Senate bill would fine Fed officials for stock market offenses


Dive brief:

  • A group of four Democratic senators tabled a bill on Tuesday that would penalize Federal Reserve officials who violate the central bank’s updated policy by banning prevent them from buying individual stocks, holding investments in individual bonds or agency-backed securities, or entering into derivatives. The bill is co-sponsored by Sen. Sherrod Brown of Ohio, Kirsten Gillibrand of New York, Jeff Merkley of Oregon and Raphael Warnock of Georgia.
  • Fed officials would face fines of at least 10% of the value of the investment bought or sold, The Wall Street Journal reported Wednesday. The bill was read twice on Tuesday and returned to the Senate Banking Committee, according to a Congress website.
  • The bill follows a scandal that saw two regional Fed chairmen, Eric Rosengren of Boston and Robert Kaplan of Dallas, resign last month after financial reports revealed they traded stocks last year while helping set monetary policy. The practice was in line with the central bank’s code of ethics, but raised concerns about potential conflicts of interest.

Dive overview:

Fed rules released last Thursday limit investments by senior officials to “the purchase of diversified investment vehicles, such as mutual funds,” the central bank said. Tuesday’s bill would codify that into law.

The bill would prevent the board of governors of the Fed, 12 regional presidents and senior executives to trade individual stocks, but allow investments in diversified mutual funds, investment trusts and US Treasury securities, according to the Wall Street Journal.

The bill would also give officials a window to sell unauthorized securities. Alternatively, officials could hold their investments or place them in a blind trust.

The Fed’s new rules last week require policymakers and senior executives to give 45 days’ notice before buying or selling authorized securities. In addition, they must obtain approval for these transactions and must hold any investment for at least a year, the central bank said. “In addition, no buying or selling will be allowed during times of heightened stress in the financial markets,” the Fed said.

Under the rules, the 12 regional Fed chairmen must publicly disclose financial transactions within 30 days – a policy that Washington-based governors and senior Fed officials must already adhere to.

“The American people must be able to trust that the Federal Reserve is working for them, and that officials are not abusing their positions for personal gain,” Brown said in a statement seen by the Journal.

Underlying the Fed’s recent ethics talks is the prospect that central bank chairman Jerome Powell is nearing the end of his term. President Joe Biden has previously said he will indicate this fall whether he will reappoint Powell, whose term expires in February.

That prospect, however, has suffered a backlash from some Democratic lawmakers who may favor a more liberal candidate. Most notably, Senator Elizabeth Warren, D-MA, publicly declared her opposition to Powell’s re-appointment during a hearing last month.

The Fed’s stock market scandal, meanwhile, has spread beyond regional presidents. Financial information, uncovered this month, revealed that the Fed’s vice chairman Richard clarida moved between $ 1 million and $ 5 million from a bond fund to equity funds on February 27, 2020 – a day before Powell issued a statement warning the Fed may cut interest rates.

Along the same lines, a Disclosure Indicated Powell withdrew between $ 1 million and $ 5 million from a Vanguard stock index fund in October 2020.

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