Fed Lawyers Role in Culture

On Mar. 8. Fed NY EVP Held spoke on lawyer role culture, conduct.

  • Lawyers have an important role at firms, as advisors not just on law—but on culture.
  • Culture is distinct from both public law and private rules, although has some linkage.
  • Firm culture often informs and is informed by rules, and powerful force in own right.
  • Lawyer's advice on culture should be grounded in law, not stray from their expertise.
  • But in-house lawyer is well-suited to assess, and help improve organization's culture.
  • Follows Fed NY CEO Dudley Jan. 2017 speech on improving bank culture, see #30608.
  • Independence and Insight
  • Supply independence and insight to understand firm's culture without being captive.
  • Independence is from a lawyer's training, code of ethics, and reporting to the board.
  • Insight is derived from lawyer, building a trusted relationship with a client over time.
  • Should be a person with both understanding of insider, and objectivity of an outsider.
  • Definition of Culture
  • Defined culture as shared norms within a firm, that are evidenced through behavior.
  • Strong culture is effective at transmitting norms in group, helping joiners assimilate.
  • Culture may yield too high a degree of adherence—or dangerous lack of questioning.
  • Can lead to a conclusion that an action is "right" because it appeared fully accepted.
  • In practice, people's behavior may not always refer to laws, rules, regulation, policy.
  • Similarly may not always consult firm's in-house counsel or compliance department.
  • But there is no "culture excuse" if people break law and regulations, as these matter.
  • Competition Failure
  • An environment that does not tolerate failure, even when guaranteed, is dangerous.
  • Can encourage cutting corners, and discourage escalation of problems to managers.
  • Misguided desire to help teammates may also contribute to misconduct, e.g. LIBOR.
  • Cultures may exist within an industry in ways that are not specific to a firm, e.g. FX.
  • Allegiances of traders were to each other, rather than to their employer or customer.
  • Any firm may have multiple cultures, e.g. not all people at FX banks participated in.
  • Branding behavior as "rogue" does not explain why it occurred or underlying reasons.
  • Role of Lawyers
  • Gaps in regulatory are inevitable, firms will develop shared norms for filling the gap.
  • For that reason, we need to look to culture, as well as seeking laws for all situations.
  • Pace of rulemaking is behind that of rule breaking, risk of fighting last year's scandal.
  • Laws are good at setting outer limit of acceptable behavior that is clearly prohibited.
  • But they are less frequently, and less reliably, used to define what is optimal or good.
  • Reliance on right-line rules may, strangely, entice people to walk right up to the edge.
  • Lawyers must push against minimalism, argue not just what is legal but what is right.
  • Questions for Lawyers to Ask
  • Lawyers can look for effective challenge, ask how CEO assured, firm is not in breach.
  • Structure: does a certain way of organizing business run risk of unacceptable conflict.
  • Are roles in a group clearly defined, or over-defined so staff loses sight of big picture.
  • Communication: are principles and tasks made clear, problems escalate early or late.
  • Method to relay and receive bad news, both from employees to managers, vice versa.
  • Leadership: do senior's messages match actions, encourage question, seeks feedback.
  • Escalation: how does firm treats employees who raise issues, diversity of viewpoints.
  • Employees Moving Between Banks
  • When staff move between banks, last employer only gives name, rank, as a reference.
  • Lawyers advise clients the best option in giving reference is to say as little as possible.
  • However, persons responsible for misconduct since crisis were not first-time offenders.
  • Had records of misconduct at prior employers, but they did not share this information.
  • Follows Fed CEO Oct. 2014 speech suggesting banker misconduct database, see #12126.
  • Banker Database Description
  • New law could require firms to report any misconduct, and to check database if hiring.
  • Report when employee leaves firm if misconduct violated law, or bank behavior policy.
  • Explain circumstance of misconduct, so new employer can understand what happened.
  • Records would be available to other institutions for fixed period of time e.g. five years.
  • Hiring firm should have duty to check database after conditional offer, before starting.
  • An offer of employment, would be contingent on a database inquiry being satisfactory.
  • Any federal statute could provide limited civil immunity, (or safe harbor) for reporting.
  • Give employee prompt notice and two options to pursue redress if believe report false.
  • Either low-cost, fast-track ombudsman hearing, or full judicial review in federal court.
  • Database would benefit from input by prosecutors, regulators, lawyers for firms, staff.
  • Suggested cultural problems in financial firms also found elsewhere, have same issues.

Regulators DoJ; Fed
Entity Types B/D; Bank; HF; IA
Reference Sp, 3/8/2017
Functions Compliance; C-Suite; Legal; Registration; Reporting; Training; HR
Countries United States of America
Products Banking; Corporate; Fund Mgt; Securities
Regions Am
Rule Type Guidance
Rule Date 3/8/2017
Effective Date 3/8/2017
Rule Id 31383
Linked to Rule :30608
Report Issue 3/15/2017
Report Section US Banking

Last substantive update on 03/08/2017