Study: SEC Employees Earn Insider-Trading-Like Returns

Employees at the Securities and Exchange Commission may benefit from divesting companies ahead of investigations, research shows.

Illustration by Alex Agius for Institutional Investor.

Illustration by Alex Agius for Institutional Investor.

Employees at the U.S. Securities and Exchange Commission earn investment returns similar to the insider traders they prosecute, according to new research from Columbia University and Arizona State University.

A portfolio mimicking trades made by SEC employees between 2009 and 2011 earned excess risk-adjusted returns of about 4 percent a year for all securities, with abnormal gains jumping to 8.5 percent when only stocks of firms based and registered in the U.S. were tracked, found Shivaram Rajgopal, a professor of accounting and auditing at Columbia’s business school, and Roger White, an assistant professor at Arizona State University’s W.P. Carey School of Accountancy, in a paper published this month.

Rajgopal and White said the excess returns seemed to be primarily due to employees selling stocks ahead of bad news revelations. SEC employees, they explained, are required to divest their holdings in companies they are assigned to investigate.

“We are concerned that such a policy is tantamount to forcing employees to sell stock on non-public information given that virtually all investigations initiated by the SEC are private,” the authors wrote. “Relatedly, we question why SEC employees should be allowed to hold individual stocks.”

The SEC’s press desk didn’t immediately provide comment.


By comparison, a portfolio mimicking U.S. corporate insider trades earns lower risk-adjusted abnormal returns of about 6 percent a year, according to the research paper.

The study was based on trading data for 3,500 SEC employees provided by the regulator to the authors under a Freedom of Information Act request. Although these employees earned abnormal returns from selling stocks, Rajgopal and White said they “seem no different from naïve individual investors in terms of the securities they pick to buy” — suggesting excess returns were not the result of investment skill.

“If SEC employees are simply good stock pickers, given their background and experience, we would expect to observe abnormal returns on their buys as well,” they wrote in the paper.

[II Deep Dive: Insider Traders Less Likely to Get Caught if SEC is Far Away]

Though Rajgopal and White acknowledge there is not sufficient evidence to conclude that abnormal returns are the result of SEC employees trading on nonpublic information, they argued that the current trading policy for employees should be reassessed.

“Even an appearance of financial impropriety potentially undermines the credibility of the SEC with its stakeholders,” they wrote, suggesting that the issues they highlighted could be solved by prohibiting employees from trading in individual stocks. “While potentially draconian, such a policy is the simplest way to abrogate the concerns of even the most cynical observer,” they said.