The Federal Reserve on Thursday said it would tighten its ethics rules concerning personal finances among its most senior officials, the latest development in a trading scandal that led to the resignation of two policymakers.
The central bank said it has introduced a broad set of new rules that prohibits any active trading and restricts the purchase of any individual securities i.e. stocks, bonds, or derivatives The new restrictions effectively only allow purchases of diversified investment vehicles like mutual funds.
If policymakers want to make any purchases or sales, they will be required to provide 45 days advance notice and obtain prior approval for any purchases and sales. Those officials will also be required to hold onto those investments for at least one year, with no purchases or sales allowed during periods of heightened financial market stress. Fed officials are still working on the details of what would define that level of stress, but said the market conditions of spring 2020 would have qualified.
The new rules will also increase the frequency of public disclosures from the reserve bank presidents, requiring annual filings instead of the status quo of monthly filings. Those at the Federal Reserve Board in Washington were already required to make monthly disclosures.
The restrictions apply to policymakers and senior staff at the Federal Reserve Bank regional headquarters in Washington, as well as its 12 Federal Reserve Bank regional outposts. The new rules will be implemented over the coming months. Fed Chairman Jerome Powell said the tough new rules were put in place to assure the public that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve. Over the last month, the regional Fed has been engulfed by a scandal centered on big financial bets made by Robert Kaplan and Eric Rosengren. Both stepped down from their roles after reporting revealed bets on real estate and individual stocks.
The American Prospect recently highlighted a financial disclosure showing Powell selling shares from a total stock market index fund in October 2020. Unlike the trades done by Rosengren and Kaplan, the fund is a broad market index with exposure to all U.S. equities The White House is currently weighing whether or not to reappoint Powell as Fed Chairman, raising questions about whether or not the trading scandal complicates his chances at nomination.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter bcheungz.