The Federal Reserve announced Thursday that it would ban officials from owning individual stocks or bonds, and put limits on other activities in response to growing concerns about investing practices.
This ban applies to top policymakers, such as those on the Federal Open Market Committee and senior staff. Future investments must be restricted to diversified assets like mutual funds.
Fed officials cannot have shares in particular companies or invest in individual bonds. They also can't hold agency securities, derivative contracts, or any other type of securities. These new rules replace the existing regulations, which, although somewhat restrictive, allowed members to still buy and sell stock.
Fed Chair Jerome Powell stated in a statement that "These new tough rules raise the bar in order to ensure the public we serve that every one of our senior officials maintains a single-minded focused on the public mission Federal Reserve."
The new rules require that officials give 45 days notice before they buy or sell securities still permitted. The new rules also require them to keep the securities for at most one year. They cannot sell or buy funds during "heightened financial stress", according to a news release.
These rules follow disclosures that Fed officials were buying and selling stock at a time when central bank policies were intended to improve market functioning, especially during the Covid crisis.
To support the economy with liquidity and low interest rates, the Fed purchased bonds worth more than $4 trillion since the beginning of the pandemic. In an effort to maintain market functioning, it also purchased billions of corporate bonds from Wall Street's biggest names in order to purchase billions of them.
After being exposed as having engaged in individual securities trading in 2020, Robert Kaplan of Dallas (regional president) and Eric Rosengren from Boston (region vice president) both resigned. The moves were made in large-dollar amounts, as was the case with Kaplan.
The reports also featured Richard Clarida, Vice Chairman. Powell also sold securities last ye, even though they were exchange traded funds that tracked market indices.
"It's likely a wise decision, because the truth is that distinguishing genuine insider trading from ordinary trades that might be taking advantage insider information is fraught With problems," stated George Selgin (director emeritus at the Center for Monetary and Financial Alternatives of the Cato Institute).
According to the announcement, reserve bank presidents must disclose transactions within 30 calendar days. This is similar to what senior staff and members of FOMC have been required to do. According to the release, the new rules will be implemented "over the next month months". The release stated that current holdings must be sold, but no timeline has been set.
Selgin stated that the Fed's previous rules were "bad optics". They needed a rule such as this. They don't need us to feel sorry for them. With this restraint, they'll be able to do just fine."
These new rules follow a revelation by the New York Times about the Fed's ethics department having sent an email to officials in March 2020 warning them not to trade as the pandemic was getting worse. Officials at the central bank were also implementing a number of emergency measures.
Senator Elizabeth Warren, D.Mass., a Fed critic, has called for Thursday's public release of the email. The Times reported that Sen. Warren was calling for the email to be released publicly.