Issa: Why are SEC employees allowed to buy stock?

Securities and Exchange Commission employees should be barred from owning stock in individual companies, according to a pair of top House Republicans.

Citing a recent study that found SEC employees performed better than average when it came to picking stocks, Reps. Darrell Issa (R-Calif.) and Jim Jordan (R-Ohio) said the SEC should review its investment restrictions for its workforce. Even if agency employees are not gaining an unfair investing edge, the mere appearance of it could undermine confidence in the market overseers, they argued.

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“The SEC’s policies that enable such trading create the perception that such inappropriate profiteering is taking place, which may harm investor confidence in financial markets,” they wrote to SEC Chairwoman Mary Jo White. “There appears to be no justification to continue to enable SEC employees to trade shares of stock on individual companies.”

The lawmakers asked White to immediately review the SEC’s employee investment policies and reconsider allowing employees to purchase most types of stocks.

In February, a group of researchers released a draft paper that found SEC employees generally posted stronger returns on their investments than average investors. In particular, the paper found that SEC employees were much more likely to sell a particular stock before the agency pursued an enforcement action.

However, the SEC defended itself against claims of insider trading after the paper garnered attention, noting that agency policy requires employees to divest themselves of stock before beginning an enforcement probe.

A 2009 report from the SEC’s inspector general found that two SEC employees had disregarded trading rules, which in part led to the new restrictions requiring SEC employees to sell off stock before beginning an investigation.

Issa and Jordan said they specifically were not taking a position on accuracy of the study’s findings, but it “nevertheless raises concerns.”

And with that in mind, the lawmakers want the SEC to go further and require all employees to invest only in broad-based mutual or index funds, rather than picking individual stocks.

“By permitting SEC employees to own stock in individual companies, the Commission risks degrading investor confidence in financial markets, contrary to the agency’s purpose and mission,” they wrote.