Fed leaders should be banned from stock trading, says Elizabeth Warren

Senator Elizabeth Warren is calling on regional Federal Reserve Banks to set rules that would prevent their leaders from trading individual stocks, following recent disclosures that the chiefs of the Boston and Dallas banks actively traded stocks and other investments last year.

“The controversy over asset trading by high-level Fed personnel highlights why it is necessary to ban ownership and trading of individual stocks by senior officials who are supposed to serve the public interest,” Warren wrote in letters addressed to the leaders of the 12 regional Fed banks.

“I am therefore asking that, within 60 days, you impose a ban on the ownership and trading of individual stocks by senior officials at the Federal Reserve Bank of Dallas,” she wrote to the leader of that bank. “I am also asking that you impose strong and enforceable ethics and financial conflicts of interest rules for yourself and those that work for you at the Dallas Fed.”

The other 11 letters, including the one to the Boston Fed, had similar language.

Warren asked for a response by 15 October on how the banks would implement the requested changes, saying the rules would “send a clear and necessary message to the American people about the importance of government ethics and the integrity of Fed officials.”

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The Wall Street Journal last week reported that Dallas Fed President Robert Kaplan and Boston Fed President Eric Rosengren actively traded stocks and other investments over the course of 2020. The other 10 regional Fed leaders largely refrained from such financial activity.

A disclosure from Kaplan showed he made multiple stock trades of over $1m each. Kaplan, who worked at Goldman Sachs for more than 20 years before leaving in 2006, traded Apple, Alibaba Group, Amazon, General Electric and Chevron stocks, among others.

He also bought and sold other investments tied to interest rates and stock futures, both of which are sensitive to changes in monetary policy.

Rosengren’s trades, which were smaller, included a number of investments in real-estate-related securities. The policy maker has frequently warned about risks in the real-estate market.

Late last week, the Boston and Dallas Fed leaders said they would sell off their stockholdings and move the money into cash or diversified investment funds by the end of the month.

The 12 regional Fed banks are quasi-private institutions that operate under the oversight of the Federal Reserve in Washington, which is part of the government. Regional Fed leaders participate in setting monetary policy and have extensive information about the economy and financial system, as well as private knowledge of monetary policy deliberations.

Both the Boston and Dallas Fed banks said their officials’ trading was consistent with their respective codes of conduct, which prevent them from holding bank stocks and limit trading around rate-setting Federal Open Market Committee meetings.

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The Boston Fed’s code noted, in words similar to Dallas’s, that bank employees are responsible “to avoid conduct which places private gain above his or her duties to the Bank, which gives rise to an actual or apparent conflict of interest, or which might result in a question being raised regarding the independence of the employee’s judgment or the employee’s ability to perform the duties of his or her position satisfactorily.”

The Fed officials’ market activity drew criticism from some central bank watchers who said that even if the two men followed the letter of the code, they violated the spirit, and that their actions raised questions about whether they were setting monetary policy for the nation or their personal profit.

Rosengren said in a statement last week that while he believed his trading squared with the bank’s rules, “the appearance of such permissible personal investment decisions has generated some questions, so I have made the decision to divest these assets to underscore my commitment to Fed ethics guidelines.”

He said he hoped his stock sales would assure the public he is operating without any conflict of interest between his personal life and his policy-making role.

Similarly, Kaplan in a statement said his transactions complied with the Fed’s ethics rules, but “to avoid even the appearance of any conflict of interest, I have decided to change my personal investment practices.”

In her letters to Rosengren and Kaplan, Warren said divesting themselves of their stockholdings “was the right move and will help reassure the public of your integrity.” But she added it is critical that the banks’ codes of conduct have enough clarity to prevent such situations in the future.

The regional Fed banks didn’t immediately respond to requests for comment on Warren’s letters.

Write to Michael S. Derby at [email protected]

This article was published by Dow Jones Newswires

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