June 11, 2024

In Bipartisan Letter, Warren, Scott Call New Federal Reserve Ethics Enforcement Policy “A Dismal Failure”

Senators Hit Culture of Corruption at Fed Under Chair Powell; New Policy Lacks Transparency or Tough Penalties for Illicit Trading by Federal Reserve Bank Officials; is Riddled with Loopholes

“This new policy is a farce: it will do more to aid and abet the coverups of Fed trading scandals than it will do to reveal and eliminate them …” 

Text of Letter (PDF) | Federal Reserve Bank Ethics Policy 

Washington, D.C. – In a bipartisan letter to the Chair of the Federal Reserve (“the Chair”, “the Fed”), Jerome Powell, Senators Elizabeth Warren (D-Mass.) and Rick Scott (R-Fla.) criticized the Fed’s long-awaited policy to address illicit trading by Federal Reserve Bank officials. The senators reveal that the new policy is riddled with loopholes, contains weak penalties, and requires no transparency for officials that violate the trading rules. The senators called for Chair Powell to repeal this failed approach and replace it with an effective, enforceable policy that prevents illicit trading by reserve bank officials. 

In 2020, during the Covid-19 pandemic, several high-profile Federal Reserve officials engaged in investment trades while in possession of insider information about the Fed, raising public skepticism about the integrity of the Fed decision-making process and its high-ranking officials. In response, the Fed IG opened an investigation into the scandal, finding that senior Fed officials had violated Fed policy (although the IG held none of them accountable) and in April 2023 released a report identifying six recommendations for the Board to enhance investment and trading rules and to better determine and enforce consequences for ethics violations. The Chair promised to implement all of the IG’s recommendations.

Over one year later, and four years after the trading scandal occurred, an inquiry made by Senator Warren’s office last month revealed that on March 25, 2024, the Fed approved its new Policy for Addressing Covered Reserve Bank Employee Material Violations of the Investment and Trading Policy and Financial Disclosure Rules. However, the policy – which does little to fulfill the IG’s recommendations and prevent future scandals– still has not been formally announced by the Board. 

The Fed’s new ethics policy is a dismal failure – it lacks the safeguards to prevent another trading scandal, provides no accountability for ethics violations, and is ridden with conflicts of interest. The policy gives the Fed’s Designated Agency Ethics Officer (DAEO) “sole discretion” to decide whether or not a violation was material, and therefore, whether it will undergo further investigation and face consequences. The DAEO is appointed and subject to removal by the Chair of the Federal Reserve Board. The Chair, alone, also decides whether to punish a violator, which puts them in a position to protect themselves and their fellow Board members from accountability – as has occurred in the past.  

The senators also highlight that the new policy requires no transparency or accountability from the Fed with respect to ethics scandals, since it requires no disclosures of “investigations, outcomes, or penalties imposed on Reserve Bank officials that engage in illicit trades.”  

“This new policy is a farce: it will do more to aid and abet the coverups of Fed trading scandals than it will do to reveal and eliminate them. It is extraordinarily disappointing that you and other Board members are still not taking your ethics responsibilities seriously,” wrote the lawmakers. 

The senators are calling for the Fed to withdraw its policy and replace it with an enforceable policy that holds officials accountable for illicit trades. The lawmakers also demand answers about the Fed’s process for developing the current policy, and an explanation for how the current policy holds violators accountable for illicit trades.  

Senator Warren has led extensive oversight efforts to hold the Federal Reserve accountable for various ethics, supervision, and regulation failures: 

  • In March 2024, in a bipartisan letter to the Federal Reserve’s Office of Inspector General, Senators Warren and Scott (R-Fla.) called out the Fed IG’s failure to hold officials accountable for violating Fed rules and fostering a culture in which severe conflicts of interests go consistently unchecked. 
  • On July 25, 2023, United States Senator Elizabeth Warren (D-Mass), Chair of the Senate Banking, Housing, and Urban Affairs Subcommittee on Economic Policy, and Senator Rick Scott (R-Fla.) sent a letter to Mark Bialek, Inspector General (IG) of the Federal Reserve (Fed), highlighting his inherent conflicts of interest and the need to make the position a Presidential-appointed, Senate-confirmed role.
  • On May 17, 2023, chairing a hearing of the Senate Banking, Housing, and Urban Affairs Committee Subcommittee on Economic Policy, Senator Elizabeth Warren (D-Mass.) questioned Federal Reserve Inspector General Mark Bialek and a panel of academic experts on the independence of the IG office and the regulatory and supervisory failures that contributed to Silicon Valley Bank’s collapse.
  • On May 17, 2023, Senators Warren and Rick Scott (R-Fla.) sent a letter to Federal Reserve (Fed) Inspector General (IG) Mark Bialek, reiterating the need to make his position a presidentially-appointed, Senate-confirmed role to provide greater accountability at the Fed.
  • On May 17, 2023, Senator Warren sent a letter to Mark Bialek, IG of the Federal Reserve, rebuking him for his failure to hold Fed Chair Powell and senior Fed officials accountable for major ethics breaches, and the IG’s sham investigation of the Fed trading scandal, both of which undermine his recommendations for strengthening the Fed’s disturbingly weak ethics rules.
  • On May 3, 2023, Senator Warren and John Kennedy (R-La.) sent a letter to the Fed IG, inviting him to testify at their hearing on the Fed’s role overseeing Silicon Valley Bank (SVB) before its failure and to consider legislative reforms that strengthen transparency and accountability at the Fed. 
  • On April 28, 2023, following the Fed’s report on SVB’s failure, Senator Warren released a statement calling on the Fed to immediately adopt stricter bank oversight and called out Chair Powell’s failure to supervise and regulate banks that posed a systemic risk to the economy. 
  • On March 31, 2023, Senator Warren and Thom Tillis (R-N.C.) led a bipartisan group of senators to reintroduce the Financial Regulators Transparency Act, bipartisan legislation that would subject regional Federal Reserve Banks to the Freedom of Information Act (FOIA) and ensure their responsiveness to congressional and public information requests.
  • On March 22, 2023, Senators Warren and Rick Scott (R-Fla.) introduced bipartisan legislation to require a presidentially-appointed and Senate-confirmed Inspector General to the Board of Governors of the Federal Reserve System and the Bureau of Consumer Financial Protection.
  • On March 22, 2023, Senator Warren led 11 senators in a letter to Fed’s Vice Chair for Supervision, Michael Barr, calling on him to exercise the Fed’s authority to apply stronger regulation and supervision to banks with assets totaling $100 to $250 billion. 
  • On March 16, 2023, Senator Warren sent a letter to Fed Chair Powell, criticizing his leadership failures at the Fed that directly contributed to the failures of SVB and Signature Bank, and the significant risk to the banking system and the economy unleashed by those collapses. 
  • On March 15, 2023, Senator Warren delivered a speech on the Senate Floor about the failures of SVB and Signature, spoke about her new legislation, the Secure Viable Banking Act, which would reverse the mistakes that Congress and President Trump made with rollbacks of Dodd-Frank
  • On March 14, 2023, Senator Warren called on Chair Powell to recuse himself from the Fed’s review of the SVB failure. 
  • In December 2022, Senator Warren and then-Senator Pat Toomey (R-Pa.) introduced the bipartisan Financial Regulators Transparency Act, legislation that would strengthen Federal Reserve accountability and ensure that no financial regulator can withhold critical ethics-related information from Congress.
  • Senator Warren has previously sent letters to Chair Powell on November 7, 2022, August 11, 2022, January 10, 2022, December 7, 2021, and October 21, 2021, and requested that the Fed publicly release additional information about its trading scandal, but the Fed has failed to adequately respond. 
  • In October 2022, Senator Warren called out Atlanta Fed President Raphael Bostic for his “alarming failure” to disclose financial transactions, which speaks to “further evidence of the depth of the ethics problem at the Fed.”
  • In May 2022, Senator Warren also secured ethics commitments from Michael Barr, who was ultimately confirmed as Fed Vice Chair for Supervision.
  • In February 2022, Senator Warren secured significant ethics commitments from several Fed Board nominees, including: Dr. Lael Brainard, nominee to serve as Vice Chair on the Federal Reserve Board, Sarah Bloom Raskin, nominee to serve as Vice Chair for Supervision on the Federal Reserve Board of Governors, and Drs. Lisa Cook and Philip Jefferson, nominees to serve as members of the Board of Governors. Bloom Raskin, Cook, and Jefferson agreed to a four year recusal period from matters which they oversee on the Board of Governors, not to seek a waiver from these recusals, and not to seek employment or compensation from financial services companies for four years after leaving government service. 
  • In January 2022, Senator Warren called on Chair Powell to immediately release information related to Fed officials' trades and changes to the Fed’s ethics policy after new and troubling revelations about then-Vice Chair Richard Clarida’s trades in March 2020.
  • As the ethics scandals involving top level Fed officials unfolded in September and October of 2021, Senator Warren called out the culture of corruption at the Fed and raised deep concerns over conflicts of interests that have undermined public confidence in the Federal Reserve System. 
  • In an October 2021 speech on the floor of the Senate, Senator Warren called out the culture of corruption among high-ranking Fed after recent reports of ethically questionable financial activity by high-ranking Fed officials, including then-Vice Chair Clarida and two regional Fed presidents.  

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