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Federal Reserve tightens ethics rules to ban active trading by senior officials

·Reporter
·2 min read

The Federal Reserve on Thursday said it will tighten its ethics rules concerning personal finances among its most senior officials, the latest development in a trading scandal that has led to the resignation of two policymakers.

The central bank said it has introduced a “broad set of new rules” that restricts any active trading and prohibits the purchase of any individual securities (i.e. stocks, bonds, or derivatives). The new restrictions effectively only allow purchases of diversified investment vehicles like mutual funds.

If policymakers want to make any purchases or sales, they will be required to provide 45 days of advance notice and obtain prior approval for any purchases and sales. Those officials will also be required to hold onto those investments for at least one year, with no purchases or sales allowed during periods of “heightened financial market stress.”

Fed officials are still working on the details of what would define that level of stress, but said the market conditions of spring 2020 would have qualified.

The new rules will also increase the frequency of public disclosures from the reserve bank presidents, requiring monthly filings instead of the status quo of annual filings. Those at the Federal Reserve Board in Washington already were required to make monthly disclosures.

The restrictions apply to policymakers and senior staff at the Fed’s headquarters in Washington, as well as its 12 Federal Reserve Bank regional outposts. The new rules will be implemented “over the coming months.”

Fed officials said changes will likely require divestments from any existing holdings that do not meet the updated standards.

Fed Chairman Jerome Powell said the “tough new rules” were put in place 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.”

Over the last month, the central bank has been engulfed by a scandal centered on big financial bets made by regional Fed Presidents Robert Kaplan and Eric Rosengren. Both stepped down from their roles after reporting revealed bets on real estate and individual stocks.

[Read: A timeline of the Federal Reserve’s trading scandal]

Eric Rosengren and Robert Kaplan
Fed Presidents Eric Rosengren and Robert Kaplan. Credit: Getty & AP

The American Prospect recently highlighted a financial disclosure showing Powell selling shares from a Total Stock Market Index Fund in October 2020. Unlike the trades done by Rosengren and Kaplan, the fund is a broad market index (with exposure to all U.S. equities).

The White House is currently weighing whether or not to reappoint Powell as Fed chairman, raising questions about whether or not the trading scandal complicates his odds at nomination.

Powell’s term as Fed chair expires in February 2022.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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