Fed Watchdog Recommends More Staff Be Covered by Trading Rules

The Federal Reserve’s internal watchdog recommended that personal trading rules be extended to more staff after discovering that hundreds with access to confidential information are not covered.

(Bloomberg) — The Federal Reserve’s internal watchdog recommended that personal trading rules be extended to more staff after discovering that hundreds with access to confidential information are not covered.

Chair Jerome Powell agreed with the recommendations in a letter accompanying the report, which was released Monday.

The Fed in 2021 beefed up its rules governing the investment and trading of senior officials in the aftermath of an ethics scandal following unusual trading activity by two regional Fed presidents. 

But many Fed employees, including dozens who attend policy-setting Federal Open Market Committee meetings, don’t fall under the restrictions because they are not considered senior officials. The watchdog said these attendees should be subject to stiffer rules as well.

Specifically, 390 people had access to a repository that included some confidential FOMC documents, the inspector general wrote. And many who attend policy meetings don’t face the restrictions. During the September 2022 FOMC meeting, for example, only 44 of the 89 attendees were covered by the investment policy, it said.

Additional Controls

The inspector general urged the Fed board to develop a plan for additional controls, which may include pre-clearance of trades and extension of the minimum holding period requirement, to help reduce the risks of conflicts of interest.

In a response included in the report, Powell said he concurred with all of the recommendations and said he would consult with the FOMC to determine whether or how many individuals should be subject to all or parts of the trading restrictions.

“We are developing action plans” to address the recommendations and “take seriously” the need to ensure the trading policy is effective, he wrote.

Under the policy, senior Fed officials — including regional bank presidents, Washington governors and senior staff — will be limited to purchasing diversified investment vehicles such as mutual funds.

Dallas Fed President Robert Kaplan and Boston’s Eric Rosengren both stepped down following revelations of unusual trading during 2020. Rosengren cited a chronic illness in announcing his early retirement.

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