Federal Reserve Restricts Trading by Senior Officials

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Federal Reserve Restricts Trading by Senior Officials

The Board of Governors (FRB) of the United States Federal Reserve System (FRS) issued a new set of regulations on Oct. 21, 2021, prohibiting the ability of “top policymakers and senior personnel” to trade individual securities in their personal investment accounts. Following reports regarding significant transactions made by two senior officials as the COVID-19 issue progressed in 2020, the Fed has been under growing pressure to strengthen its ethics regulations.

“These stringent new guidelines set the bar high in order to ensure that all of our top officials retain a single-minded concentration on the Federal Reserve’s public purpose,” said Federal Reserve Board Chair Jerome H. Powell in a news statement.

Key Takeaways

  • The Federal Reserve of the United States has imposed additional restrictions on official trading.
  • In addition, the Fed is increasing public disclosures.
  • The new restrictions are a reaction to an ethical debate that arose in 2020 while the Fed developed policy solutions to COVID-19.
  • Two regional Federal Reserve Bank presidents may have traded based on intimate knowledge of those evolving policies. Both officials resigned lately.

The 2020 Fed Trading Controversy

Robert S. Kaplan, then president and CEO of the Federal Reserve Bank of Dallas, conducted multimillion-dollar stock transactions. Eric S. Rosengren, then president and CEO of the Federal Reserve Bank of Boston, traded in real estate-related securities. Both have just resigned, while Rosengren claims that his early departure is due to health issues.

According to a recent news story, both rejected instructions from the Fed’s ethics officials to avoid aggressive trading in March 2020. As the COVID-19 crisis progressed, the Fed was in the midst of developing and executing an unprecedented set of policy efforts aimed at stabilizing the economy and financial markets.

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The Fed’s New Trading Rules

According to the Fed’s press release, the Fed is: “announcing a wide set of measures that will ban individual securities purchases, limit active trading, and improve the timeliness of reporting and public disclosure by Federal Reserve officials and senior personnel Senior Federal Reserve officials would be restricted to acquiring diverse investment vehicles such as mutual funds as a consequence of the new restrictions.”

“The new limits will apply to both Reserve Bank and Board policymakers and senior employees, and they will bar them from acquiring individual stocks, investing in individual bonds, investing in agency securities (directly or indirectly), or engaging in derivatives. The new guidelines are broad, with the goal of elevating the Government Reserve’s investment and trading policies to the forefront of key federal institutions.”

In general, Fed policymakers and senior staff must provide 45 days’ notice before engaging in securities transactions, acquire clearance, and retain these assets for at least one year. Furthermore, “no purchases or transactions will be permitted during moments of increased financial market stress.”

Presidents of the Federal Reserve Banks’ 12 regional branches must now make public disclosures of their financial transactions within 30 days, a provision that already applies to members of the Board of Governors and senior personnel. According to the press release, all of these additional limits will be implemented into the Fed’s regulations and procedures in the coming months.

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