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WASHINGTON (AP) -- Federal prosecutors and the FBI have been investigating possible illegal insider trading by two Securities and Exchange Commission enforcement attorneys who were in a position to receive sensitive information about agency probes of public companies.

The SEC's inspector general, David Kotz, found that the frequent stock trades over a two-year period by the pair raised suspicions of insider trading. Earlier this year, he referred the matter to the Fraud and Public Corruption Section of the U.S. attorney's office in Washington.

That office, together with the FBI, "is conducting an investigation of possible criminal and civil violations," Kotz told SEC Chairman Mary Schapiro in a memo dated March 3.

The memo and Kotz's report of his investigation were provided by the office of Sen. Charles Grassley, R-Iowa, who has been an active critic of the SEC's operations.

Kotz's report also found that the SEC "has essentially no compliance system in place to ensure that ... employees, with the tremendous amount of nonpublic information they have at their disposal, do not engage in insider trading themselves." The agency's disclosure and compliance requirements is based on the honor system and there is no way to determine whether an employee fails to report a transaction.

"We take seriously even the suggestion that any SEC employee would engage in insider trading," according to a statement from the agency. "We note that the (inspector general's) report neither accuses any SEC employee of insider trading nor concludes that any such conduct took place."

Still, the SEC has been taking "additional steps to enhance our protections against the potential for improper conduct ... (including) developing a new computer system to facilitate reporting and review of securities trading by all SEC personnel, hiring a chief compliance officer, and providing greater clarity of our rule governing the reporting of trades," the statement said.

The FBI investigation and Kotz's findings were first reported Thursday by CBS News. FBI spokesman Richard Kolko said the bureau would have no comment. Kotz declined to comment Friday.

The SEC enforcement attorneys, one male and one female, each earn more than $160,000 annually and had stock portfolios estimated to be worth more than that, according to Kotz's report. They often e-mailed each other about stocks and their trades, it said. The attorneys and the companies whose stock they were said to have traded weren't named.

For example, they both traded in the stock of a large financial company after being told by a colleague about investigations of the company, a violation of SEC rules, according to the report.

"SEC attorneys are supposed to spend their time trying to prosecute insider trading, not profit from it," Grassley said in a statement Friday. "The SEC needs a better system to deter misconduct and give the public confidence that this sort of thing isn't a systemic problem."

Two months before an SEC investigation of a large health care company was opened, according to Kotz's report, the female attorney sold all her shares in the company. She traded stocks 247 times between in 2006 and 2007, the report said.

Both attorneys "inexplicably" testified to investigators that they failed to see how sending e-mails to the male attorney's brother and sister-in-law from his SEC account could create the appearance that he was improperly sharing nonpublic information with someone outside the SEC, the report says.

The disclosure of Kotz's findings comes at a time when the SEC has been roiled by criticism over its failure to detect the massive pyramid scheme run by fallen money manager Bernard Madoff, despite red flags raised to its staff by outsiders over the course of a decade. Kotz has been investigating the SEC's failure to uncover the fraud by Madoff, a former chairman of the Nasdaq Stock Market who was a member of SEC advisory committees.

Schapiro, an Obama appointee who took over in January, has taken several actions intended to strengthen and speed the SEC's enforcement efforts, and to tighten internal management and processing of complaints and tips. She has "made it a priority to significantly improve the agency's ethics and compliance programs around employee stock ownership," the SEC statement said.

http://finance.yahoo.com/news/FBI-probes-possible-insider-apf-15260703.html?sec=topStories&pos=6&asset=&ccode=