Federal Reserve adopts rules restricting insider trading by insider staff.

The facade of the Federal Reserve Bank. Image courtesy of Adobe Stock.

The Fed formally approved rules which will provide significant restrictions on investment activities by regional bank presidents, senior staff, and a host of staff have access to market-moving information as a part of their job.

This follows multiple news reports of Fed officials who were trading securities with somewhat awkward timing, such as after decisions had been made and before the full impact hit the market or in anticipation of major decisions which would be made within days.

The Fed issued a press release on 2/18/22: FOMC follow adopts comprehensive new rules for investment and trading activity.

Here are a few comments in the press release, which provide a great summary of the new restrictions. I converted the comment into bullet points:

“Under the new rules, senior Federal Reserve officials are prohibited from purchasing

“individual stocks or

sector funds;

holding investments in

individual bonds,

agency securities,

cryptocurrencies,

commodities, or

foreign currencies;

entering into derivatives contracts; and

engaging in short sales or

purchasing securities on margin. “

That basically leaves diversified mutual funds which are not sector funds as the main investment vehicle. Would also leave real estate as an option. Seems to allow precious metals which are physically held.

Sounds like a solid plan to keep Fed staff from looking like inside trading scammers.

It actually gets better.

Advanced disclosure, which cannot be withdrawn, is required and will be made public, all with a requirement to hold any position for one year:

“Additionally, senior Federal Reserve officials will be required to provide 45 days’ non-retractable notice for purchases and sales of securities, obtain prior approval for such transactions, and hold investments for at least one year.”

There is a long list of Fed staff for whom these restrictions apply, starting with regional Reserve Bank presidents, Board Members, and first vice presidents with the restrictions extending to a long list of other specific staff.

“In addition to Board Members and Reserve Bank presidents, the new rules apply to Reserve Bank first vice presidents, Reserve Bank research directors, FOMC staff officers, the manager and deputy manager of the System Open Market Account, Board division directors who regularly attend Committee meetings, any other individual designated by the Chair, and to the spouses and minor children of these individuals.”

Notice the rules apply to spouses and minor children. That means is no more of the flimsy rationalization offered by some federal judges that they didn’t look at what was in their spouse’s securities portfolio so they weren’t responsible for knowing about the positions.

Required disclosures will have increasing visibility on the regional banks’ websites and the website of something called the Office of Government Ethics. (I will skip the obvious joke.)

For background, here are my previous discussions on the ethical lapses at the Fed:

Leave a Reply

Your email address will not be published.