Academic Researchers Find That SEC Employees Know When to Fold 'Em

A report from two academic professors, released by the Darden School of Business at the University of Virginia, found that SEC employees' hedge portfolios earn positive and economically significant abnormal returns. Shivaram Rajgopal of Emory University and Roger M. White of Georgia State University (the "researchers") used data obtained through the Freedom of Information Act to investigate the trading strategies of the SEC's 3,500 employees during 2009-2011.

The researchers found that the abnormal returns came from the selling, not buying, of stocks ahead of a decline in stock prices. They found that the returns were about 4 percent per year for all securities in general, and 8.5 percent for U.S. common stocks, noting that a hedge portfolio mimicking corporate insider trades earns returns of about 6 percent per year. The report explained that the expected return of the U.S. common stocks which SEC employees buy is not particularly good, indicating that it is the selling of the stock at the right time rather than the initial purchase that yields the unusually high returns.

Furthermore, the report stated, some of the trading profits are information-based, as the employees tended to divest "(i) in the run-up to SEC enforcement actions; and (ii) in the interim period between a corporate insider’s paper-based filing of the sale of restricted stock with the SEC and the appearance of the electronic record of such sale online on EDGAR."

The current version of the report is in its preliminary stages and is incomplete. The researchers stated that it is open to comments.