting transaction reporting 
deadlines to account for implementation of such systems; and (4) 
prohibiting purchases of direct listed assets for seven calendar days 
after the direct listing effective date. In addition, the proposed 
amendments make certain definitional and technical changes that we 
believe would not have a substantial economic effect.

A. Proposed Amendments Concerning Financial Industry Sector Funds

    The Commission is proposing 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 not Financial Industry Sector Funds 
that focus on investing in entities directly regulated by the 
Commission. Investments in Financial Industry Sector Funds, however, 
are subject to preclearance, reporting, and holding period requirements 
in the Supplemental Standards.
    The proposed amendments could enhance the integrity of the capital 
markets by further guarding against the perception of improper use of 
nonpublic information by SEC employees. Expanding the prohibition to 
include investments in Financial Industry Sector Funds would reduce the 
risk of actual or perceived conflicts of interests and could bolster 
investor confidence in capital markets.
    The cost to implementing this amendment would be borne mostly by 
the members and employees who currently hold these funds, as the 
Commission would require members and employees to sell, or otherwise 
divest, these types of assets. We do not have sufficient information to 
quantify the total effects associated with such divestment. Finally, we 
expect that implementing the proposed amendments would not add 
significant technical and administrative costs to the Commission as 
compliance would be accomplished via the Commission's existing 
compliance system with minimal upgrade costs.

B. Proposed Amendments Concerning Permissible Diversified Investment 
Funds

    The Commission is proposing to modify its rules to eliminate the 
preclearance, reporting, and holding period requirements for 
Permissible Diversified Investment Funds by making them exempt from 
such requirements under Rule 102(g)(1). Under the current rule, 
Commission members and employees are required to preclear all trades in 
Permissible Diversified Investment Funds and confirm any such executed 
transactions. Commission members and employees are required to hold 
Permissible Diversified Investment Funds for at least 30 days before 
selling.
    The proposed amendments would benefit Commission members and 
employees by removing certain procedural requirements that currently 
apply to their purchases and sales of Permissible Diversified 
Investment Funds and consequently reducing delays in executing 
investment choices. The magnitude of the benefits, however, would 
depend on how implementing the proposed amendments would affect 
individual members' and employees' investment decisions and portfolios, 
which is difficult to predict.
    We do not expect that the proposed amendments would impose costs on 
the Commission, its members and employees, or the public. Because 
Permissible Diversified Investment Funds are diversified and therefore 
eligible for most applicable regulatory conflicts exemptions, we expect 
that the proposed exemption would add no significant risk of real or 
perceived conflicts of interest, and would allow the Commission to 
focus on employees' holdings or transactions that present more 
significant conflicts and appearance concerns.

C. Proposed Amendments Concerning Automated Reporting of Purchases, 
Sales, Acquisitions, and Dispositions of Securities and Related 
Adjustment of Transaction Reporting Deadlines

    The Commission is proposing to amend Rule 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 and to modify the existing five-business-days 
reporting requirement to require all members and employees to report 
transactions that are not exempt under Rule 102(g)(1) in the manner and 
according to the schedule required by the DAEO.
    We do not expect the proposed amendments to result in significant 
economic effects to the Commission or members of the public. The 
proposed amendments would benefit Commission members and employees by 
reducing their reporting costs because manual submission of transaction 
data would no

[[Page 7895]]

longer be necessary.\5\ In addition, the proposed amendments could 
enhance the integrity of Commission operations by allowing more 
effective OEC oversight of member and employee activity through 
improved data accuracy and completeness and independent verification of 
employee holdings and transactions. The proposed amendments may provide 
more or less time for Commission members and employees to report the 
transactions depending on the schedule set by the DAEO.
---------------------------------------------------------------------------

    \5\ See Section II.0, supra.
---------------------------------------------------------------------------

    The costs of implementing an automated electronic reporting system 
would be borne mostly by the Commission, including both initial costs 
of setting up the system and ongoing maintenance costs. We do not 
expect that the proposed amendments will impose costs on the public.

D. Proposed Amendments Concerning Prohibiting Purchases of Direct 
Listed Assets

    The Commission is proposing to expand the limitation in Rule 
102(c)(2) to prohibit a member or employee from purchasing securities 
that are directly listed on an exchange for seven calendar days after 
the direct listing effective date.
    The Commission believes that the proposed limitation could benefit 
the integrity of the capital markets by further guarding against the 
perception of improper use of nonpublic information by SEC employees. 
Expanding the prohibition to include direct listed assets would reduce 
the risk of actual or perceived conflicts of interests and could 
bolster investor confidence in capital markets.
    The costs from implementing this amendment would be borne mostly by 
the members and employees who may otherwise have purchased securities 
that are directly listed on an exchange insofar as the proposed 
limitation will restrict their investment options. We do not expect 
that the proposed amendments will impose costs on the Commission or the 
public.
    We request comment on all aspects of our economic analysis, 
including the potential costs and benefits of proposed amendments. 
Commenters are requested to provide empirical data, estimation 
methodologies, and other factual support for their views.

Statutory Basis and Text of Rule

    These amendments to the Commission's ethics rules are being 
proposed 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 2635.105, 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 proposing to amend 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), 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 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 Rule.
    (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

[[Page 7896]]

have five business days after clearance to effect a transaction.
    (2) Documentation of the clearance of any transaction pursuant 
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), 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 report and certify all 
securities holdings according to the schedule and in the manner 
required by the DAEO;
    (2) Members and employees must report all purchases, sales, 
acquisitions, or dispositions of securities 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) 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 may 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.
    (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.
    (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 or limitations 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 or limitations 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

[[Page 7897]]

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 or restriction 
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: January 30, 2023.
Vanessa A. Countryman,
Secretary.
Emory A. Rounds, III,
Director, Office of Government Ethics.
[FR Doc. 2023-02235 Filed 2-6-23; 8:45 am]
BILLING CODE 8011-01-P