Federal Reserve Announces New Trading Restrictions on Central Bank Officials

The Federal Reserve faced scrutiny after two regional bank presidents disclosed questionable 2020 trading. Now it’s revamping the rules.,


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Fed announces new curbs on trading by central bank officials following criticism of ethics rules.

The Federal Reserve unveiled a sweeping set of ethics changes on Thursday.Credit…Stefani Reynolds for The New York Times

Oct. 21, 2021Updated 2:34 p.m. ET

The Federal Reserve unveiled a sweeping set of changes to its ethics practices on Thursday, outlining new rules governing the types of financial securities that policymakers can own and how they can trade them in response to an ethics scandal that has embroiled the central bank.

Senior Fed officials will not be allowed to hold individual stocks or other securities, and will instead be limited to purchasing diversified investment vehicles like mutual funds, the Fed said in an announcement. Trading activity will be limited in general, and during periods of heightened financial market stress the Fed will declare official trading blackouts.

The announcement amounted to rough guidelines and principles, ones that will be fleshed out and incorporated into official Fed rules in the weeks and months to come. It came as the Fed continued to grapple with fallout from trades made by two regional reserve bank officials during 2020, a year in which the central bank took extraordinary steps to rescue financial markets amid the pandemic.

Robert S. Kaplan traded millions of dollars‘ worth of individual stocks last year while he was head of the Federal Reserve Bank of Dallas. Eric S. Rosengren, bought and sold securities tied to real estate while running the Federal Reserve Bank of Boston. Both have since resigned, though Mr. Rosengren cited health issues as his reason for retiring early.

Jerome H. Powell, the Fed chair, has faced mounting criticism over the trades, with Democrats and watchdog groups questioning the central bank’s ethics policies. Mr. Powell ordered a revamp of the Fed’s ethics rules last month, which culminated in the new rules outlined on Thursday. He has also asked for an investigation by the Fed’s independent watchdog, which has agreed to a review.

But scrutiny has persisted, with Senator Elizabeth Warren, a Democrat from Massachusetts, asking for more details earlier on Thursday after The New York Times reported that ethics officers had warned against active trading in March 2020 during the most turbulent period of market turmoil and Fed action.

The Fed’s new rules could help to reassure the central bank’s critics. They will apply to presidents at the 12 reserve banks, governors on the Fed’s seven-seat board in Washington, and senior staff, the Fed said. Beyond curtailing stock ownership, they would also prohibit officials from holding investments in individual bonds, holding investments in agency securities either directly or indirectly, or investing in derivatives.

“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,” Mr. Powell said in a statement.

Officials will also be restricted in their ability to move money around. Policymakers and senior staff “generally” will be required to provide 45 days of advance notice for security purchases and sales, will need to obtain prior approval for purchases and sales of securities, and will be asked to hold investments for at least one year, the Fed said.

Reserve bank presidents now will be required to publicly disclose financial transactions within 30 days, which Washington-based policymakers already do.

The Fed will “incorporate these new restrictions into the appropriate Federal Reserve rules and policies over the coming months,” according to the release.

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