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Powell orders review of Fed ethics rules after stock trades made by senior officials

·3 min read
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Federal Reserve Chairman Jerome Powell has directed staff to review the central bank system’s rules around stock trading as part of clean-up efforts related to the disclosure of several personal multi-million dollar transactions made by senior policymakers last year.

“Chair Powell late last week directed Board staff to take a fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials,” a Fed spokesperson said.

The Fed said its guardrails on personal financial interests are “stricter” than those that apply to Congress, but emphasized that the review was being launched because “trust of the American people is essential.”

Earlier in the month, the Wall Street Journal reported that Dallas Fed President Robert Kaplan purchased and sold several multi-million stakes in companies like Apple, Verizon (Yahoo’s former parent company), Johnson & Johnson, Occidental Petroleum, and even a floating rate bond ETF (FLOT).

Shortly after, Bloomberg reported that Boston Fed President Eric Rosengren had made several transactions in separate real estate investment trusts.

The trades were made over the course of 2020, during which Fed officials deliberated over a monetary policy rescue plan for a U.S. economy reeling from COVID-related shutdowns.

Last Thursday, both reserve banks simultaneously issued nearly-identical statements claiming that their investments complied with Fed ethics rules, but committed to dumping their holdings by the end of the month. The two presidents also promised to stop all trading in those accounts for the remainder of their time serving in those roles.

Both did so acknowledging “even the appearance of any conflict of interest.”

Under scrutiny

Lawmakers in D.C. have zoned in on the Fed, escalating the public relations fallout for an institution that values its independence.

Massachusetts Democrat Sen. Elizabeth Warren on Wednesday pressed the central bank to impose a more stringent ban on personal financial interests to minimize potential conflicts of interest.

“I am therefore asking that, within 60 days, you impose a ban on the ownership and trading of individual stocks by senior officials,” Warren wrote in letters to all 12 reserve banks.

One challenge with the Fed’s ethics rules is the independent system’s quasi-public structure.

The Fed’s Board of Governors, based in Washington, is a government agency and serves as the head of the entire Fed system.

The 12 reserve banks scattered across the country, which includes the outposts in Dallas and Boston, report to the Fed Board but technically operate as private not-for-profit organizations with their own boards of directors.

The president of the reserve banks all participate in the central bank’s Federal Open Market Committee, which steers interest rate policy and other monetary tools.

The reserve banks have similar codes of conduct that, among other things, prohibit direct or indirect holdings in banks and financial services firms that take deposits (due to the Fed’s role as a banking regulator). 

But interests in firms that are not “predominantly engaged in the banking or thrift business” are exempt from the prohibition, with any grey area investments to be reviewed by an ethics officer at that bank (not the Fed Board).

Powell’s review suggests that the Board may be interested in implementing more stringent and standardized rules across the system.

“The Board will make changes, as appropriate, and any changes will be added to the Reserve Bank Code of Conduct,” the Fed spokesperson said.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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