Fed Tightens Trading Restrictions for Officials After Ethics Scandal

By Tom Ozimek
Tom Ozimek
Tom Ozimek
Reporter
Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he's ever heard is from Roy Peter Clark: 'Hit your target' and 'leave the best for last.'
February 19, 2022 Updated: February 19, 2022

The Federal Reserve on Friday adopted a strict new set of investing and trading rules for its senior officials, their spouses, and minor children, among others, as part of the central bank’s effort to boost confidence in its policymakers after an ethics scandal sparked a public outcry.

The Fed said in a statement the tough new restrictions intend “to ensure public confidence in the impartiality and integrity” of the work of the Federal Open Market Committee (FOMC), the central bank’s policy-setting body, with the move meaning to guard against “even the appearance of any conflict of interest.”

Under the sweeping new rules, top Fed officials are barred from buying stocks and sector funds, and from holding individual bonds, agency-backed securities, commodities, foreign currencies, and cryptocurrencies.

Also banned are the use of derivatives, short sales, and purchasing securities on margin, with officials being required to give 45 days notice of planned transactions and having to get approval to execute them. The rules also say any investments must be held for at least a year.

The bulk of rules take effect on May 1, after which officials covered by the restriction will have 12 months to get rid of any investments that aren’t permitted, while newly covered officials will have 6 months to dispose of impermissible holdings.

Besides Fed board members and Reserve Bank presidents and vice presidents, the new rules apply to research directors, FOMC staff officers, their spouses and minor children, and others. The Fed said it expects more staff will be subject to the rules after the central bank completes a further review.

The new rules come out of a review ordered by Fed Chair Jerome Powell after Boston Fed chief Eric Rosengren and Dallas Fed President Robert Kaplan resigned following reports of their active trading in 2020, when the central bank deployed a range of emergency measures to blunt the economic impact of the pandemic, which helped boost financial assets.

While the trades were allowed under the Fed’s ethics guidelines, their disclosure prompted public outcry over possible conflicts of interest. Both Kaplan and Rosengren later resigned.

Robert Kaplan
Robert Kaplan speaks on stage at the Cystic Fibrosis Foundation’s 60th Anniversary Gala in New York on Nov. 19, 2015. (Neilson Barnard/Getty Images for Cystic Fibrosis Foundation)
Eric S. Rosengren
The Federal Reserve Bank of Boston’s President and CEO Eric S. Rosengren speaks in New York on April 17, 2013. (Keith Bedford/Reuters)

Another Fed policymaker, former Vice Chair Richard Clarida, also came under fire after he corrected a previous financial disclosure in late December to show that he had sold a stock fund and then swiftly rebought it shortly before the Fed announced a series of stimulus measures. Clarida resigned two weeks before the end of his term.

Previously, the rules that guided personal financial practices for Fed officials were the same as those for other government agencies, although the Fed had supplemental rules that were stricter than those for Congress and other agencies.

Reuters contributed to this report.

Tom Ozimek
Reporter
Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he's ever heard is from Roy Peter Clark: 'Hit your target' and 'leave the best for last.'