Wall Street May Create UK-Like Registry of Misbehaving Bankers, Traders

By | December 29, 2015

Bankers’ misdeeds would be cataloged, by name, on a private registry for hiring managers under a proposal that’s gaining traction as Wall Street firms struggle to restore reputations damaged by the financial crisis and the Libor and foreign-exchange scandals.

When traders or bankers leave a firm, any instances in which they’ve violated the firm’s ethics or conduct rules would be listed on a central database, allowing prospective employers to see their records before deciding whether to hire them. The concept, promoted by Federal Reserve Bank of New York President William Dudley following a similar plan in the U.K., is aimed at stopping offenders from moving easily between banks.

“We can see a fair number of people who have been bad actors who have recirculated at institutions and created havoc wherever they have gone,” said H. Rodgin Cohen, who has represented many of the largest U.S. banks as senior chairman of Sullivan & Cromwell LLP. The main problem is employees who have been dismissed or covered their tracks by going to another firm “one step ahead of dismissal,” he said.

Closed-Door Sessions

Bankers and regulators discussed the idea in closed-door sessions during a New York Fed conference last month on culture and behavior in the finance industry. Several participants argued for a searchable database and debated whether it should focus on the cause of an employee’s departure or also include “official warnings and reprimands that occur during the course of employment,” according to a summary of the conference released by the regulator.

Currently, a hiring manager can use background checks or the Internet to see whether a job candidate has an arrest record or has been publicly disciplined by regulators. But violations of a previous employer’s internal code of conduct are usually invisible to the outside world.

Panelists and moderators leading the discussions included executives from Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co., Deutsche Bank AG and UBS AG. In his closing remarks, Dudley encouraged the industry to pursue a registry.

Stream of Scandals

Dudley is making the push as a stream of scandals at large global banks continues to hurt the finance industry’s reputation. Penalties levied by regulators in the foreign- exchange probe alone have surpassed $10 billion, and a dozen banks and brokerages have been fined about $9 billion for manipulating the London interbank offered rate.

A database would have to clear several significant hurdles before being implemented. Banking lawyers and executives say it would likely need congressional approval to provide liability protection for banks reporting misconduct by former employees. A draft of what could eventually become proposed legislation has the backing of industry executives but needs to be presented to “the right people in Congress,” according to Cohen.

Banking executives say employees would need to be able challenge the registry in court and defend themselves against false accusations. Other questions include whether offenses would be deleted after a certain number of years, and whether information technology workers, in addition to traders and executives, would be part of the database.

Six-Year Search

Under a U.K. plan due to take effect in March, banks and insurance companies must get information for some new hires going back six years, and employers must say whether former employees had received disciplinary warnings or punishments. The U.K. already has a public registry showing whether regulated financial services employees are in good standing or have been banned, similar to a broker database in the U.S. operated by the Financial Industry Regulatory Authority.

The Group of 30, made up of prominent former regulators and financiers from around the world, said in a July report that employers should conduct full due diligence on the employment history of potential new hires and suggested that authorities consider a registry.

The system being discussed in the U.S. would initially cover firms supervised by the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. It would be maintained by the regulators using information from the banks. Asset managers, hedge funds and private equity firms might eventually be able to opt into the system.

Triggering Event

Under a registry, the so-called triggering event for getting listed would be an employee’s departure. Banks would have two main obligations: to report misconduct, and to check the registry before making a hiring decision.

Firms could decide to hire even if they know about a candidate’s history. Since last year, several traders involved in regulators’ investigations of foreign-exchange and Libor markets have been hired by non-bank financial firms.

A registry could be helpful “at the margins,” said Robert Hockett, a law professor at Cornell University in Ithaca, New York. “‘There’s a kind of implicit shaming effect,” he said. “Some people might have qualms about the prospect of being put on the list and rein in their behavior.”

Still, many bankers and traders are comfortable “pushing the envelope” and will continue to do so even with a database, said Hockett, who has worked as a part-time consultant to the New York Fed.

Quiet Concern

While the summary of the New York Fed’s culture conference said that “no participant raised an objection to the registry,” some executives, when outside the earshot of regulators, express concerns that it could trample the rights of individuals. One attendee, who asked not to be identified at the risk of offending regulators, said a registry would be terrifying for bankers if strict due process and privacy standards aren’t met.

Spokesmen from the Securities Industry and Financial Markets Association, Wall Street’s biggest lobbying group, and the American Bankers Association, which represents lenders of all sizes, declined to comment on the idea.

Near the end of an October 2014 speech on improving the culture of the financial services industry, Dudley mentioned the idea and compared it to a lender’s ability to check a borrower’s credit score. “It would be helpful if financial firms, prior to making a hiring decision, could look up a candidate’s ‘ethics and compliance score’ that reflects the individual’s past performance at other financial firms,” he said.

Restricted Access

Dudley noted that a similar system exists at regulated broker-dealers, which must file forms when they hire or dismiss licensed brokers. Finra, Wall Street’s self-regulator, runs a public database that includes violations, regulatory actions and complaints against brokers to help individual investors. A banker registry wouldn’t be public, and access would be restricted to hiring managers and some top executives.

Regulators say they’re disturbed that while bankers and traders move frequently between firms, their records don’t. Manipulation of Libor involved collusion among employees at different firms, some of whom knew each other at their previous jobs. Dudley noted that “often allegiance to an external network of traders has been more important than the ties the trader has to his or her particular employer.”

Dudley has been on the defensive amid criticism by lawmakers, including Senator Elizabeth Warren, who say the New York Fed has been too deferential to the Wall Street banks it oversees. During a congressional hearing last year, Warren told him that if he couldn’t fix the “cultural problem” at the reserve bank, “we need to get someone who will.”

Though many of the specifics of a database must still be addressed, that’s not the biggest obstacle, according to Sullivan & Cromwell’s Cohen.

“The devil is truly not in the details,” he said. “The devil is in having the will to do it in the first place. If you have that, you can solve the detail problems.”


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