A blog on financial markets and their regulation
Insider trading inside the regulator
March 1, 2014Posted by on
Rajgopal and White have a paper euphemistically (or sarcastically) titled “Stock Picking Skills of SEC Employees”. The paper is actually about potential insider trading by the regulator’s employees. The empirical results show that sales (but not purchases) by SEC employees earned abnormal profits (as measured by the standard Fama-French four factor model). There is evidence that some of these sales were based on impending SEC enforcement actions or disclosures made to the SEC that have not yet been made public. This indicates that the measures introduced by the SEC after an earlier insider trading scandal in 2009 (see here, pages 40-43) are not sufficiently effective or are not properly enforced.
If my memory serves me right, back in 2000, when I was in SEBI (the Securities and Exchange Board of India), employees (from the Chairman down to all staff) were forbidden from investing in equities except through mutual funds. This is arguably too draconian, but clearly the SEC rules (and their enforcement) were not tight enough.