International Forecaster Weekly

TRADING SCANDAL FORCES FED'S HAND - Change in Personal Investment Rules Coming

Yesterday, the Federal Reserve announced changes to its rules regulating its officials' personal investment practices.

The changes come after recent scandals over some members' trading practices raised eyebrows and produced a firestorm of criticism.

Guest Writer | October 22, 2021

By Dave Allen for Discount Gold & Silver

Yesterday, the Federal Reserve announced changes to its rules regulating its officials' personal investment practices.

The changes come after recent scandals over some members' trading practices raised eyebrows and produced a firestorm of criticism.

Axios’ Ivana Saric observes that the rule revamp is the postscript to the biggest scandal to hit the Fed in recent memory. 

A few weeks ago, we learned that two senior Fed officials — Dallas Fed president Robert Kaplan and Boston Fed prez Eric Rosengren — owned, and in Kaplan’s case, actively traded assets affected by policies they helped to shape.

One of those policies is the Fed’s unprecedented support of U.S. equity and Treasury markets — through its monthly purchase of $120 billion in government bonds.

Those purchases reinforced a massive financial market boom over the past year and continue to prop up overpriced securities in the DJIA, S&P 500 and NASDAQ to this day.


All of the 12 regional Fed bank heads released financial disclosures for 2020 — but two raised eyebrows: Kaplan and Rosengren.

Kaplan made several million-dollar stock trades plus other investments, while Rosengren invested in REIT-like assets.

We were told at the time that their activity didn't violate Fed ethics rules; lawyers at the respective regional banks review officials’ disclosures.

A Fed spokesperson said additional rules specific to Fed officials are “stricter than those that apply to Congress and other agencies.”

Fed officials and senior staff are subject to a “blackout period” – i.e., they can’t do any trading 10 days ahead of policy meetings through midnight of the final meeting day.

They also can't own bank stocks and are restricted in how much government securities they can own. For instance, they can own Treasury bonds as long as holdings aren’t valued above $50,000, per a conduct guide, last updated in 2017.

But while Powell, as Fed chair, is required to report transactions above a certain threshold within 30 days — like other top government officials — Fed bank presidents don’t have to do that.

Soon after the public outcry, Kaplan and Rosengren said they would dump their individual stock holdings (by September 30th) — and wouldn’t trade stocks while in their posts to avoid “even the appearance of any conflict of interest.”

In that vein, the Fed’s conduct guide already cautions officials to “avoid any dealings … that might convey even an appearance of conflict between their personal interests, the interests of the [Fed], and the public interest.”

Those are just some of the rules that Powell said are "not adequate." He directed Board staff to take a fresh, deep dive at the ethics rules around financial holdings and activities by senior Fed officials.

Earlier this month, the Fed announced that a government watchdog would evaluate whether Kaplan and Rosengren’s actions violated Fed’s rules or federal laws. Both officials have since resigned.

New Rules

Under the new rules, Fed policymakers and senior staff will be banned from buying individual securities (stocks, bonds, etc.) — forcing them to sell what they now own and buy mutual funds and ETFs — and be restricted in their active trading.

The new restrictions will also prohibit them from holding investments in federal agency securities (directly or indirectly) or entering into derivatives (e.g., interest rate swaps). 

The Fed’s press release says the new rules are “expansive and are designed to place the Federal Reserve's investment and trading rules at the forefront among major federal agencies.”

The Fed will also improve the quality and timeliness of public financial disclosures by requiring policymakers and senior staff to:

  • Get prior approval for any purchases or sales of securities;
  • Give 45 days advance notice on any purchases and sales of securities; and
  • Hold onto investments for at least one year.

The press release also notes, "Further, no purchases or sales will be allowed during periods of heightened financial market stress" — although that phrase isn’t defined (it should be in the new rules themselves).

A quote in the press release, attributed to Powell, says, "These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve." 

The Board and regional banks will supposedly incorporate these new restrictions into the appropriate Fed rules and policies over the coming months.

Is Powell Serious About Raising the Bar?

If Powell is really serious about raising the bar, these new rules must just be the first step in a comprehensive overhaul of how the Fed does business.

Beyond this important gut check, Powell should take a long look in the mirror — especially as President Biden mulls his reappointment to another term as chair.

As our friends Pam and Russ Martens of Wall Street on Parade reported yesterday, Powell is perilously close to — or even over — the conflict line in at least one of his personal investment relationships.

The Martens report that a good portion of Powell’s wealth is managed by the hedge fund BlackRock — through its iShares ETFs — and its billionaire chair and CEO Larry Fink.

Interestingly (notoriously?), the Fed gave BlackRock three no-bid contracts last year to manage the Fed’s corporate bond buying programs. Amazingly, under those contracts, BlackRock is allowed to buy its own ETFs.

Now, we’ve learned, via the Martens, that a big piece of the Fed’s reverse repo operations have landed…where? You guessed it — in BlackRock money market funds. 

Crane Repo Data reports that as of September 30th, BlackRock’s Liquid FedFund money market fund held $84 billion of the Fed’s reverse repos, and its Liquid T-Fund held $65 billion — a combined $149 billion.

The Fed has been raising eyebrows in some corners of Wall Street and getting a wink and a nod in others — as its reverse repos have soared to a daily total of over $1.4 trillion from nearly zero a year ago. 

Crane Data notes that money market funds are holding almost all of that $1.4 trillion — at least $149 billion of which is in funds managed by the same firm that manages a portion of Jerome Powell’s personal wealth. 

Talk about the appearance of a conflict of interest!