Wall Street Mulls Naughty List for Ethically Challenged Bankers

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

He’s 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.

@bloomberg.com – Wall Street Mulls Naughty List for Ethically Challenged Bankers