September 28, 2023

Brad Marolf

Business & Finance Wonders

Fed imposes tougher rules on financial trades amid scandal

Top Federal Reserve officials will be banned from a broad range of financial trades and face stricter approval and disclosure requirements under a set of new rules announced by the bank Thursday.

The new rules come as the Fed faces growing backlash over investment decisions made by top officials in 2020 as the bank deployed trillions in emergency relief efforts meant to stabilize financial markets and support the economy through the COVID-19 pandemic.

“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,” said Fed Chairman Jerome Powell, whose term expires in February. The trading scandal is among several factors that could threaten a potential renomination from President BidenJoe BidenOvernight Energy & Environment — Presented by American Clean Power — Methane fee faces negotiations White House rejects latest Trump claim of executive privilege The No Surprises Act:  a bill long overdue MORE.

Under the new rules, members of the Fed Board of Governors, presidents of the 12 regional reserve banks, and senior staff members would no longer be allowed to purchase individual stocks, bonds, or securities backed by federal agencies, or trade derivatives. Covered officials would also need to provide 45 days advance notice of any purchase or sale of securities, obtain prior approval, and hold those investments for a year.

Fed officials would largely be limited to investing in mutual funds and other diversified investment products typically included in 401(k)s and similar retirement savings accounts. Officials would also be barred from making any portfolio changes during periods of financial volatility. 

The Fed said it will apply those rules “over the coming months,” but did not specify when. The bank also did not say whether Fed officials would have to adjust their current holdings to comply with the rules. While the rules appear to allow Fed officials to hold onto stocks they currently own, the standards specifically ban the possession of bonds and agency-backed securities, which some Fed officials hold.

It is also unclear who would be responsible for clearing Fed officials’ trades.

The new rules are the Fed’s most aggressive response yet to a trading scandal that emerged over the summer amid several economic and political challenges for the bank.

Former Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren both stepped down in recent weeks after articles from the Wall Street Journal and Bloomberg News exposed several controversial investments made last year. 

Kaplan bought several million dollars worth of individual stocks as the market was reacting heavily to the Fed’s attempts to stabilize the economy. Rosengren invested in securities tied to commercial real estate and frequently spoke about the issues facing the sector in public appearances. All of those transactions were allowed under regional bank rules at the time.

The backlash intensified last month when Bloomberg News reported that Fed Vice Chair Richard Clarida traded between $1 million and $5 million out of a bond fund into a stock fund Feb. 26 of last year. The transaction, which the Fed said was pre-planned and pre-approved, happened a day before Powell announced the bank could take action in response to growing market chaos unleashed by the pandemic.

Powell has also faced criticism from progressives for his sale of a $1 to $5 million stake in a stock index fund tied to the market’s broad performance on Oct. 1, 2020. The sale occurred shortly before Powell and Fed officials expressed growing concern about the economic impact of resurgent COVID-19 cases, but ended up costing Powell money as the market rallied considerably over the past year.

Some investment experts and ethics officials have stressed the difference between Powell and Clarida’s sale of broader index funds, which follow the broad strokes of the market, and Rosengren and Kaplan’s trade of specific securities with clearer direct connections to Fed actions.

Others have argued that it is inappropriate for Fed officials to make any financial trades while wielding immense influence over markets and receiving a constant stream of non-public information.

The Fed’s internal watchdog is reviewing the trading done by top officials for violations of bank regulations and federal trading laws. Such reviews typically end in suggested rule changes and internal reforms, but occasionally include criminal referrals.

While Powell has not been directly accused of wrongdoing by lawmakers, the scandal has raised questions about whether Biden will renominate him for another term leading the central bank.

Powell, a Republican first appointed to the Fed by former President ObamaBarack Hussein ObamaBiden ahead of pace Trump set for days away from White House: CNN The Senate is setting a dangerous precedent with Iron Dome funding Obama says change may be coming ‘too rapidly’ for many MORE, enjoys broad bipartisan support and would likely be reconfirmed by the Senate if nominated again. His willingness to stand up to former President TrumpDonald TrumpYoungkin ad features mother who pushed to have ‘Beloved’ banned from son’s curriculum White House rejects latest Trump claim of executive privilege Democrats say GOP lawmakers implicated in Jan. 6 should be expelled MORE, who frequently attacked him after elevating him to the chairmanship in 2017, response to the onset of the pandemic, and frequent presence on Capitol Hill has earned high praise from both sides of the aisle.

But Biden has also faced steady pressure from Democratic lawmakers such as Sen. Elizabeth WarrenElizabeth WarrenDemocrats face critical 72 hours The Hill’s Morning Report – Presented by Facebook – Biden, Democrats inch closer to legislative deal This week: Democrats aim to unlock Biden economic, infrastructure package MORE (D-Mass.), financial sector critics and climate advocates to replace Powell with a more liberal choice.

Asked about the development during a Thursday briefing, White House principal deputy press secretary Karine Jean-PierreKarine Jean-PierreOvernight Defense & National Security — Presented by Boeing — US ‘deeply alarmed’ by reports of military takeover in Sudan New hacking efforts show Russia undeterred by US actions The Hill’s 12:30 Report – Presented by Facebook – Dems eye legislative deal by the end of the week MORE declined to comment on the specific developments but said that Biden believes that all officials “should be held to the highest ethical standard.” 

Morgan Chalfant contributed.