Federal Reserve Tightens Rules on Trading by Officials

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Federal Reserve Tightens Rules on Trading by Officials

The Federal Open Market Committee (FOMC) stated on February 18, 2022, that it had voted unanimously the day before to officially establish a set of extensive new regulations to control the investing and trading activities of top Federal Reserve System employees (FRS).According to the Fed’s press release, these guidelines, which were initially published on October 21, 2021, “seek to maintain public trust in the impartiality and integrity of the Committee’s work by protecting against even the appearance of any conflict of interest.”

The new restrictions were developed in reaction to the resignations of two regional Federal Reserve Bank presidents due to controversies. Both had made transactions during the COVID-19 crisis in 2020 that seemed to be based on intimate knowledge of Federal Reserve policy activities.

Key Takeaways

  • The Federal Reserve has imposed severe new limitations on top officials’ trading and investment.
  • On October 21, 2021, an outline was released, and on February 17, 2022, comprehensive regulations were enacted.
  • The majority of the new regulations go into effect on May 1, 2022.
  • More banned investments, more disclosures, and more covered people are all part of the new regulations.

Stated Purpose

The Fed’s news release contains a full five-page paper outlining the new regulations, which were enacted on February 17, 2022 and will take effect (with one exemption) on May 1, 2022. The text reads in its first section: “The Federal Open Market Committee (the ‘Committee’) is dedicated to preserving the highest ethical standards. Public trust is essential for the Committee’s monetary policy obligations to be carried out successfully. To protect public trust in the impartiality and integrity of the Committee’s work, the Committee has imposed tight limits on covered persons’ investing and trading activities.”

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Prohibited Activities

Senior Federal Reserve officials are no longer permitted to own individual stocks or sector funds under new restrictions. Individual bonds, federal agency securities, cryptocurrencies, commodities, or foreign currencies are not permitted. They are not permitted to enter into derivatives contracts, participate in short sales, or buy assets on margin.

Futures, swaps, warrants, and options are examples of prohibited derivatives transactions.

During “periods of heightened financial market stress,” all buying and transactions will be forbidden. Existing restrictions prevent Federal Reserve officials from owning bank stocks or US Treasury securities, as well as participating in any financial activities during the blackout periods that surround FOMC meetings. To comply with the FOMC’s external communication blackout period, the new regulations prolong the financial trading blackout period surrounding regularly scheduled FOMC meetings by one day after each meeting.


While the ownership of US Treasury Bonds and US Treasury Notes is forbidden, the ownership of US Treasury Bills is not. They must, however, be held to maturity. Money market mutual funds that focus on government assets in the United States are likewise exempt.

Equity securities and equity options owned by a covered individual’s spouse in conjunction with the spouse’s job are exempt.

Exempt are assets held in different defined benefit or defined contribution retirement schemes. Those formed by the federal government are exempt in this regard.

Exempt are commodities or foreign money held for non-investment reasons.

Equity securities issued by small enterprises, including small family farms, money market mutual funds, qualified automated transactions, and untaxed dividends from 529 plans, health savings accounts (HSAs), or other comparable accounts are all exempted trades.

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Required Disclosures and Approvals

Senior Fed officials must send “non-retractable notice” 45 days in advance of any securities acquisitions and sells, seek prior permission for such transactions, and retain assets for at least one year.

The advance notification must describe the security that will be sold or acquired, the quantity or value of the security that will be exchanged, and a trading date window for the transaction of no more than seven calendar days.

The new regulations requiring advance notice and prior approval of securities transactions, in general, do not apply to the types of exempt securities and transactions described above. They also do not apply to securities sales required to comply with other ethical laws, regulations, or policies.

Regional Federal Reserve Bank presidents must publicly report securities transactions within 30 days of the new rules taking effect. This regulation already applies to members of the Federal Reserve Board (FRB) and senior FRB personnel. In extreme circumstances, the wait might last up to 45 days.

Financial disclosures made by regional Federal Reserve Bank presidents will be disclosed “promptly” on the appropriate Reserve Bank’s website. Financial disclosures submitted by FRB members will remain accessible on the Office of Government Ethics’ website.

Who’s Covered

The new rules apply to regional Federal Reserve Bank first vice presidents, regional Federal Reserve Bank research directors, FOMC staff officers, the manager and deputy manager of the System Open Market Account (SOMA), FRB division directors who regularly attend FOMC meetings, any other individual designated by the FRB Chair, and their spouses and minor children. Following further evaluation and analysis, more workers will be subject to all or portions of these guidelines.

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The new regulations also apply to trusts in which a covered person or a covered individual’s spouse serves as trustee or fiduciary or otherwise has discretionary power or control over the trust’s assets. However, some of these “covered trusts” may be granted exemptions by the relevant ethical authority.

Effective Dates

Except for the requirements for early notification and pre-clearance of transactions, the new regulations will go into force on May 1, 2022. Officials subject to the new restrictions will have 12 months from the moment the laws go into effect to dispose of any illegal assets. In the future, freshly covered officials will have six months to dispose of any illegal assets. The FRB will also vote on modifying the codes of conduct at the regional Federal Reserve Banks to comply with the new guidelines.

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