CalPERS Set To Hold Public Hearing On Proposed Personal Trading Regulations

by Allen Matkins

In March, the Board of Administration of the California Public Employees Retirement System (CalPERS) initiated the process for the adoption of proposed regulations on personal trading by Board members, executives and various employees.  The comment period for these proposed regulations ended on May 14, 2012 and a public hearing has been scheduled for tomorrow (June 13).  CalPERS received comments from Service Employees’ International Union, Local 1000 and two individuals.  A summary of the comments and CalPERS’ responses is available here.

The proposed regulations, as amended in response to the comments, prohibit “Covered Persons” from, among other things, executing a transaction that “would constitute insider trading under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5″.  The policy also prohibits “Covered Persons” from buying, selling or transferring covered securities during the “Blackout Period”.  (Oddly, the regulations define “Black-Out Period” but then use the term “Blackout Period”.  Elegance of variation has its virtues, but these are not generally appreciated in regulations.)   Under the proposed regulations, the “Black-Out Period” is the three-day period of time that commences one market day before and ends one market day after a transaction in Covered Securities by CalPERS.  The rules don’t say which market (e.g., London, New York, Hong Kong?). 

The proposed regulations define a “Covered Person” as persons occupying any of 14 specified positions with CalPERS.  A ”Covered Person also includes ”the secretary and assistant” and the spouse or registered domestic partner of any of the listed persons.   I’m sure that in using the conjunction “and”, CalPERS did not intend to exclude unhelpful secretaries.  Also, it’s not clear why CalPERS chose not to include other members of a listed person’s immediate family.  However, the application of the policy to non-employees does raise the question of whether CalPERS can discipline its employees for the actions of others, including spouses and domestic partners.

From the perspective of a securities lawyer, the terminology of the proposed regulations is quite  unconventional.  For example, the regulations define a “Covered Account” as an account “with the capability of trading Covered Securities to which the Covered Person holds legal title or over which the Covered Person has the power to place or direct trades.”  Accounts don’t trade securities, people do.  Moreover, the reference to legal title is strangely narrow.  A better definition would focus on whether the Covered Person has a financial or pecuniary interest in the Covered Account.  For example, SEC Rule 16a-1(a)(2)(i) defines “pecuniary interest” as “the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject security”.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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