Several U.S. Senate Democrats are backing a bill to ban stock market trading by top officials of the Federal Reserve banks and board of governors. This is a welcome and needed reform. While they’re at it, congressional leaders should apply a similar restriction to themselves.
The principal benefit would be to remove suspicion that high-ranking government officials and politicians with access to privileged information are abusing that access for their own profit.
That appearance of a conflict of interest is dangerous for both the Federal Reserve System and Congress because it reduces confidence that their decisions are strictly in the public interest.
The bill introduced by Sen. Sherwood Brown, D-Ohio, is a response to recent news stories showing a pattern of stock trading by Fed officials.
Federal Reserve Vice Chairman Richard Clarida moved up to $5 million into stocks and out of a bond fund in February 2020, a day before Federal Reserve Board Chairman Jerome Powell announced the central bank could take policy action to help the economy.
Boston Federal Reserve Bank President Eric Rosengren resigned for health reasons on Oct. 27, a few days after it became public that he had traded stocks and other investments related to the real estate industry in 2020 while also helping to set monetary policy.
Dallas Federal Reserve Bank President Robert Kaplan resigned Sept. 27, acknowledging that his market trades raised questions. His disclosure statement showed he traded many millions of dollars in stocks, stock market futures and interest-rate funds since becoming Dallas Fed president in 2015.
In reaction to the understandable outcry, the Fed published new rules last month forbidding its officials from trading stocks. Sen. Sherwood’s bill would make that ban legally enforceable.
But questionable stock trading on possible inside information is not a problem only for the Fed.
ProPublica, a public-interest investigative news service, reported that the Securities and Exchange Commission is investigating Sen. Richard Burr, R-N.C., for possible insider trading. According to the SEC, Mr. Burr, the chairman of the Senate Select Committee on Intelligence, had access to private information about the rapid spread of COVID-19 when he and his brother-in-law sold about $1.8 million in stocks days before the stock market crashed.
The report quotes the SEC as alleging that Sen. Burr’s brother-in-law called brokers to sell stocks immediately after he got a phone call from the senator. The inference is that Sen. Burr passed along inside information about COVID-19’s threat to the economy. Sen. Burr has said he acted only on public information and has pointed to articles addressing the economic threat from the pandemic.
In September, an outside ethics group filed complaints against seven Democratic and Republican House members — five of them serving on the Financial Services Committee — for failing to report hundreds of stock transactions.
There are lessons here. Mr. Burr would not be in such a perilous position with the SEC if he had not traded stocks. And an untold number of lawmakers are ignoring the Stop Trading on Congressional Knowledge Act, which was meant to increase transparency but also has proven difficult to enforce. Did members of Congress base trades on public information or on something they learned in private?
It makes sense to solve this problem by adopting a rule that prohibits members of Congress from engaging in individual market transactions; instead, they could invest only in securities, like some mutual funds, that follow broad market trends and are not privy to inside information.
Erecting barriers to potential conflicts of interest would help restore faith and confidence in the financial decisions made by our nation’s leaders. It also would add assurances that our best interest — not theirs — is what’s most important.