As President Biden attempts to fill seats in the Federal Reserve Bank’s (Fed) Board of Governors, the Fed is also aiming to restore confidence that its officials are fully committed to serving the public after several reports indicated that some branch presidents and the former Vice Chair actively traded in 2020.[1] These reports led to questions about the possibility of self-dealing at the Fed and whether these high-ranking officials took advantage of insider information.[2] Following the release of these reports, the Fed has worked to restore public trust by ordering a full review of these trades to ensure that they were legal and complied with its ethics rules,[3] enacting stricter rules that likely would have prevented these trades from occurring,[4] and obtaining the resignation of all three high ranking officials who actively traded.[5]
In September 2021, reports emerged that Robert Kaplan, the President of the Dallas Fed, and Eric Rosengren, the President of the Boston Fed, were active investors on trades that were sensitive to monetary policy.[6] The reports indicated that Mr. Kaplan made multiple sales and purchases of over $1 million in different companies and investment funds, some of which included Apple, Chevron, Alphabet, and Verizon Communications.[7] Furthermore, Mr. Kaplan bought and sold iShares Floating Rate Bond ETFs, which track bond levels that are under five years of maturity and are influenced by Fed rate policies and projections.[8] Mr. Rosengren was an active trader in Real Estate Investment Trusts (REITs) after previously warning about the risks in the commercial real estate market and helping to set the Fed’s policy on mortgage-backed securities.[9] This policy was meant to strengthen the housing market by improving financing conditions. In addition to actively trading in REITs, Mr. Rosengren also held stakes in Pfizer, Chevron, and AT&T.[10] While Messrs. Kaplan and Rosengren, and the Dallas and Boston Fed branches, have remarked that these trades were legal and consistent with the Fed’s ethics rules, the possibility that Fed officials may financially benefit from nonpublic information has led to criticism of these rules, which were enacted decades ago.[11] The appearance of self-dealing is especially worrisome given the Fed’s responsibility of providing impartial oversight of employment and inflation in the U.S.[12]
In an effort to restore trust and confidence in the Fed, Chairman Jerome Powell ordered a staff review of the ethics rules relating to what investments and trades senior officials can make. However, these efforts were set back when the trade records of Vice Chair, Richard Clarida, were released. The reports indicated that Clarida traded between $1 and $5 million out of a bond fund into stock funds the day before Mr. Powell announced that the Fed was ready to support the economy as the pandemic settled in.[13] At the time, the Fed explained that this was a long-planned portfolio rebalancing and that Mr. Clarida’s trades were legal and consistent with the Fed’s ethics rules.[14] However, the situation worsened upon reports that Mr. Clarida’s trade records were not fully released, and that before moving into stocks on the eve of the Fed’s announcement, he had traded out of the stock funds and into the bond funds before returning to stocks.[15] This back-and-forth movement raises questions about the rebalancing explanation first provided by the Fed. Critics claim it indicates that Mr. Clarida capitalized on privileged information and actively traded. Both Mr. Clarida and the Fed have claimed that his trades were legal and consistent with ethics laws, however the New York Times reported that Mr. Clarida stood to make a healthy gain compared to how he would have fared had he held the investment without trading.[16]
In response to the negative publicity these trades generated, the Fed asked the Office of Inspector General to review Messrs. Kaplan, Rosengren, and Clarida’s trades to determine if they were legal and met ethics standards. Additionally, the Fed also enacted stricter rules that would prohibit purchasing individual securities, restrict active trading, and increase the timeliness of reporting and public disclosure by Fed policymakers and senior staff. Furthermore, policymakers and senior staff are now required to provide notice 45 days in advance for purchases and securities sales, obtain prior approval for these purchases, and hold investments for at least one year.[17] Moreover, no sales or purchases will be allowed in periods of heightened financial market stress. These new rules would likely have prevented trades like the ones made by Messrs. Clarida, Kaplan, and Rosengren from initially occurring.[18] Lastly, all three high-ranking members involved in the questionable trades have resigned from their positions. Mr. Powell remarked that restoring public confidence is essential for the Fed to properly do its job,[19] but only time will tell whether that faith has been restored.
Following these resignations, some are calling this an opportunity for the Fed to become more diverse and representative of the public which it serves.[20] Prior to Kaplan’s and Rosengren’s resignations, Raphael Bostic, President of the Atlanta Federal Reserve, was the only black person leading a regional reserve bank in the Fed’s system.[21] Meanwhile, there were only three women serving as Presidents.[22] After their resignations, Rosengren’s and Kaplan’s seats have been filled by Susan M. Collins, and Meredith N. Black, respectively.[23] Susan M. Collins is the first ever black woman President in the Fed system.[24] Although Meredith N. Black serves as the interim president of the Dallas Fed branch,[25] appointing another diverse candidate to make the Fed more representative of the people it serves can go a long way in improving public trust.
[1] See Jeanna Smialek, A Fed Official’s 2020 Trade Drew Outcry. It Went Further Than First Disclosed., N.Y. Times (Jan. 10, 2022), https://www.nytimes.com/2022/01/06/business/economy/richard-clarida-fed-stock-fund.html; see also Thomas Franck, Inspector General Probing Whether Fed Official Trades Broke Ethics Rules or the Law, CNBC Markets (Oct. 5, 2021), https://www.cnbc.com/2021/10/04/office-of-inspector-general-to-review-whether-fed-officials-trading-activity-broke-ethics-rules-or-the-law.html.
[2] Jeanna Smialek, Fed Officials’ Trading Draws Outcry, and Fuels Calls for Accountability, N.Y. Times (Sept. 9, 2021), https://www.nytimes.com/2021/09/09/business/economy/fed-stock-trading.html; Thomas Franck, Powell Orders Ethics Review After Fed Presidents Disclosed Multimillion-dollar Investments, CNBC Polictics (Sept. 16, 2021), https://www.cnbc.com/2021/09/16/fed-chief-powell-orders-ethics-review-after-multimillion-dollar-trades.html; see also Jeanna Smialek, Fed Unveils Stricter Trading Rules Amid Fallout From Ethics Scandal, N.Y. Times (Oct. 21, 2021), https://www.nytimes.com/2021/10/21/business/federal-reserve-trading-ethics.html.
[3] See Alister Bull, Powell Opens Review of Investment Rules for Fed Policy Makers, Bloomberg (Sept. 16, 2021), https://www.bloomberg.com/news/articles/2021-09-16/powell-asks-fed-to-examine-staff-trading-rules-after-disclosures; see also Franck, supra note 1.
[4] Press Release, Bd. Governors Fed. Rsrv. Sys., Federal Reserve Board Announces a Broad Set of New Rules That Will Prohibit the Purchase of Individual Securities, Restrict Active Trading, and Increase the Timeliness of Reporting and Public Disclosure by Federal Reserve Policymakers and Senior Staff (Oct. 21, 2021), https://www.federalreserve.gov/newsevents/pressreleases/other20211021b.htm; see also Smialek, supra note 2.
[5] Victoria Guida, Fed’s No. 2 Official Resigns Amid Trading Scandal, Politico (Jan. 10, 2022), https://www.politico.com/news/2022/01/10/federal-reserve-vice-chair-resigns-ethics-scandal-526849.
[6] See Michael S. Derby, Dallas Fed’s Robert Kaplan Was Active Buyer and Seller of Stocks Last Year, Wall St. J. (Sept. 7, 2021), https://www.wsj.com/articles/dallas-feds-robert-kaplan-was-active-buyer-and-seller-of-stocks-last-year-11631044094; see also Craig Torres et al., Fed Official Who Warned on Real Estate Traded REITs Actively, Bloomberg (Sept. 8, 2021), https://www.bloomberg.com/news/articles/2021-09-08/fed-official-who-warned-on-real-estate-was-active-reit-trader; see also Smialek, supra note 2.
[7] See Derby, supra note 6; Torres, supra note 6.
[8] Bull, supra note 3.
[9] See Jeanna Smialek, Fed Officials Under Fire for 2020 Securities Trading Will Resign, N.Y. Times (Sept. 27, 2021), https://www.nytimes.com/2021/09/27/business/fed-rosengren-kaplan.html; Michael S. Derby, Fed Leaders Eric Rosengren, Robert Kaplan to Resign Following Trading Controversy, Wall St. J. (Sept. 27, 2021); Torres supra note 6; Bull, supra note 3.
[10] Franck, supra note 2.
[11] See Jeff Cox, Dallas Fed President Kaplan to Retire Early on Oct. 8, Citing Trading Disclosure ‘Distraction’, CNBC Markets (Sept. 27, 2021), https://www.cnbc.com/2021/09/27/dallas-fed-president-kaplan-to-retire-early-on-oct-8-citing-trading-disclosure-distraction.html; Torres, supra note 6; Smialek supra note 2; Jeanna Smialek, Jerome Powell says the Fed is Reviewing Its Trading Rules., N.Y. Times (Sept. 22, 2021), https://www.nytimes.com/2021/09/22/business/fed-officials-securities-trading.html.
[12] Franck, supra note 2.
[13] See Craig Torres, Clarida Traded Into Stocks on Eve of Powell Pandemic Statement, Bloomberg (Oct. 1, 2021), https://www.bloomberg.com/news/articles/2021-10-01/clarida-traded-into-stocks-on-eve-of-powell-pandemic-statement?sref=eeq6exxF; Smialek, supra note 1.
[14] Smialek, supra note 1; see also Jeanna Smialek, The Fed’s Vice Chair Resigns as Questions Mount About His Early-Pandemic Trades., N.Y. Times (Jan. 10, 2022), https://www.nytimes.com/2022/01/10/business/economy/richard-clarida-fed-resign.html.
[15] Smialek, supra note 1; Smialek, supra note 14.
[16] Letter from Cary Williams, Designated Agency Ethics Official, Bd. Of Governors of the Fed. Rsrv. Sys., to the Hon. Emory A. Rounds, III, Dir. U.S. Off. of Gov’t. Ethics (Dec. 16, 2021), https://extapps2.oge.gov/201/Presiden.nsf/PAS+Index/DD6B6C47E3592957852586D9002EC1AB/$FILE/Richard-H-Clarida-2021-278%20Amendment.pdf; Smialek, supra note 1.
[17] Guida, supra note 5.
[18] Smiatek, supra note 2.
[19] Id.; see also Franck, supra note 1; Franck, supra note 2.
[20] See Christopher Condon & Craig Torres, Trading Scandal That Rocked the Fed Offers Chance to Reshape It, Bloomberg (Sept. 27, 2021), https://www.bloomberg.com/news/articles/2021-09-27/rosengren-exit-may-give-fed-board-more-sway-in-picking-successor.
[21] Id.; Federal Reserve History, https://www.federalreservehistory.org/people (last visited Feb. 10, 2022).
[22] See Condon & Torres, supra note 21; Federal Reserve History, https://www.federalreservehistory.org/people (last visited Feb. 10, 2022).
[23] See Jeanna Smialek, The Boston Fed Names Susan M. Collins As its New President., N.Y. Times (Feb. 9, 2022), https://www.nytimes.com/2022/02/09/business/economy/boston-fed-president-susan-collins.html#:~:text=The%20Federal%20Reserve%20Bank%20of,Fed%20system’s%20108%2Dyear%20history; Rob Kaplan to Retire as Dallas Fed President, Fed. Rsrv. Bank Of Dall. (Sept. 27, 2021), https://www.dallasfed.org/news/releases/2021/nr210927kaplan.
[24] See Smialek, supra note 24.
[25] See Rob Kaplan to Retire as Dallas Fed President, supra note 23.
