Market

Fed Unveils ‘Tough New Rules’ Restricting Central Bank Officials’ Stock Trades After High-Profile Resignations

Topline

The Federal Reserve on Thursday announced new rules governing the investments and trades made by central bank officials, banning the purchase of individual securities mere weeks after the presidents of two of the Fed’s regional banks resigned from their positions amid scrutiny over their trading activity during the pandemic. 

Key Facts

As a result of the new rules, Fed policymakers and senior staff, including board members, will be barred from purchasing individual securities, including stocks and bonds, holding investments in agency securities—like Treasurys—and entering into derivatives contracts.

Officials will be required to provide 45 days of advance notice before purchasing or selling securities “to help guard against even the appearance of any conflict of interest,” the Fed said. 

They must also obtain prior approval to transact securities and hold their investments for at least one year.

Though the Fed didn’t specifically reference the pandemic stock trades that sparked widespread criticism last month, it did specify that officials will no longer be allowed to purchase or sell investments during periods of “heightened financial market stress.”

The rules will also require Fed presidents to publicly disclose financial transactions within 30 days, as is already required by board members and senior staff. 

The Fed, which did not immediately respond to Forbes‘ request for comment, said the new restrictions would be incorporated into the Fed’s rules and policies “over the coming months.”

Crucial Quote 

“These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve,” Federal Reserve Board Chair Jerome Powell said in a statement. 

Key Background

Eric Rosengren and Robert Kaplan, the former presidents of the Federal Reserve Banks of Boston and Dallas, respectively, announced their retirements on the same day last month, weeks after they came under scrutiny for trading individual stocks during the pandemic. While Rosengren cited health issues for his early retirement, Kaplan acknowledged the “recent focus” on his financial disclosures risked “becoming a distraction” for the Fed. Trades made by Federal Reserve Vice Chair Richard Clarida in February 2020 have also faced criticism. After the disclosures, Powell ordered a sweeping review of the rules governing Fed officials’ trades. “Even if it appears to be the case that these trades were in compliance with existing rules, that just tells you the problem is the rules and the practices, and the disclosure needs to be improved,” Powell said in congressional testimony last month.

Chief Critic

“The reports of this financial activity … reflect atrocious judgement by these officials, and an attitude that personal profiteering is more important than the American people’s confidence in the Fed,” Sen. Elizabeth Warren (D-Mass.) wrote in a letter to the Securities and Exchange Commission earlier this month, urging the agency to launch an investigation into the trades. “There is no justifiable ethics or financial rationale for any government official to be involved in these questionable market machinations while having access to non-public information and authority over decisions that have extraordinary impacts on markets and the economy.” The SEC has declined to comment on whether it will initiate an investigation. 

Further Reading

Dallas Fed President Robert Kaplan Resigns Amid Scrutiny Over Trading—Hours After Boston Colleague Steps Down (Forbes)

Elizabeth Warren Calls On SEC To Investigate Fed Officials’ ‘Ethically Questionable’ Trades (Forbes)

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