Brown to Federal Reserve: Prohibitions on Stock Trading Need Teeth

WASHINGTON, D.C. – Today, U.S. Senator Sherrod Brown (D-OH), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, urged Federal Reserve Chair Jerome Powell to strengthen enforcement penalties under the Fed’s Investment and Trading Policy. In a letter to Chair Powell, Brown cites a Fed report that said that in March 2020, just before the Board met to consider monetary policy and emergency lending programs in response to the COVID-19 crisis, two former Federal Reserve Bank Presidents traded securities in violation of the blackout period. Brown urged Chair Powell and the Federal Reserve Board to implement substantive penalties for Federal Reserve officials that engage in prohibited market trading activity and to establish a sufficient review process to determine when officials violate the policy.

“Federal Reserve officials, as charged with setting monetary policy, must serve the American people—not their own investment portfolios. To restore trust that Federal Reserve officials are not using their access to sensitive economic and monetary policy information to enrich themselves, the Board should, without delay, establish a process for enforcing the Investment and Trading Policy and develop sufficient penalties for individuals that violate the policy. As such, I urge the Board to implement substantive penalties for Federal Reserve officials that engage in prohibited market trading activity. Nothing will change unless there are real consequences for violating the Board’s Investment and Trading Policy,” Brown wrote. “The American people must be able to trust that the Federal Reserve works for them, and that officials aren’t abusing their positions for personal gain.”

You can read the full letter here and below: 

Dear Chair Powell:

In March 2020, as the Federal Reserve considered monetary policy actions and programs to support financial institutions and businesses to limit the economic damage to our economy from the COVID-19 crisis, several officials engaged in trading activity that called into question their ability to set economic policy without a conflict of interest. Last month, the Office of Inspector General (IG) for the Board of Governors of the Federal Reserve System (Board) released a report providing additional information regarding their investigation into the trading activity of two former Federal Reserve Bank Presidents.^[1] The report’s findings show that both Federal Reserve officials engaged in market trading activity during an advised Federal Open Market Committee (FOMC) blackout period and failed to disclose those trades to their respective ethics officer. While the IG’s investigation determined the officials’ conduct “did not violate the laws, rules, regulations, or policies related to trading activities,” it is clear that more needs to be done to address market trading activity that could create an “appearance of acting on confidential FOMC information” under the FOMC blackout rule or an “appearance of a conflict of interest”.^[2]

Given the seriousness of these incidents, the Board acknowledged the gap in the oversight of trading prohibitions and developed several policy enhancements to mitigate conflict of interest risks for Federal Reserve officials. Under the Board’s 2022 update of its Investment and Trading Policy, covered individuals are prohibited from trading activities throughout blackout periods and must pre-clear any market trades with their respective ethics officers—in effect, banning the trading activities conducted by Federal Reserve officials in March 2020. 

Since the Board issued its revised Investment and Trading Policy in an April 2023 report, the IG made five additional recommendations to improve the trading and investment rules and prevent future conflicted trading activities. The Board concurred with all of the IG’s recommendations, and in January 2024, the FOMC published an update to the Investment and Trading Policy adopting most of the IG’s recommendations—including expanding “the number of Federal Reserve System staff who will be covered by the most stringent restrictions on investment and trading activities and tightening restrictions on all staff with access to confidential FOMC information.”^[3]

The Board’s Investment and Trading Policy is a constructive step toward restoring the public’s trust that Board officials will not use their knowledge of the economy and monetary policy setting to boost their investment portfolios. Nevertheless, I am concerned that the Board has not yet adopted the IG’s most critical recommendation to “formalize a process for determining and enforcing consequences for Reserve Bank covered individuals who violate the Investment and Trading Policy that includes clear roles and responsibilities.”^[4] Without an enforcement mechanism and penalties for Federal Reserve officials who violate the Board’s Investment and Trading Policy, these changes are ineffectual. 

Federal Reserve officials, as charged with setting monetary policy, must serve the American people—not their own investment portfolios. To restore trust that Federal Reserve officials are not using their access to sensitive economic and monetary policy information to enrich themselves, the Board should, without delay, establish a process for enforcing the Investment and Trading Policy and develop sufficient penalties for individuals that violate the policy. As such, I urge the Board to implement substantive penalties for Federal Reserve officials that engage in prohibited market trading activity. Nothing will change unless there are real consequences for violating the Board’s Investment and Trading Policy. 

Additionally, I encourage the Board to establish protocols so that all covered Federal Reserve officials who violate the Board’s Investment and Trading Policy are subject to a disciplinary review process. I also urge the Board to assess whether its existing Ethics Program has a sufficient number of full-time ethics officials to effectively oversee the financial reporting disclosures of all covered Federal Reserve staff. Creating substantive penalties and making sure there are sufficient staff to oversee covered Federal Reserve employees’ compliance with the rules, will reduce the likelihood of future conflicted trading activity. 

The American people must be able to trust that the Federal Reserve works for them, and that officials aren’t abusing their positions for personal gain. Thank you for your work on this issue and I look forward to your timely consideration of this request.

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