Robert Kaplan carried out multiple $1 million-plus transactions when he was president of the Dallas Fed, at a time when the Federal Open Market Committee deployed a variety of large-scale operations to stabilize markets at the onset of the pandemic. Eric Rosengren, head of the Boston Fed at the time, made numerous trades in funds that were invested in mortgage-backed securities in 2020. 

None of the trades violated federal law or broke any rules or regulations, the Fed inspector general said in a report released Monday, though it called the rules in place at the time inadequate and said the trading created an “appearance of a conflict of interest.” For Kaplan, the trades also created an appearance that he was acting on information gleaned from confidential policy deliberations, the report said.

Kaplan and Rosengren retired in 2021 soon after the release of their 2020 financial disclosures. Rosengren did not immediately respond to a request for comment.

A spokesperson for Kaplan pointed to his statement, released when he resigned in September 2021, that he adhered to all Fed ethical standards and policies, and that his trading activities and disclosures met bank compliance rules. The spokesperson also pointed to a statement from the Dallas Fed board at the time that said Kaplan “conducted his investment activities in accordance with the rules and policies of the Federal Reserve System.”

The trades and resulting probes have increased scrutiny and criticism of the Fed, and prompted bipartisan legislation that would bolster congressional oversight of the central bank. 

The Fed revamped its trading rules in 2022, imposing sweeping restrictions on officials’ investing and trading activity. In its report Monday, the IG said the previous rules “did not sufficiently support public confidence in the impartiality and integrity of the policymakers and senior staff carrying out the public mission of the FOMC’s work.”

“The disparity of the public response and the IG’s seemingly accurate conclusion that the trades complied with the rules as they existed is a clear testament to the woeful inadequacy of the rules that were in place,” said Kathryn Judge, a Columbia Law School professor.

“Just because they have been cleared by the IG doesn’t mean they have been cleared by the public or their peers,” Judge said, adding that this can serve as a check against inadequate ethics rules.

The scandals increased attention from Congress on the Fed, with lawmakers questioning governance around reserve bank presidents, who are chosen by local boards in an opaque process. Fed governors, by contrast, are subject to Senate confirmation.

Senator Elizabeth Warren said in 2021 that the trading scandal raised concerns about “a culture of corruption” at the central bank, and said that she wouldn’t support Chair Jerome Powell for a second term as chairman. Warren has blasted the Fed for withholding information from lawmakers about the trades, and introduced bipartisan legislation to subject the Fed’s regional banks to federal public disclosure laws.

The trades by Kaplan and Rosengren in 2020 occurred during the pandemic, when the Fed was intervening directly in a broad array of financial markets to support the economy.

The Fed used its balance sheet to buy up Treasuries, mortgage-backed securities, corporate bonds and municipal debt. The huge intervention put a floor under asset markets, with the S&P 500 stock index decisively turning off its lows on March 23, 2020, when the Fed announced its support programs.

Kaplan’s disclosure listed stock trades in securities such as Apple Inc. and an S&P 500 ETF. Rosengren’s trades happened as the Fed bought billions of dollars of mortgage-backed securities in an effort to backstop markets, a piece of its crisis-fighting arsenal that’s similar to what it did during the financial crisis in 2008 and after. 

Kaplan, who disclosed most of his 2020 trading activity but failed to report the actual days they were executed on, and didn’t report transactions based on stock option contracts, didn’t violate the rules at the time for reserve bank disclosures, the IG said, but the missing information would have “provided a more comprehensive understanding of his trading activities.”

From March 17 to March 19, the report said, Kaplan made multiple trades including stock index securities. A few days later, the Fed would announce “extensive” new measures to support the economy.

The report detailed a back-and-forth between staff at the Fed Board in Washington and the Dallas Fed general counsel in 2021, including an instance of the general counsel stating that she didn’t provide the board with dates for Kaplan’s trades because they would then be subject to public disclosure laws. The reserve banks, semi-private entities, are not subject to Freedom of Information Act requests.

The Fed issued new ethics rules following the scandal to bar top officials from buying individual stocks and bonds, limit active trading and require new appointees to divest certain assets before joining the Fed.

Those rules are “far better than what we had before,” former New York Fed President Bill Dudley said on Bloomberg Radio. “Certainly the appearance of a conflict is a bad thing because it can undercut the credibility of the central bank.”

The Fed IG on Monday also released additional details of an earlier investigation into trading by Powell and former Vice Chair Richard Clarida that cleared them both of wrongdoing in 2022.

Mark Bialek, the Fed’s inspector general, has faced scrutiny in the wake of that probe from some lawmakers, who argue his position comes with inherent conflicts of interest. The Fed’s internal watchdog is chosen by the Fed chair, and he reports to the Fed board in Washington. His compensation is also based on the salaries of board officials who he may have to investigate.

Warren and Senator Rick Scott, a Florida Republican, have introduced legislation to make the IG position a presidential appointee, confirmed by the Senate. 

“It’s hard for an IG, who’s not independent of the chairman, to investigate activities of direct reports of the chairman,” said Aaron Klein, a senior fellow at the Brookings Institution. “The Fed IG needs structural reform and reports like this undermine confidence in the faith of the Federal Reserve system.”

Atlanta Fed President Raphael Bostic, who in 2022 said he inadvertently omitted transactions from his financial disclosures, is also under investigation by the Fed’s internal watchdog. The latest report didn’t address those transactions.