Federal Reserve Enacts New Rules On Investing And Trading By Senior Officers

The Federal Reserve has formally adopted new rules related to the investment and trading activities of its senior leadership.

What Happened: Under the new rules, senior Federal Reserve officials are prohibited from purchasing individual stocks or sector funds, nor can they holding investments in individual bonds, agency securities, cryptocurrencies, commodities or foreign currencies.

Furthermore, they are prohibited from entering into derivatives contracts and engaging in short sales or purchasing securities on margin. Senior Fed officials will not be required to provide 45 days' non-retractable notice for purchases and sales of securities — they must also obtain prior permission for such transactions and hold the investments for at least one year.

And in the event of the next economic crisis, the Fed announced its senior Fed officials can no longer engage in purchases and sales “during periods of heightened financial market stress.”

When the new policy takes effect, Reserve Bank presidents will be required to publicly disclose securities transactions within 30 days, as Board members and senior Board staff currently do. In addition, financial disclosures filed by Reserve Bank presidents will be promptly posted on the website of the relevant Reserve Bank. Financial disclosures filed by Board Members will continue to be available on the website of the Office of Government Ethics.

See Also: What The Fed's Balance Sheet Reduction Will Mean For The S&P 500

The new rules apply to Federal Reserve Board Members and to Reserve Bank presidents, first vice presidents and research directors, along with FOMC staff officers, the manager and deputy manager of the System Open Market Account, the Board division directors who regularly attend Committee meetings, any other individual designated by the Board Chairperson, and to the spouses and minor children of these individuals.

The rules take effect on May 1, excluding the requirements for advance notice and pre-clearance of transactions — the latter go into effect on July 1.

Why It Happened: The central bank’s policymaking Federal Open Market Committee unanimously voted to approve the rules that were first announced in October following news reports from the previous month on financial transactions carried out by Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren during 2020 when they were helping to shape the Fed’s response to the COVID-19 pandemic. Both men abruptly announced early retirements after transactions became public.

Fed Vice Chairman Richard Clarida was also in the press spotlight last October following news reports that traded between $1 million and $5 million from a bond fund into a stock fund one day ahead of an unexpected press statement from Fed Chairman Jerome Powell reaffirming the nation’s economic strength amid the beginning of the global spread of the coronavirus. Clarida would later step down two weeks prior to his term’s expiration.

Photo: Federal Reserve headquarters, via the Government Accountability Office