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July 14, 2022

Federal Reserve’s IG Report on Chair/Former Vice Chair’s Trading Was Very Narrow, Omits Key Information and Is Not Credible

WASHINGTON, D.C.—Dennis Kelleher, President and CEO of Better Markets, issued the following statement in response to the Federal Reserve’s Inspector General’s Report on personal trading by the Chair and former Vice Chair Clarida:

“The Federal Reserve’s Inspector General’s report today on its investigation into the personal trading by the Chair and former Vice Chair Clarida during the pandemic while in possession of material nonpublic information was very narrow, omits key information, and is not credible.

“First, the IG reviewed the Chair’s pre-pandemic December 2019 trade, but not the Chair’s trade in the middle of the Fed’s pandemic response on October 1, 2020 when he sold between $1 million and $5 million worth of stock from his personal account, apparently one of his largest trades ever.

“Second, the IG inexplicably took a very, very narrow view of the Fed’s policies applicable to the trading it did review and then limited its review to the ‘policies as investigated by our office.’  Specifically, the IG appears to have entirely ignored the Federal Reserve’s ‘Directors-Guide to Conduct,’ which is part of the ‘Policies Governing Directors.’ These polices were clearly applicable and extend far beyond the so-called ‘Blackout periods’ that the IG narrowly focused on, including:

‘Beyond these guidelines, they should carefully avoid engaging in any financial transaction the timing of which could create the appearance of acting on inside information concerning Federal Reserve deliberations and actions.’

“The detailed applicable policies ignored by the IG are quoted at length below.  The personal trading of the Chair above and the former Vice Chair below not investigated by the IG appear to have violated those clear, applicable policies, which the IG failed to mention much less review.

“Third, the IG appears to have also ignored the highly suspicious trading of Vice Chair Clarida in February 2020 just as the Fed was considering and announcing unprecedented policy actions in response to the pandemic.  Specifically, the IG makes no mention of Vice Chair Clarida’s supposed explanation for his purchase on Feb. 27, 2020, which unnamed Fed officials claimed at the time it was revealed was pursuant to a preplanned rebalancing program.  However, it was disclosed many months later that there was an undisclosed sale of the same stock just days before, on Feb. 24, 2020, which would seem to prove that the trading was not a rebalancing and not pursuant to any preplanned program.  That trading and those contradictory claims are not mentioned by the IG.

“Fourth, the IG makes no mention of the Fed’s Ethics Officer’s email to senior Fed officials in March of 2020 urging them to refrain from personal trading.

“Fifth, the IG is hired by the Chair and reports to the Chair.  A person like the Chair asking a subordinate like the IG to investigate his boss is simply not credible, particularly, where, as here, the boss has already repeatedly stated publicly that no laws or rules were broken.  An after-the-fact investigation by the subordinate concluding that the boss’ prior public statements were accurate is not a credible investigation.”

For additional detailed information, see “Everything You Need to Know About the Federal Reserve’s Trading Scandal.”

Fed’s appliable policies not mentioned by the IG:

 

“1. Members of the Board of Governors of the Federal Reserve System and presidents and first vice presidents of the Federal Reserve Banks have a special responsibility for maintaining the integrity, dignity, and reputation of the System. Accordingly, they should scrupulously avoid conduct that might in any way tend to embarrass the System or impair the effectiveness of its operations.

“2. They should carefully adhere to the spirit, as well as the letter, of the rules of ethical conduct prescribed for employees of the Board of Governors or the Federal Reserve Banks and should exemplify in their own conduct the high standards set forth in those rules.

“3. Their personal financial dealings should be above reproach, and information obtained by them as officials of the System should never be used for personal gain. In order to avoid even the appearance of acting on confidential information, they should not knowingly purchase or sell any security [during the FOMC black out period]…. Beyond these guidelines, they should carefully avoid engaging in any financial transaction the timing of which could create the appearance of acting on inside information concerning Federal Reserve deliberations and actions.”

“4. They should be careful to avoid any dealings or other conduct that might convey even an appearance of conflict between their personal interests, the interests of the System, and the public interest….”[1]

 

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Better Markets is a non-profit, non-partisan, and independent organization founded to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.

 

[1] Federal Reserve “Voluntary Guide to Conduct for Senior Officials” (“Guide”):  https://www.federalreserve.gov/monetarypolicy/files/FRAM2-026-1.pdf (emphasis added). While oddly titled “Voluntary,” it’s clear that the Guide is official Fed policy governing regional Fed presidents and others as made clear by its reference to “See also Directors—Guide to Conduct,” which can be found here (and quoted below): https://www.federalreserve.gov/generalinfo/listdirectors/PDF/guide-to-conduct.pdf.  The Guide is also part of the “Policies Governing Directors,” which can be found here:  https://www.federalreserve.gov/aboutthefed/directors/policy-governing-directors.htm. The Guide is also listed on the FOMC “Rules and Authorizations” website at the bottom: https://www.federalreserve.gov/monetarypolicy/rules_authorizations.htmSee also “DIRECTORS-Guide to Conduct for Directors of Federal Reserve Banks and Branches”: https://www.federalreserve.gov/generalinfo/listdirectors/PDF/guide-to-conduct.pdf (“Directors of Federal Reserve Banks and branches have a special obligation for maintaining the integrity, dignity, and reputation of the Federal Reserve System.”; “it is essential that directors, through adherence to high ethical standards of conduct, avoid actions that might impair the effectiveness of System operations or in any way tend to discredit the System.”; “Their personal financial dealings should be above reproach and information obtained by them as directors of the System should never be used for personal gain.”; “Directors … should avoid any action that might result in or create the appearance of— a. affecting adversely the confidence of the public in the integrity of the Federal Reserve System….”)

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