Federal Reserve Board: Treatment of Market-Moving Leaks Instructive–Board Lacks Sufficient Accountability and Its IG Is Powerless to Investigate Internal Wrongdoing

The New York Times published an article “Fed Deflects Outside Aid to Investigate Data Leaks.” The article concerns the investigatory approach of the Federal Reserve Board (Board) towards leaks of market-moving information. The article demonstrates the need for more Board accountability and the need for an Inspector General (IG) that can truly investigate internal Board matters (subject to the appropriate level of accountability to the Congress).

According to the article, the Board’s approach towards investigations of leaks changed several times over the years:

  • January 2011–After a breach, the Board decided that the Board’s IG would investigate.
  • In 2012, the Board decided to investigate leaks itself, without referral to its IG.
  • In 2014, the Board increased the role of internal investigations and continued to not use its IG.

This issue is unique to the Board because of the statutory authority provided to the Board chair under 12 U.S.C. §244. The Board chair is provided with substantial authority without being subjected to much oversight by the congressional committees. To whom much authority is given, much more accountability is expected. So the multiple investigations of a leak to Medley Global Advisors are necessary, but the Board should have applied rigorous scrutiny to the situation before these events escalated to this level of congressional and Justice Department scrutiny.

This blog has discussed the problematic authority granted to the Board chair in the context of civil rights laws and regulations, but this leak situation only furthers the need to amend the Federal Reserve Act to reform the 1913 agency to perform to twenty-first century expectations. Regardless of any claims of the Board professing “independence,” the Board must be aware that it is a function of the consent of the people of the United States. Without that consent, the agency cannot function with legitimacy.

In addition, the leak situation demonstrates the weak position of the IG. Sadly, the Board’s IG is akin to a toothless tiger.

  • The Board selects its IG. The IG is not nominated by the President and approved by the U.S. Senate. Thus, an immediate conflict of interest and lack of independence is created.
  • Further, the IG submits a budget to the Board for its approval (See Board Annual Report, 2013, page 314 (paragraph 3)). Again, the IG instantly is subservient to the head of the agency. As a result, the IG cannot function.

Despite all of this activity to belatedly investigate the leak, will the leaker be determined? I am not sure. But, definitely, Congress can address the issues of overbroad authority granted to the Board chair by expecting more accountability of the Board’s use of its discretionary authority. The same is true for the Board’s IG.