Fed imposes new restrictions on investment activities of officials

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Federal Reserve Chairman Jerome Powell has imposed sweeping restrictions on personal investment on senior officials in a bid to resolve a stock market controversy that has led to the resignation of two reserve bank chairmen and hurt his chances of be reappointed as head of the central bank next year.

The Fed said on Thursday that the new rules will restrict transactions by senior officials to broad-based investment vehicles such as mutual funds. They will also require all transactions to be pre-approved and scheduled in advance, eliminating the potential for any appearance that officials have inside information to bolster their personal investments.

The rules will apply to the 12 presidents of the system’s reserve banks and the seven governors of the Washington-based central bank board, as well as an unknown number of senior executives heavily involved in preparing for committee meetings. rate setting.

Mr Powell, a Republican, has been the frontrunner to keep his job when his term expires early next year. But the questionable business activities of two Fed bank chairmen, first reported last month by the Wall Street Journal, have been caught by a vocal minority of Democrats who have already opposed his appointment because they believe he is he’s too good friends with Wall Street on banking regulation.

The conflict of interest controversy for the Fed has shaken but not derailed Mr. Powell’s chances for a second term. The other main candidate for the post is Fed Governor Lael Brainard, who was responsible for overseeing reserve banks.

People familiar with the Biden administration’s deliberations said the trade imbroglio had not featured prominently in internal discussions about Fed staff decisions.

A White House spokeswoman on Thursday declined to talk about Fed developments, but said President Biden, a Democrat, “believes all government agencies and officials, including independent agencies, should be held accountable. the highest ethical standards, including avoiding any suggestion of conflicts of interest. “

The new rules will require Fed officials and senior executives to provide 45 days’ notice for all purchases and sales of diversified investment vehicles, such as mutual funds. Officials will also be required to obtain pre-approval for all purchases and sales of investments, and they will be required to hold investments for at least one year. Transactions will not be allowed during times of “heightened stress in financial markets,” the Fed said in a statement.

The rules go beyond what other government agencies demand of senior leaders, as well as what some congressional lawmakers have proposed in recent legislation that would broadly cover executive officials. Previously, the Fed prohibited officials from buying or selling shares of banks and other financial companies regulated by the central bank.

Norman Eisen, who was the chief ethics attorney at the Obama White House, said the latest provisions “meet or exceed” what any other US financial regulator requires. “The new rules are precise,” he said. “Of course, the proof of the pudding will be in the implementation, and we’ll all be watching closely… They took a negative situation and turned it into a big ethical step forward.”

It is high time to bring the Fed’s reserve banks “under a stricter system-wide ethics regime …” said Sarah Binder, professor of political science at George Washington University.

Fed officials chose not to force officials to put their assets in a blind trust – a separate option to keep official decisions away from personal finance matters – in part because they feared they might not be able to ” impose some of the requirements announced Thursday on these trusts. Government ethics officials have generally discouraged executive officials from using blind trusts.

Mr Powell announced a review last month after revelations from Dallas Fed Chairman Robert Kaplan and Boston Fed Chairman Eric Rosengren revealed a series of investments in companies or funds individuals last year. These transactions caused a significant backlash as they coincided with extensive interventions in the central bank market to avoid a financial panic due to the Covid-19 pandemic.

Mr Kaplan’s financial information showed he had bought and sold at least $ 1 million in stock in companies including Chevron last year. Corp.

, Delta Airlines Inc.,

Oil Marathon Corp.

, and Johnson & Johnson. Disclosures from Mr Rosengren, who cited health reasons when announcing his retirement last month, showed he had performed more than three dozen surgeries, albeit for sums far less than Mr Kaplan’s. , on the shares of four real estate investment trusts that buy and sell. the same types of mortgage bonds that the Fed bought in large quantities last year.

The crisis is severe because the Fed’s footprint on the economy is larger than it has ever been, and questions about whether the institution is acting in the best public interest is tarnishing its credibility.

In a written statement, Powell said the new rules “set the bar very high to assure the public that we serve that all of our senior officials remain focused on the public mission of the Federal Reserve.”

Senator Elizabeth Warren (D., Mass.), Who said she would oppose Mr Powell’s appointment due to disagreements over regulatory policy, stepped up her criticism of the Fed’s leadership in the aftermath of ethical controversy. She asked the Securities and Exchange Commission to examine the investing activities of Fed officials, including disclosures made in May that Vice President Richard Clarida transferred money between two mutual funds. as the coronavirus pandemic began to shake the markets.

Mr Clarida, who listed five trades involving broad-based index funds last year occurring on two dates, six months apart, said those trades were part of planned activity. “I have always discharged my public service obligations honorably and with integrity,” he said last week.

Ms Warren cited the deals earlier this month as evidence of a “culture of corruption” at the Fed and said Mr Powell had “failed as a leader.”

The Fed has separately hired its Inspector General’s office to conduct a review of the negotiation, which remains separate from the policy changes announced Thursday.

Ms Warren on Thursday demanded that the investigation, along with an SEC investigation, be “completed promptly and without Fed interference.” She added: “There can be no reform without accountability. “

Mr Powell told a press conference last month that the disclosures of Messrs. Kaplan and Rosengren have revealed a blind spot in the Fed’s code of conduct. Even though the exchanges had been in line with the policies of the respective reserve banks, this code of conduct “is now clearly seen as inadequate for the task of genuinely maintaining public trust in us,” he said. “We have to make changes, and we will do it accordingly. “

The disclosures of the transactions by Messrs. Kaplan and Rosengren have triggered a closer examination of the investing activity reported by Mr Powell. On October 1 of last year, he sold between $ 1 million and $ 5 million in shares of the Vanguard Total Stock Market Index Fund to raise money for a family expense.

The new rules allow Powell and other Fed officials to hold such investments, but are designed to further minimize any appearance of conflict by requiring prior planning and approval.

The rules also place tighter restrictions on the 12 reserve banks. The stock market controversy has raised new questions about the degree of oversight exercised by the Washington-based board of directors over regional quasi-private banks.

Some regional Fed chairmen have described a process by which ethics lawyers in Washington provide regular feedback on their annual disclosure statements. “They will ask questions or suggest changes to the forms. I will respond to these changes, ”Minneapolis Fed Chairman Neel Kashkari said in an interview in September.

On March 23, 2020, when the Fed announced an unprecedented package of emergency lending programs, a Fed lawyer wrote to participants on the federal rate-setting committee, as well as some senior executives and officials. reserve ethics 12. bank presidents — to emphasize the need to minimize the appearance of conflicts of interest.

“In light of the rapidly changing nature of recent and likely future system actions, please consider observing a trading hiatus and avoiding unnecessary securities transactions for at least the next few months, or until the next few months. ‘to return the political actions of the FOMC and the Council to their regular schedule, “the email said. The email was first reported by The New York Times.

The email reflected heightened sensitivity to potential appearances of conflict of interest during the most acute phase of the Fed’s response to the crisis. Normally, Fed officials are prohibited from engaging in financial transactions before the bank’s eight annual policy-making meetings, but the Fed last spring frequently made announcements about market movements between scheduled meetings. .

Write to Nick Timiraos at nick.timiraos@wsj.com and Michael S. Derby at michael.derby@wsj.com

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