Perhaps the most well-known aspect of securities law is the illegality of insider trading. If a person gains access to nonpublic information about a firm, it cannot be used as a basis for buying or selling its stock. Yet, an interesting special report from Kristina Cooke, Pedro da Costa and Emily Flitter at Reuters reveals that the same rules don't apply to the Federal Reserve. Considering the importance monetary policy holds these days, shouldn't the same rules apply?
The authors of the Reuters article explain that some people with close ties to the Fed use their insider knowledge to their advantage. They provide the following example:
On August 19, just nine days after the U.S. central bank surprised financial markets by deciding to buy more bonds to support a flagging economy, former Fed governor Larry Meyer sent a note to clients of his consulting firm with a breakdown of the policy-setting meeting.
The minutes from that same gathering of the powerful Federal Open Market Committee, or FOMC, are made available to the public -- but only after a three-week lag. So Meyer's clients were provided with a glimpse into what the Fed was thinking well ahead of other investors.
His note cited the views of "most members" and "many members" as he detailed increasingly sharp divisions among the officials who determine the nation's monetary policy.
The inside scoop, which explained how rising mortgage prepayments had prompted renewed central bank action, was simply too detailed to have come from anywhere but the Fed.
According to the article, those with nonpublic knowledge of the Fed are not forbidden from using that information to their advantage. Indeed, Meyer charges clients $75,000 for his advisory product, who can then use the information as the basis for buying and selling securities. This raises two questions: shouldn't benefiting from such nonpublic Fed information be illegal, and if not shouldn't Fed officials be forbidden from disseminating such important information selectively?