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.
||B/D; Bank; HF; IA
||Compliance; C-Suite; Legal; Registration; Reporting; Training; HR
||United States of America
||Banking; Corporate; Fund Mgt; Securities
Last substantive update on 03/08/2017