Fed limits trading by top officials in wake of ethics scandal

Bonds

The Federal Reserve will ban top officials from buying individual stocks and bonds as well as limit active trading after an embarrassing scandal that led two officials to resign and clouded Chair Jerome Powell’s path to renomination.

“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,” Powell said in the statement Thursday.

The Fed’s action marks its most significant response yet to recent revelations over trading last year by a few top policy makers as the central bank fought to protect the U.S. economy from COVID-19.

The Marriner S. Eccles Federal Reserve building.

Bloomberg News

While Powell’s critics seized on the disclosures as ammunition to block his potential renomination by President Joe Biden and demanded an investigation, the chair had said little beyond assuring Americans the rules would be thoroughly reviewed.

Senator Elizabeth Warren, among his most vocal opponents, has asked the Securities Exchange Commission to look into whether any insider trading rules were breached. Critics also seized on Powell’s own 2020 financial disclosure — showing he sold between $1 million and $5 million in a broad-based stock index fund last October — to question keeping him at the helm of the central bank.

Powell’s current term ends in February. Fed watchers said that if the ethics scandal was hurting Powell’s chances for another four years, his prompt action to tighten the rules could tip the balance back in his favor.

“I don’t think there is anything that will satisfy Powell’s small but vocal group of critics — they will continue to use any argument they can find,” said Roberto Perli, a former Fed economist and partner at Cornerstone Macro LLC. “But regardless, Powell showed leadership and the ability to do the right thing quickly. So, if anything, I think this strengthens his candidacy. The Fed needs an independent chair.”

Under the new policies, senior Fed officials — including regional bank presidents, Washington governors and senior staff — will be limited to purchasing diversified investment vehicles such as mutual funds, the central bank said in a statement Thursday.

New appointees will have to divest certain assets before joining, like a portfolio of individual corporate bonds, for example, a Fed official said on a briefing call with reporters.

Other rules “to help guard against even the appearance of any conflict of interest in the timing of investment decisions” include providing 45 days’ advance notice for buying and selling securities, obtaining prior approval for such transactions, and holding investments for at least one year. Additionally, “no purchases or sales will be allowed during periods of heightened financial market stress,” the Fed said.

The 12 regional Fed presidents will be required to publicly disclose financial transactions within 30 days, a policy that already applies to Washington-based governors and senior staff, the Fed said. They previously were only required to do so on an annual basis. Reports will be made public on the Fed’s website.

The announcement comes after Powell last month ordered a system-wide review of ethics rules.

“At the pace that the government usually moves, this is breakneck speed.” said Peter Conti-Brown, an associate professor at University of Pennsylvania. “Those who have been critical of the Fed should recognize the Fed is holding itself to a much higher standard than any other part of the government, including Congress.”

The Fed chief has also asked the Fed inspector general to take a look at the trading of “certain senior officials.”

Warren, in her request to the SEC, singled out a Bloomberg News report on Oct. 1 about Fed Vice Chair Richard Clarida’s 2020 financial disclosures. His filings showed he traded between $1 million and $5 million out of a bond fund into stock funds one day before Powell issued a statement flagging possible policy action as the pandemic worsened.

Dallas Fed President Robert Kaplan and Boston’s Eric Rosengren both stepped down following revelations of unusual trading during 2020. Rosengren cited a chronic illness in announcing his early retirement.

The new rules will supplement those already in place, such as a 10-day trading blackout around Fed meetings, according to the Fed official on the call.

“Today’s announcement is a very important step forward in restoring the Fed’s reputation,” said Andrew Levin, a Dartmouth College professor and former special adviser to the Fed’s board. “The Fed should promptly announce that it is actively cooperating with the DOJ and SEC to investigate the past trading activities of top Fed officials,” he said, referring to the U.S. Department of Justice.

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