Fed Adopts Sweeping Trading Curbs After Ethics Scandal

Kaplan, a former senior Goldman Sachs Group Inc. executive, disclosed multiple $1 million-plus transactions that year.

The new rules essentially force senior Fed personnel to limit their investments to highly diversified investment vehicles, like mutual funds and exchange-traded funds, an official said on the briefing call Friday.

Some questions still surround the full extent of Kaplan’s trading. The Dallas Fed has denied a request by Bloomberg News to provide the dates of the trades. Asked at a January press conference for the dates, Powell said that the Fed’s Washington-based Board didn’t have that information.

Congress Rules

The ethics scandal at the Fed has helped fuel momentum for stricter rules for members of Congress. Progressive Democrats and conservative Republicans alike have joined in proposals that run the gamut from requiring securities be held in a blind trust to complete bans on individual stock ownership.

Senate Majority Leader Chuck Schumer has endorsed the idea, though no specific proposal, and House Speaker Nancy Pelosi has said she is open to restricting trading after initially opposing limits.

Numerous questions have been raised by some lawmakers, including whether the restrictions or bans would apply to spouses and dependent children.

Current law, known as the Stock Act, prohibits members of Congress from using nonpublic information gleaned in the course of their duties for personal benefit and requires disclosure of securities trades by members, spouses or dependent children of more than $1,000.

Critics say the law is too easily skirted, the disclosure requirements too loosely enforced and the penalties too lenient.

President Joe Biden has nominated Fed Governor Lael Brainard to succeed Clarida as vice chair, and she awaits Senate confirmation for the post. The Boston Fed last week announced that economist Susan Collins will be the bank’s new president.

Under the the new Fed ethics rules:

Officials are prohibited from holding individual stocks, sector funds, agency securities, bonds, commodities, cryptocurrencies, foreign currencies and derivatives contracts, and from engaging in short sales or buying securities on margin;
Officials must provide 45-day non-retractable notice for transactions, receive pre-approval for purchases and sales and hold investments for at least one year;
The time periods straddling FOMC meetings during which transactions are prohibited were extended by one day to align with the Fed’s communications blackout period;
Transactions will be prohibited during periods of heightened financial market stress
Regional presidents will be required to disclose transactions within 30 days, as officials and staff of the Board of Governors already do;
The rules will apply to all members of the FOMC, regional bank first vice presidents, FOMC staff officers, the manager and deputy manager of the Fed’s System Open Market Account, Fed Board division directors and other individuals designated by the chair, as well as the spouses and minor children of all affected individuals;
The rules take effect May 1, with the pre-clearance requirement taking effect July 1; and
Affected individuals will have 12 months to dispose of prohibited holdings and new employees will have six months.

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