Why not do SEC employees a favor and require them to invest their money in the most sensible way? Photographer: Joshua Roberts/Bloomberg

Letting SEC Employees Own Stock Is Bad for SEC Employees

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Securities and Exchange Commission employees seem to be, as Slate notes, "freakishly good stock traders." A paper from Shivaram Rajgopal and Roger M. White shows SEC employees dramatically outperform the market by selling stocks ahead of enforcement actions in SEC investigations.

Cue the corruption investigations! But not so fast: The SEC has an explanation.

In a statement to the Washington Post, the SEC said that this can all be explained. Before an employee works on a case, they must divest themselves from any interest in the company. So it makes sense that employees sell their stock in a company before enforcement action. It just happens to also be profitable.

Fair enough. But it does raise a question: Why are SEC employees allowed to own individual stocks?

I'm not allowed to own individual stocks -- not just in companies that I do write about, but also in companies that I might write about. Too much potential for conflict of interest, because Bloomberg News sensibly doesn't want me to not be able to write a story because I'm invested in a company. As a result, virtually all of my assets are boringly invested in index funds. Is there some reason we couldn't impose a similar rule on SEC employees?

I can think of one: that people wouldn't want to become SEC employees if they couldn't make lots of money owning individual stocks. But as a graduate of the University of Chicago's Booth School of Business, I already believe that SEC employees can't make lots of money owning individual stocks, because you can't beat the market over the long run. SEC employees, of all people, should know that; part of their job, as I understand it, is looking hard at people who are making abnormal returns, because this may indicate that they are benefiting from inside information.

So why not do SEC employees a favor and require them to invest their money in the most sensible way? And, as a happy side effect, remove even the appearance of a conflict of interest?

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

(Megan McArdle writes about economics, business and public policy for Bloomberg View. Follow her on Twitter at @asymmetricinfo.)

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net