New Rules from the Federal Reserve restrict central bankers from trading stocks

Spark Global Limited reports:

The event profile

The Fed on Thursday announced new rules governing the investments and trades of central bankers, barring them from buying individual stocks. Just weeks ago, the presidents of two regional Fed banks resigned amid scrutiny of their trading activities during the pandemic.

Key facts

As a result of the new rules, Fed policymakers and senior officials, including board members, will be barred from buying individual securities such as stocks and bonds, holding investments in agency securities, such as Us Treasuries, and entering into derivatives contracts.

The Fed said officials would be required to give 45 days’ notice before buying or selling securities “to help guard against any appearance of a conflict of interest”.

In addition, they must obtain prior approval to trade securities and hold their investments for at least a year.

While the Fed did not specifically mention stock trading by some officials during the pandemic that sparked widespread criticism last month, it made clear that fed officials would no longer be allowed to buy and sell investment products during periods of “heightened financial market stress”.

The new rules would also require regional fed branch presidents to disclose trading information within 30 days, a requirement already applied to board members and senior staff.

The Fed, which did not immediately respond to Forbes’ request for comment, said the new restrictions would be incorporated into fed rules and policies “in the coming months.”

Important remarks

“These stringent new rules raise our ethical standards to assure the public we serve that all of our senior officials are fully focused on fulfilling the Federal Reserve’s public mission,” Jerome Powell, the Fed chairman, said in a statement.

The key background

Eric Rosengren, former President of the Boston Fed, and Robert Kaplan, former president of the Dallas Fed, announced their retirements on the same day last month. A few weeks ago, they came under scrutiny for trading individual stocks during the pandemic. While Rosengren cited health issues as the reason for his early retirement, Kaplan acknowledged that the “recent focus on his financial disclosures” could “become a distraction for the Fed.” Fed Vice Chairman Richard Clarida’s trade in February 2020 also drew criticism. In the wake of the disclosure, Mr Powell ordered a comprehensive review of the rules governing securities trading by Fed officials. “Even if these transactions appear to comply with existing rules, it just tells us that existing rules and practices are broken and we need to improve disclosure rules,” Mr Powell said at a congressional hearing last month.

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Important criticism

“Reports of such financial activities…… Reflects poor judgment on the part of these officials and an attitude that personal profitmaking is more important than the confidence of the American people in the Federal Reserve, “Sen. Elizabeth Warren (D., Mass.) wrote in a letter to the Securities and Exchange Commission earlier this month, urging the agency to investigate the transactions. “There is no sound moral or financial justification for any government official to engage in these questionable market conspiracies when they have access to non-public information and are empowered to make decisions that have particular market and economic implications.” The SEC declined to comment on whether it would launch an investigation.

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