Does legal recruiting need more oversight?

Kimberly Stockinger, the CEO of The Sweetbridge Group, has questions about the ethics and regulation surrounding the industry.

Legal recruiting is a lucrative industry, relied on by law firm leaders who want to attract the best talent to their ranks. But Kimberly Stockinger, CEO of legal recruiting firm, The Sweetbridge Group, has questions about the ethics and regulation surrounding the industry.

A former financial advisor, Stockinger would like to see some oversight for legal recruiters including requirements to track transactions, disclose conflicts of interest, and safeguards around confidential information. She recently penned an article for the ABA Journal titled, "Do you know who your legal recruiter is?" We chatted with Stockinger to dive deeper into the subject.

Lawdragon: What is your professional experience and background with regulations?

Kimberly Stockinger: My career started in finance thirty years ago from a banking regulatory department to a limited partnership trading desk, by the time I was twenty-one, I was working at a fast-paced, high-end office of Smith Barney. In these roles I gained valuable experience and insight on the inner workings of financial institutions with multiple regulatory agencies overseeing every move.

A few years later, I obtained all of the licenses to trade millions of dollars in a day. I was recruited to work with a managing partner of the regional firm Piper Jaffray and then recruited internally to work with the top producer in California. Our clients were extremely wealthy individuals who needed tax-free investments and major corporations who needed short term investment tools. Several years later I transferred with the firm to the Midwest where investment needs were drastically different. Just like attorneys, financial advisors have to be registered in each state they do business in and back in those days there wasn’t the remote ability. 

My career ended in leadership teaching new advisors how to pass the securities tests and how to build a business and guiding established advisors with large transactions.

LD: Tell us more about the process of obtaining your securities license.

KS: Each of the securities tests have several chapters to study and many questions on the tests about the history of the regulations; how and why they were implemented. In short, “The Banker’s Panic” of 1907 led to the creation of The Federal Reserve in 1913 and was the beginning of the “Regulatory Era.” A couple of decades later there was the famous stock market crash of 1929. Several factors caused this massive crash including panic selling and over inflated shares. Other questionable behavior was likely in an unregulated market and many also pointed to the unfavorable media coverage. A look back at what caused the crash and the mess that followed provided the impetus for federal securities legislation and the first major federal legislation enacting the Securities Act of 1933.

Regulations can be a snore fest but if you are still with me, I would like to point out both of these are still used and improved over time and were implemented after a major and costly crisis.

LD: What does that history mean to you today?

KS: I see what happened to Stroock & Stroock and think with some regulations the demise could possibly have been prevented. If we had some basic rules around privacy and protection of private information, they may have had an opportunity to restructure and rebuild without the scope of the media and the shark-style recruiters who circled at the whiff of a crisis. How is this information even leaked? Leaking confidential information that results in a trade is illegal in other industries. The number of hits this firm and others took after this information was exposed is alarming.

In finance we are required by regulators to safeguard our clients’ identities. Law firms’ sensitive information also needs to be kept confidential and should not be used to inspire a transaction. 

LD: What could have prevented you from getting your trading licenses and what activity would cause you to lose it?

KS: Any felony convictions and certain misdemeanor offenses ten years prior. Violations of securities laws and regulations including privacy laws is a Series 7 license disqualification, as are ejections from financial-trade organizations for repeated offenses. So, if I was a major criminal or tied to major criminal activity, or a repeated offender of bad behavior, I could not have been a financial advisor. 

LD: Why did you leave the financial industry and how did you pivot to legal recruiting?

KS: The highly anticipated financial crisis of 2008 caused me to reevaluate my place in the financial world. I remember hearing the warnings and thinking there was no way something like that could happen, there must be safeguards, the people in charge must have a solution. When it was over in just a few short hours, these esteemed institutions had their guts laying all over Wall Street. I built my career with these firms who were abruptly disseminated and unrecognizable. Firms one swore they would never work with suddenly acquiring them and their book of business. 

The list of financial institutions worldwide that were affected by the Great Recession in 2007-2009 is astonishing. Many of these firms were taken over or merged with other financial institutions foreign and domestic. Suddenly everyone on this list is working with someone they did not originally sign up with. The shocking lack of control any of us had on the outcome was eye opening. It was then I knew it was time for something new.

As for pivoting, I made the hard choice to bench my licenses, something I still dream about today and I started my own legal recruiting business in 2010. My global contacts and natural market enabled me to get started right away. The best guide navigating possible conflicts was my experience in a regulated market.

In finance we are required by regulators to safeguard our clients’ identities in every way possible or else. In recruiting those that need the identity protection are the confidential candidates. Law firms’ sensitive information also needs to be kept confidential and should not be used without permission to inspire a transaction. 

I have learned from other recruiters on what not to do and how to watch out for unruly, bad-acting recruiters who aren’t doing the right thing and setting their own standards and most importantly, safeguard my confidential candidates in every way possible including a confidential clause in my contracts as many recruiters have as well. These large firms don’t allow their candidates' information to be stolen from them, which is why they use arbitration to enforce their employee contracts. Arbitration has been a platform for these massive recruiting firms to pay the arbitrator and seal the case, shielding their bad behavior.

LD: What is the recurring dream about your licenses?

KS: It is my most recurring dream where I have an opportunity to do a big deal but I need my licenses back. It usually ends with me studying for them again.

LD: What does legal recruiting have in common with a transaction in finance?

KS: There is so much to compare, but I will try to narrow it down. Legal recruiting that involves a portable business is quite literally matching and trading assets, only in an unregulated market. When a deal is done in finance, the sensitive information is safeguarded by regulations. Many law firms exclude recruiters from the detailed inside information about a firm’s full financial scope and practice weakness and strengths because of what a recruiter can do with that information later. Firms that do not safeguard their information or realize what can happen with the information if given to the wrong person may think that giving a recruiter the information may help seal the deal, however, unlike the regulated finance world, there are no regulations disallowing recruiters to stash and use the information later against them.

Arbitration has been a platform for these massive recruiting firms to pay the arbitrator and seal the case, shielding their bad behavior.

Both professions match assets that result in a substantial commission. These fees vary from thousands to an excess of a million for recruiters and financial advisors. The larger the investment the smaller the pool of advisors who work in that space and it is the same for recruiters on the size of deals they work on.

Many acquisitions at law firms include outside recruiters and can involve highly sensitive information. In finance, all sensitive information is protected and highly regulated and you have to be a licensed professional to use it. Right now, the information recruiters get in these transactions can enable them to influence future deals, they can even leak information to the media.

Many see recruiting and consulting firms that advise and place as having a major conflict of interest. Showing your clients only your inventory and having the ability to use private information to close a deal should be a conflict. If a recruiter is going past the role of introducing, they are consulting and this is seen as a conflict.

Financial advisors are required to avoid or disclose conflicts. They are forbidden to “front run” with confidential information that could influence a transaction. Meaning, if you have inside information such as a looming merger, or other private information you would not be allowed to use that to influence a transaction. In investments, an advisor has to disclose they are showing their client only their proprietary products. When there is an exclusive with recruiting, it is like investing in that recruiter’s proprietary catalog but they aren’t required to tell you. 

LD: What are some other differences in the standards for financial advisors versus legal recruiters? 

KS: There are many to cover but to start, all employees at an investment firm go through a comprehensive background check that includes an ID check. A registered financial advisor has a more in-depth background check that includes fingerprint verification and more.

In order to work as a financial advisor, there are a number of challenging tests that focus on rules and regulations, and there are several agencies that oversee everything related to trading investments. The Series 7 test is required for trading most investments and is passed by less than 65 percent of candidates.

A financial advisor abides by many rules and regulations when matching assets and has continued education. They have internal and external compliance departments and several layers go into making sure a trade follows the rules.

LD: What are some other regulations financial advisors must abide by in regards to their clients and when selling investments?

KS: Aside from being a registered and licensed individual with continued education requirements, there are many rules and regulations. One of the biggest conflicts is if a financial advisor advises a client to trade products that are not in their best interest but the advisor would earn a larger commission. The advisor is not allowed to use insider information to impact a trade. Financial advisors must disclose if they can only sell proprietary investments and must disclose conflicts.

Financial advisors are required to safeguard client information or they can be penalized by the regulatory agencies. They are not allowed to leak information to the media regarding their client’s sensitive information.

Legal recruiting that involves a portable business is quite literally matching and trading assets, only in an unregulated market.

LD: When and why did you decide to join the National Association of Legal Search Consultants?

KS: In 2017 I was recruited to join NALSC. It was through this organization I discovered no one is really holding anyone accountable unless you are a member of NALSC and many of the repeating offending firms are not qualified to be members of NALSC because of their unwillingness to adhere to and be bound by the NALSC Code of Ethics.

When a recruiting firm decides it wants to grow so large where they cannot manage their own contracts, it does not mean the rest of the industry should lower their standards for these firms. Many of us do not grow our recruiting firms because of the conflicts that go with it. We all have the choice to be advocates for law firm standards and simple ethics or to be advocates for poor recruiter behavior.

LD: What do you feel about the future of legal recruiting, will it compete with AI?

KS: Just like an established financial advisor with a portable book of business on the line, attorneys that are large producers will continue to need the confidential experience that only a trusted human can provide in my opinion. I cannot see that part changing. If we give the industry the attention it needs and implement an oversight organization, it will weed out the bad actors. Those who are thoroughly vetted and want to follow basic rules will be trusted recruiters. 

LD: How can we create a safe, confidential and monitored legal recruiting environment? 

KS: We would have to do another entire segment on this but in short: ID verification, criminal background check, transaction monitoring, rules in place to protect firms’ confidential information and the confidential candidate and everyone involved. Professionals that are matching assets using confidential financial and other inside information should be required to a higher standard, properly trained and monitored with ongoing continued education.

There could be a scope into Diversity & Inclusion recruiting with more continued conversations for improvement and oversight for recruiters that are in the D&I category, making sure the larger recruiting firms are not just targeting people in this group while enforcing employment agreements.

They should have a set of rules that does not allow bad behavior. They should be ineligible if they have a history of criminal activity or if they mismanage their own client contracts and break rules repeatedly.

There is much discussion on the need for more or less transparency inside law firms, this is for them and their regulatory agencies to figure out but as it pertains to recruiters, there should be less transparency when it comes to sensitive information unless there are enforceable rules.

LD: What is next?

KS: I think it would be important to have the majority of the Am Law 100/200 support in order to make something happen and worth organizing. It is important now more than ever to have a safer recruiting environment for everyone involved.