A watchdog review into market trading from two former high-ranking Federal Reserve officials has criticized their actions but has stopped short of accusing them of doing anything illegal. The report released by the Fed’s Office of Inspector General takes issue with trades made by former regional presidents Robert Kaplan of Dallas and Eric Rosengren of Boston.
Both men left their posts in September 2021 amid criticism over their trading activities. Kaplan retired early, citing trading disclosure distraction, while Rosengren retired for medical reasons. The report raises concerns about the actions of these individuals, which ultimately led to conflicts of interest, raising issues over impartiality and the proper conduct of central bank officials.
Revelations showed that some Fed officials engaged in market trading at a time when they were also considering important and delicate policy matters in the early days of the Covid pandemic in 2020. The Fed ultimately slashed interest rates and launched a bevy of lending and liquidity programs that helped prop up financial markets as the pandemic crushed the U.S. economy.
While the report mentions Governor Richard Clarida, the details focus on the actions of Kaplan and Rosengren. The report concludes that the actions resulted in conflicts of interest that raised issues over impartiality and the proper conduct of central bank officials.
Kaplan traded millions in stocks and options and other securities, but claims that his actions were compliant with standards in place at the time. On the other hand, Rosengren is faulted for not disclosing multiple trades on his 2020 ethics forms and for “multiple discrepancies” in brokerage statements and trading data.
The report mentions that the trades made by Rosengren regarding real estate investment trusts at a time when the Fed was buying mortgage-backed securities “create an ‘appearance of conflict of interest’ that could cause a reasonable person to question Mr. Rosengren’s impartiality under FRB Boston’s code of conduct.”
The report states that the OIG “did not find that [Kaplan’s] trading activities violated laws, rules, regulations, or policies related to trading activities as investigated by our office.” However, the OIG faults Kaplan for not disclosing specific information regarding the selling of stock option contracts.
Since the controversy, the Fed has revamped its trading rules and now prohibits officials from owning stocks, bonds, and cryptocurrencies. The new rules aim to support public confidence in the impartiality and integrity of the Committee’s work by guarding against even the appearance of any conflict of interest.
Looking ahead, these changes aim to strengthen the public’s trust in the Federal Reserve while ensuring that all officials adhere to the highest ethical standards. By implementing these new rules, the Federal Reserve is taking proactive steps to uphold its commitment to transparency and accountability. This will help to maintain integrity and public confidence in the operations of the central bank.
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