Stock Picking Skills of SEC Employees

We examine the profitability of stock trades executed by SEC employees. We find that a hedge portfolio mimicking such trades earns a positive abnormal return of about 8.5% per year in U.S. stocks, driven solely by avoiding losses on the sell-side. That is, SEC employees are using luck, skill, or private information to get out of U.S. stocks before prices fall. The SEC claims that this result stems in part from employees being forced to sell stocks in a firm when they are assigned to secret investigations. We question whether this policy is reasonable.