Watchdog flags conflict of interest issue in ex-Fed bank presidents’ trading

(This Jan. 22 story has been corrected to clarify that the trading activity was disclosed after the fact, in paragraph 12)

By Michael S. Derby

NEW YORK (Reuters) – The U.S. central bank’s internal watchdog said on Monday the former presidents of the Dallas and Boston Federal Reserve banks did not break the law but created the appearance of a conflict in interest in how they invested and reported their financial activity from 2019 to 2021.

Robert Kaplan, who announced in September 2021 that he would step down as head of the Dallas Fed amid a controversy over his trading, documented his investing in a way that “did not support public confidence in the impartiality and integrity” of the U.S. central bank, the report from the Fed’s Inspector General (IG) said.

The report also chastised Kaplan for not providing in his official disclosure forms the specific dates for his trading and for not identifying trading involving the selling of stock option contracts.

It also said a Fed Board of Governors ethics officer recommended to the Dallas Fed’s general counsel that Kaplan should provide more specifics in his 2020 disclosure form, but that official said Kaplan wanted to keep the document as it was “because he did not have the time to complete the revisions by the due date” requested of him. The Dallas Fed general counsel also said Kaplan said he would be more specific in future filings, the report said.

Then-Boston Fed President Eric Rosengren, who exited the Fed around the same time as Kaplan, failed to properly account for his trading and also created the appearance of a conflict of interest, the report said.

It zeroed in on a series of investments Rosengren made in real estate securities at a time when the Fed was intervening to support the housing sector, and said the activities “could cause a reasonable person to question” his impartiality under the ethics guideline then in force at the regional bank.

In closing the investigation into the two former Fed policymakers, the report also took aim at the central bank itself. “We note that the rules in effect during the scope of our review did not sufficiently support public confidence in the impartiality and integrity of the policymakers and senior staff carrying out the public mission” of the Fed, it said.


The report arrived more than two years after it became public that some regional Fed officials had been actively trading stocks and other investments while helping set monetary policy.

The controversy led to the early departures of Kaplan and Rosengren, moves that came soon after Fed Chair Jerome Powell told reporters after the end of a policy meeting on Sept. 22, 2021 that, “no one is happy, no one on the (Federal Open Market Committee) is happy to be in this situation, to be having these questions raised.”

Kaplan’s financial disclosure forms during his tenure at the Dallas Fed showed that he’d traded many millions of dollars in stocks and other securities while declining to provide precise dates and amounts for those investments in his disclosure forms. Rosengren traded in markets to a much lesser degree, but what he traded caused concern.

The trading happened under a Fed ethics code that forbade ownership of bank stocks, banned trading from happening close to monetary policy meetings, and commanded officials and the Fed’s top staff not to engage in investing that would create the perceptions of conflicts of interest.

The trading activity of Kaplan and Rosengren was disclosed after the fact in ethics filings to the boards of directors of their respective regional Fed banks, bank lawyers and ethics officials at the Fed’s board in Washington.

A spokesperson for Kaplan reiterated the former Dallas Fed president’s Sept. 27, 2021 statement in which he said he had adhered to all Fed ethical standards and policies and that his securities investing activities and disclosures met Fed compliance rules and standards.

The spokesperson also referred to a statement on the same day by the Dallas Fed’s board of directors which stated that Kaplan also conducted his investment activities in accordance with the rules and policies of the Fed system.

Rosengren did not immediately respond to a request for comment.

In the wake of the resignations the Fed substantially tightened its ethics code to tightly limit how officials, top staff and their families could trade and invest in financial markets, formally adopting that policy in February 2022. Further changes to the ethics code are also likely.

“The Federal Reserve is committed to upholding the highest ethical principles to maintain public confidence in the impartiality of its actions,” the Fed said in a statement released after the IG report was made public.

“The comprehensive new rules adopted in 2022 – including restrictions on the type, manner, and timing of investments, pre-clearance requirements, and a strict disclosure regime -guard against even the appearance of conflicts of interest. We continue to evaluate our rules and will update them as necessary,” the Fed said.

Questions about trading also extended to Powell and to Richard Clarida, who at the time was Fed vice chair, the central bank’s second-in-command. They were cleared by an IG report in July 2022, although the report released on Monday provided more information into how that investigation was conducted.

Mark Bialek, the Fed’s IG, is selected for his job by the Fed chief and has faced questions about how independent he can be in the watchdog’s investigations, including in a contentious hearing from U.S. senators in May 2023. Bialek said then that “no Board Chair has resisted or objected to our oversight work since I have been the IG.”

The IG’s report does not resolve issues around trading activity by Atlanta Fed President Raphael Bostic, who has acknowledged inadvertent problems with some of his investing activity. He is also facing an IG investigation.

(Reporting by Michael S. Derby and Ann Saphir; Editing by Dan Burns and Paul Simao)