Tuesday, March 14, 2017

New York Fed VP: How lawyers can help reform financial services culture

By Thomas G. Wolfe, J.D.
Speaking at Yale Law School’s “Chirelstein Colloquium” in New Haven, Conn., Michael Held, Executive Vice President of the Federal Reserve Bank of New York, emphasized that an in-house lawyer “who is both a partner and a guardian—an insider and an outsider—can greatly benefit a financial services firm” by helping to improve the firm’s culture. In his March 8, 2017, remarks, Held provided examples of how lawyers might accomplish that goal through their “independence and insight” without compromising their legal role and without becoming “captive” to a financial services firm’s culture.
Culture. According to Held, while some individuals commit financial crimes because they are greedy, that does not explain the whole picture. From Held’s experience, “the reasons why bankers break the law are varied and complex. And, in many instances, misconduct is related to an organization’s culture.” For instance, Held said that “junior bankers typically don’t consult ‘the law’ for guidance on a day-to-day basis. They take their cues from their peers and immediate supervisors.”
Although Held observed that, given a financial firm’s culture, individuals may not always refer to written policies, consult with in-house counsel or the firm’s compliance department, he asserted that “there is no ‘culture excuse’ when people break the law.”
Lawyers’ role. Held noted that “a proliferation of technical rules prompts us to ask what we can do, not what we should do.” He pointed out that lawyers in financial firms are too often asked by clients, in effect, “How close to the legal line can I get?” Likewise, Held also expressed concern that, given this type of cultural mindset, “lawyers, intentionally or not, enable this kind of thinking. Lawyers are certainly not immune from cultural influences.”
Against this backdrop, Held offered ways in which lawyers might improve a financial services firm’s culture. Among other things, in Held’s view, lawyers should:
  • be “part of the conscience of the organization;”
  • ask questions about the organization to help resolve difficult ethical questions, particularly since the rules governing the legal profession “expressly permit advice on non-legal matters;”
  • identify and combat “troublesome silos of behavior” within the organization to help the firm’s management evaluate whether there is an isolated “rogue” unit or a “more systemic problem” present;
  • explore whether the way the business is organized and run poses a risk of “unacceptable conflicts of interest;”
  • determine whether principles and tasks are communicated clearly and whether problems are addressed early or belatedly;
  • assess whether the firm’s senior leaders set a proper example; and
  • inquire about how the firm treats employees who “escalate issues.” 
Commenting that culture is “contagious,” Held noted that, as a result of current privacy and risk concerns on the part of employers, a banker’s record of misconduct does not always travel with him or her from one financial firm to the next. Held discussed the possibility of a potential “database of banker misconduct,” which was initially introduced by New York Fed President Bill Dudley. Held touched upon the pros and cons of establishing this type of database.
For more viewpoints by regulators and by the financial services industry on improving the business culture, subscribe to the Banking and Finance Law Daily.

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