Employees of the Securities and Exchange Commission are enjoying the same spectacular investment returns as many of the companies they investigate for insider trading, according to a recent study.

The paper, entitled Stock Trades of SEC Employees, was written by Columbia Business School professor Shivaram Rajgopal and Roger M. White, an assistant professor at Arizona State University's School of Accountancy.

The report tracked trades made by SEC employees from 2009 through 2011. It found that a portfolio mimicking their trades would have earned excess risk-adjusted returns of roughly 4% per year across all securities, with gains as high as 8.5% for only those securities based and registered in the United States, as reported by Institutional Investor.

By comparison, insider traders over the same period earned average risk-adjusted returns of roughly 6% per year.

Insider Trading?

What could be behind impressive returns of this kind? Researchers indicate that "the excess returns seemed to be primarily due to employees selling stocks ahead of bad news revelations," according to the report. The reason for this is that SEC employees are required to divest their holdings in companies which they have been charged with investigating.

Does this constitute insider trading? The authors of the study wrote that they "are concerned that such a policy is tantamount to forcing employees to sell stock on non-public information given that virtually all investigations initiated by the SEC are private. Relatedly, we question why SEC employees should be allowed to hold individual stocks."

SEC Monitors Potential Crooks But Who's Monitoring Them?

The Securities and Exchange Commission is a regulatory body charged with overseeing the securities industry in the United States.

The report also suggested that SEC employees made decisions which "seem no different from naive individual investors in terms of the securities they pick to buy." This could mean that any excess returns were not the result of particular investment skill.

On significant implication of this study has to do with the standing of the SEC itself. "Even an appearance of financial impropriety potentially undermines the credibility of the SEC with its stakeholders," the authors of the study wrote. (See also: How The SEC Tracks Insider Trading.)