On Oct. 21, 2021, the Board of Governors (FRB) of the U.S. Federal Reserve System (FRS) announced a new set of rules restricting the ability of “senior policymakers and senior staff” to trade individual securities in their personal investment accounts. The Fed has come under increasing pressure to tighten its ethics rules in the wake of disclosures about large trades made by two senior officials as the COVID-19 crisis unfolded in 2020.
“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,” stated Federal Reserve Board Chair Jerome H. Powell in a press release.
Key Takeaways
- The U.S. Federal Reserve has new limits on trading by officials.
- The Fed is also expanding public disclosures.
- The new rules are in response to an ethics controversy that emerged in 2020 as the Fed formulated policy responses to COVID-19.
- Two regional Federal Reserve Bank presidents may have used inside knowledge of those developing policies to guide their trading. Both officials recently resigned.
The 2020 Fed Trading Controversy
Robert S. Kaplan, then president and CEO of the Federal Reserve Bank of Dallas, made stock trades worth millions of dollars. Eric S. Rosengren, then president and CEO of the Federal Reserve Bank of Boston, traded in securities tied to real estate. Both have resigned their positions recently, although Rosengren states that his early retirement is for health reasons.
A recent news report indicates that both ignored warnings issued by the Fed’s ethics officers to avoid active trading in March 2020. At the time, the Fed was in the process of formulating and implementing an unprecedented set of policy initiatives designed to stabilize the economy and the financial markets as the COVID-19 crisis unfolded.
The Fed’s New Trading Rules
As stated in its press release, the Fed is: “announcing a broad set of rules that will prohibit the purchase of individual securities, restrict active trading, and increase the timeliness of reporting and public disclosure by Federal Reserve policymakers and senior staff. As a result of the new policies, senior Federal Reserve officials will be limited to purchasing diversified investment vehicles, like mutual funds.”
“The new restrictions will apply to both Reserve Bank and Board policymakers and senior staff and prohibit them from purchasing individual stocks, holding investments in individual bonds, holding investments in agency securities (directly or indirectly), or entering into derivatives. The new rules are expansive and are designed to place the Federal Reserve’s investment and trading rules at the forefront among major federal agencies.”
In general, Fed policymakers and senior staff must give 45 days’ advance notice before making securities transactions, obtain approval for them, and hold these investments for at least one year. Moreover, “no purchases or sales will be allowed during periods of heightened financial market stress.”
Presidents of the 12 regional Federal Reserve Banks now must make public disclosures of their financial transactions within 30 days, a rule that already applies to members of the Board of Governors and senior staff. The press release indicates that all these new restrictions will be incorporated into the Fed’s rules and policies during the upcoming months.