After two presidents at the Federal Reserve banks crossed the line in trades they made, senior officials have put new restrictions on investments in place to prevent an overreach from happening again.
The new rules forbid both policymakers and senior staff members at the Fed from buying individual stocks in active trading. They are also prohibited from holding market products like individual bonds or derivatives -- in fact, they can no longer hold any investment that is secured and backed by the government.
What’s left isn’t much, but it’ll have to do. Starting immediately, the only investments Fed officials can make are to purchase diversified investment vehicles, like mutual funds.
"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 Federal Reserve Board Chair Jerome H. Powell.
Who crossed the line?
NPR reports that the two Fed bank presidents who crossed the line were Robert Kaplan and Eric Rosengren. Kaplan, who works at the Dallas Federal Reserve Bank, bought or sold stock worth more than a million dollars in 2020 in nearly two dozen companies, including Amazon and Delta Air Lines. Rosengren, who heads the Boston Federal Reserve Bank, bought or sold securities tied to real estate and made investments worth tens to hundreds of thousands of dollars in AT&T, Chevron, and Pfizer.
Those two were certainly in the right place at the right time, as the Fed was flooding the market with trillions of dollars. Both men tried to justify their trading by claiming they were in compliance with existing ethics rules. However, Kaplan and Rosengren won’t be putting themselves in danger anymore -- both have since announced their retirements.
Guarding against conflicts of interest
Powell said the Fed’s primary reason for drawing the new boundaries is simple: to help guard against even the appearance of any conflict of interest in the timing of investment decisions.
Going forward, policymakers and senior staff are obliged to provide 45 days advance notice for almost any financial investment purchase or sale they make. Plus, they have to hold on to those investments for at least one year. Additionally, no purchases or sales will be allowed during periods of heightened financial market stress.
According to the Office of Financial Research, the U.S.’ financial stress level is in a safe zone, with the most recent stress spikes coming in March 2020, and April 2020, as the COVID-19 pandemic started to flare.