The Federal Reserve on Thursday announced what it said was a “broad set” of new rules that will restrict the trading and investment activity of top officials and senior staff.
As a result of the new rules, top Fed officials will not be allowed to buy and sell securities of individual companies. Instead, they will be limited to purchasing diversified investment vehicles like mutual funds.
Also prohibited are investments in individual bonds and agency mortgage securities.
Officials will have to give 45-day advance notice of purchases and sales and they will have to obtain pre-approval before executing the trades.
There will be a one-year holding requirements. Trading will also be prohibited during times of heightened market stress.
Federal Reserve official said there was strong support among Fed governors and the regional bank presidents for the rules. Officials said a rule that would have mandated top Fed policymakers put their investments in blind trusts was considered but rejected.
Dennis Kelleher, president of Better Markets, a consumer advocacy group, called the Fed rules “long overdue and a good start.” He pressed the Fed to reconsider its decision on blind trusts. “The most senior leaders of the Fed must be required to put all their investments into a qualified blind trust and be banned entirely from any trading,” he said.
Fed officials said some divestment will be required as a result of the new rules.
The reserve bank presidents will have to publicly disclose transactions in 30 days, which was previously only required for the board of governors.
“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 in a statement.
The Fed has been on the defensive since the Wall Street Journal and Bloomberg uncovered that two Fed officials, Dallas Fed President Rob Kaplan and Boston Fed President Eric Rosengren, were active traders in 2020 at the same time the central bank was providing massive support to the economy in the wake of the coronavirus pandemic. Kaplan resigned in the wake of the disclosure while Rosengren left office for health reasons.
Sen. Elizabeth Warren, Democrat of Massachusetts, has called for the Securities and Exchange Commission to review the trading activity. Fed officials receive daily private reports about the health of the U.S. economy.
Advocates of reform of the Fed have also pointed to investment decisions by Fed Vice Chair Richard Clarida and Powell during 2020 as examples of trading that should be curtailed.
Some experts have defended Powell’s trading activity – which was to sell holdings of a stock index in October 2020.
Former Obama top economist Jason Furman said Powell’s activity was essentially withdrawing money from a bank. Peter Conti-Brown, a professor at the University of Pennsylvania, said it would be “a scandal” if Powell’s trading was used against him in the question of whether President Joe Biden would give him a second term.
Kelleher of Better Markets called on the Fed to release all documents related to the pandemic trading by the Fed’s leaders.