US Federal Reserve Chair Jerome Powell ordered a review of the central bank’s ethics rules for the financial activities of its leaders this week.
The move follows reports from earlier in the week that two of the Federal Reserve's 12 regional bank presidents actively traded shares amid the volatility of the pandemic last year.
The Fed’s historically accommodative policies had a massive impact on markets last year as companies navigated the uncertainties of the Covid-19 pandemic.
Dallas Fed president Robert Kaplan and Boston Fed president Eric Rosengren each made multi-million dollar stock trades last year while wielding that influence, according to a report by the Wall Street Journal.
The trades were permitted under the Fed’s ethics guidelines but the disclosures are prompting activists and lawmakers to flag potential conflicts of interest and call for changes to the rules.
"This review will assist in identifying ways to further tighten those rules and standards,” a Fed spokesperson said in a statement to media this week. “The board will make changes, as appropriate, and any changes will be added to the Reserve Bank Code of Conduct.”
Conflicts of interest
Documents showed that Kaplan bought and sold at least $18m of individual stocks in 2020, including companies such as Apple, Amazon, General Electric and Marathon Petroleum – all of which had bonds purchased by the Federal Reserve through the central bank’s secondary market corporate credit facility.
Meanwhile Rosengren held stakes in four real estate investment trusts while publicly discussing his concerns about over-valuation in the commercial real estate sector, Bloomberg highlighted in a report.
Following the reports and initial review of policies, both Kaplan and Rosengren said they would divest any holdings of individual stocks by 30 September and put the proceeds into index funds or cash.
"Regrettably, 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," Rosengren said in a statement on Thursday.
Kaplan said in a separate statement: "While my financial transactions conducted during my years as Dallas Fed president have complied with the Federal Reserve’s ethics rules, to avoid even the appearance of any conflict of interest, I have decided to change my personal investment practices."
A spokesman for the Dallas Fed said Kaplan’s trading was reviewed and approved by the bank’s general counsel.
More modest Fed presidents
Other Fed presidents disclosed little to no trading but still held significant financial holdings.
For example, Richmond Fed president Thomas Barkin holds, but did not trade, several financial securities in excess of $1m, including stakes in Coca-Cola and a variety of exchange-traded and mutual funds overseen by outside managers.
Indeed, chairman Powell himself was a private equity lawyer at Carlyle Group and has a net worth in excess of $17m or more, according to his latest ethics filings.
Others come from academic backgrounds and have much fewer holdings. St Louis Fed president James Bullard has so few ethics disclosures that he handwrites his form and former Fed chair Janet Yellen’s disclosures were more notable for a sizable stamp collection than it was for its portfolio of stocks.
Following reports from the Wall Street Journal and others this week, Massachusetts senator Elizabeth Warren sent letters to each of the 12 Fed presidents demanding stricter ethics for stock buying.
Warren is calling on the Fed to implement rules that align with her own Anti-Corruption and Public Integrity Act, which would prohibit all government officials from holding or trading stock where its value might be influenced by their agency, department or actions.
“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 her letter to Kaplan.
“Fortunately, you can act on your own to minimise the potential for an appearance of financial conflicts of interest at the Federal Reserve Bank of Dallas.”