3 min read.Updated: 27 Oct 2021, 06:29 PM ISTMICHAEL S. DERBY, The Wall Street Journal
Democrats plan to introduce legislation enforcing rules after two regional presidents stepped down from posts following investment trades
A group of Senate Democrats plans to introduce legislation that would penalize Federal Reserve officials who fail to adhere to a new ethics code made public by the central bank last week.
The bill is co-sponsored by Senate Banking Committee Chairman Sherrod Brown of Ohio and Sens. Kirsten Gillibrand of New York, Jeff Merkley of Oregon and Raphael Warnock of Georgia.
The legislation would prevent Fed officials from trading individual stocks, but allow investments in diversified mutual funds, investment trusts and U.S. Treasury securities. If enacted, the law would allow a window to sell prohibited securities, or officials could hold them while in office or place them in a blind trust. If officials didn’t comply with the law, they would face fines of at least 10% of the value of the investment that was either bought or sold. The bill would make the Fed responsible for administering its provisions.
“The American people need to be able to trust that the Federal Reserve works for them, and that officials aren’t abusing their positions for personal gain," Sen. Brown said in a statement. The senators said in a press release that the bill was a companion to legislation that would impose similar restrictions on members of Congress, who have faced criticism for their own stock trading.
The Federal Reserve declined to comment on the legislation.
Some of what the senators are proposing for the Fed lines up with changes the central bank is already making. The Fed last week imposed personal-investing restrictions on its senior officials in response to a stock-trading controversy that prompted the retirement of two Fed bank presidents. The new ethics code came after The Wall Street Journal reported that both presidents had been actively trading stocks and other investments while helping to set the nation’s monetary policy. The Fed said it would formally codify the new rules over the next few months.
The Fed’s new rules would limit officials to trading broad-based investments such as mutual funds to manage their personal wealth. They would have to preschedule and seek preapproval for any financial trades, and they wouldn’t be allowed to trade during periods of market tumult.
The Fed’s restrictions apply to all of the members of the Fed board of governors in Washington, the presidents of the 12 regional Fed reserve banks and senior central bank staff. The rules are designed to remove the potential for any appearance that officials would personally benefit from inside information about the markets or the central bank’s policy intentions.
Robert Kaplan, who became president of the Dallas Fed in 2015, bought and sold millions of dollars of stocks and other investments through 2020, the year the Fed confronted the economic and financial tumult caused by the Covid-19 pandemic with a historically aggressive monetary-policy response. Eric Rosengren, who became president of the Boston Fed in 2007, traded stocks and other investments related to the real-estate industry.
Messrs. Kaplan and Rosengren retired after Fed Chairman Jerome Powell refrained from offering them public support, saying at his September press conference that “no one is happy" about the trading revelations.
Both the Dallas and Boston Fed banks had said that the trading of their leaders was consistent with Fed rules prohibiting officials from owning bank stocks and from trading around monetary-policy meetings. That code was put in place just over two decades ago.
Mr. Powell has faced criticism over his personal financial holdings. He owned municipal bonds when the central bank started buying the assets as part of its efforts to support financial markets last year. “Munis were always thought to be a pretty safe place for a Fed person to invest because...as you know, the lore was that the Fed would never buy municipal securities," Mr. Powell said at the central bank’s September press conference. “So it was not an uncommon thing."
Fed Vice Chairman Richard Clarida has drawn criticism over transactions he made early last year that took place just before the Fed’s signal to markets of a looming rate cut aimed at offering support to the economy. Mr. Clarida disclosed that he had moved money between two mutual funds as the coronavirus pandemic began buffeting markets.
Mr. Clarida, who listed five transactions involving broad-based index funds last year occurring on two dates, six months apart, has said that those transactions were part of a preplanned activity. “I’ve always acquitted myself honorably and with integrity with respect to the obligations of public service," he said last week.
Sen. Elizabeth Warren (D., Mass.) has called for a Securities and Exchange Commission investigation into central-banker trading and has lamented what she called a “culture of corruption" at the Fed.
This story has been published from a wire agency feed without modifications to the text
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