Federal Reserve Enacts New Rules Barring Policymakers From Stock Activity

The Federal Reserve has unveiled new rules designed to restrict the purchase and trading of individual securities by the central bank’s policymakers and senior officials.

What Happened: The new rules restrict Federal Reserve Bank and Board policymakers and their senior staff from purchasing individual stocks, holding investments in individual bonds, holding investments in agency securities (either directly or indirectly) or entering into derivatives.

Future investments will be limited to diversified assets including mutual funds, but policymakers and senior staff will be required to provide 45 days’ advance notice for purchases and sales of these assets, securities and obtain prior approval for their purchase and sale; investments must be held for at least one year. Purchases or sales during periods of “heightened financial market stress” will be prohibited.

Reserve Bank presidents will also be required to publicly disclose financial transactions within 30 days. Previously, this was only required of Board Members and senior staff.

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Why It Happened: Regional Fed presidents Robert Kaplan of Dallas and Eric Rosengren of Boston resigned last month following disclosures they engaged in stock trading during 2020. Kaplan acknowledged the bad optics of “my financial disclosure risks becoming a distraction” while Rosengren cited hitherto unreported health concerns for his abrupt resignation. Both men sold their stocks after news of their activities became public.

Earlier this week, news broke that Federal Reserve Chairman Jerome Powell sold between $1 million and $5 million in stocks at the beginning of October 2020. And earlier in the month, news reports surfaced that Federal Reserve Vice Chairman Richard Clarida had moved between $1 million and $5 million across mutual funds on Feb. 27, 2020, the day before Powell hinted the Fed could cut interest rates in response to the early chaos created by the pandemic.

Neither Powell nor Clarida have signaled they would resign. Powell’s term expires in February and President Joe Biden has been under pressure from progressive members of his Democratic Party not to renominate Powell for a second five-year term.

"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 Powell in a statement announcing the new rules.

Photo: Maklay62 / Wikimedia Commons.