In an interesting development, the SEC recently charged one of its own with securities fraud. The SEC alleged that David R. Humphrey, an SEC staffer from 1998 to 2014, violated the Commission’s own employee trading rules during his tenure there by concealing his personal securities trading activities from the SEC’s ethics office, and later misrepresented those activities to the SEC’s Office of Inspector General when questioned during an investigation. According to the SEC’s complaint in the matter, Mr. Humphrey engaged in various prohibited transactions involving derivatives, failed to obtain required pre-clearance before trading non-prohibited securities and failed to hold securities for the period required by the SEC’s internal rules. Among other things, he never obtained required pre-clearance for options trading activity and he filed forms that falsely represented his securities holdings. In order to further conceal his activities, he apparently failed to disclose to at least one financial firm at which he held a brokerage account that he was employed by the SEC.
In announcing the matter, the SEC noted that its employees are “subject to rigorous rules regarding securities transactions to guard against even the appearance of using public office for private gain,” rules that, among other things, specifically prohibit trading in options or derivatives, and require annual disclosure of SEC employees’ securities holdings and transactions to the SEC’s ethics office. Nevertheless, this particular employee seemingly chose to ignore the rules and violate the policy.
We focus on this matter not in an effort to chide the SEC or to suggest that having its own version of a fox guarding the henhouse somehow diminishes its ability to take the moral high ground when similar things happen at the firms it regulates. Quite the contrary: we focus on this very isolated incident to show that even an entity with the strongest policies and procedures, a clear mandate to prevent the acts that occurred and a mission dedicated to the prevention of such misdeeds can be victimized by a person with the deliberate intent to do what is forbidden and a modicum of “cleverness” that enables the person to concoct a scheme for accomplishing that goal.
Financial firms and many other types of businesses, including public companies of all types, have policies, procedures and internal rules that govern, among other things, each employee’s trading of securities. Whether it is to prevent the potential misuse (deliberate or accidental) of material non-public information, purloining of client ideas or opportunities, or simply to keep the employee’s attention focused on business matters during working hours, these policies, procedures and internal rules have been implemented to protect the firm, its customers and clients, and the integrity of the securities markets. But someone truly bent on violating the policies, procedures and internal rules will usually be able to figure out a way to do it, and to avoid detection for at least some length of time. One of the things we always caution firms about is the need to be consistently vigilant with respect to the integrity of these policies, procedures and rules, and indeed all of their policies, procedures and rules, in an effort to ensure compliance. While most employees are, like the businesses employing them, honest and law abiding, there is always the risk that an isolated rogue individual will try to exploit a weakness in those policies, procedures and rules for personal gain.
It is only through regular and rigorous efforts to ensure the integrity of its policies, procedures and internal rules − through reviewing and updating, surveillance, continuing education, and a strong compliance culture − that a firm can hope to avoid what can be at minimum (like the SEC matter) a bit of public embarrassment when someone does something so clearly inappropriate, as well as potentially far more severe opprobrium and sanctions. So if you haven’t reviewed your procedures in a while, haven’t kicked the tires to see whether the procedures you have in place are still functioning as intended, and/or haven’t been as vigilant as you could be in enforcing the rules, now is probably a very good time to do a bit of housekeeping. As always, we are ready to assist in such efforts and to provide guidance in developing, implementing, updating and/or testing of your policies, procedures and internal rules to help you avoid a problem, rather than having to deal with one when it arises.
So if you haven’t reviewed your procedures in a while, haven’t kicked the tires to see whether the procedures you have in place are still functioning as intended, and/or haven’t been as vigilant as you could be in enforcing the rules, now is probably a very good time to do a bit of housekeeping. As always, we are ready to assist in such efforts and to provide guidance in developing, implementing, updating and/or testing of your policies, procedures and internal rules to help you avoid a problem, rather than having to deal with one when it arises.