The much-publicized Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 became effective on August 12, 2011. Section 342 of the Dodd-Frank Act, requiring the implementation of diversity practices for both government agencies and regulated financial entities, has received less attention and has been somewhat overlooked, but that will change in the near future. Regulated companies need to review and update their diversity policies in preparation for the scrutiny that is on the horizon from their government regulators.
Who It Affects
Section 342 of the Dodd-Frank Act addresses diversity practices and applies to:
- Federal financial agencies
- Entities that contract with federal financial agencies
- Private financial entities that are regulated by any of several federal financial agencies (the 12 regional Federal Reserve Banks, Federal Reserve Board of Governors, Departmental Offices of the Department of Treasury, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Consumer Financial Protection Bureau)
Practically speaking, this umbrella will include any bank or financial institution regulated by the federal government.
What It Accomplishes
Section 342 requires federal financial agencies to create an Office of Minority and Women Inclusion (OMWI) to be "responsible for all agency matters relating to diversity in management, employment and business activities." First, each of the government entities were and are to take steps to promote diversity within its workforce. Specific steps for the agencies to take include: (1) recruiting at historically black colleges and universities along with other colleges that serve minority populations, (2) sponsoring and recruiting at urban job fairs, (3) placing employment ads in periodicals oriented toward minorities and women, (4) partnering with organizations that focus on developing opportunities for minorities and women, and (5) and partnering with inner-city high schools to establish financial literacy programs and provide mentoring.
Second, the Act requires government entities to develop standards to ensure the fair inclusion of minorities, women, and minority-owned businesses in the agency's contracts. The procedures used by the covered agencies in evaluating potential contracts or contractors will now include consideration of the diversity of the applying contractor as a criterion. The Act also requires the government agency to create standards to assess whether the agency contractor or subcontractor has made a "good faith effort" to include minorities or women in their workforces. The penalties for failing to prove such a good faith effort can include termination of the contract. Section 342 also expands the definition of "federal contract" to include almost any financial service entity and law firms that do business with one of the affected federal agencies.
Third, and perhaps most significantly, the Act gives the OMWI the authority to assess the diversity policies of regulated private entities. Section 342, however, provides no specific guidance as to the criteria that the OMWI will be using to assess such programs. The OMWI offices have yet to promulgate final regulations but OMWI directors from six of the financial agencies proposed joint standards that should serve as a possible guide. The four broad categories that should be included in a company's diversity policy, according to the proposed joint standards, are:
- Organizational commitment to diversity and inclusion,
- Workforce profile and employment practices,
- Procurement and business practices – supplier diversity, and
- Practices to promote transparency of organizational diversity and inclusion.
The proposed standards did recognize that one size does not fit all and that a financial entity's "size and other characteristics (for example, total assets, number of employees, governance structure, revenues, number of members and/or customers, contract volume, geographic location, and community characteristics)" should be taken into account.
Additionally, most believe that the OMWI will require regulated entities to submit annual reports on their policies, statistics, and outreach programs. As a possible guide, the Housing and Economic Recovery Act (HERA) has created such a reporting obligation, and the Federal Housing Finance Agency has implemented regulations that covered entities must submit reports "describing efforts to promote diversity and ensure the inclusion and utilization of minorities, women, individuals with disabilities, and minority, women, and disabled-owned business at all levels, in management and employment, in all business and activities, and in all contracts for services and the results of such efforts." Such reports are to include the number of equal opportunity complaints that were filed, the number and result of any claims of discrimination, and the amount paid by the regulated entity for settlement or judgments on discrimination claims. Affected entities should bear these reporting requirements in mind when evaluating strategy on EEOC complaints that they handle as the information will become much more transparent.
Practical Tips
Although final regulations and enforcement mechanisms will be determined by the OMWI in the days ahead, regulated financial entities should review and enhance their diversity policies and prepare for the examination of such policies by their regulators. With scrutiny from regulators on the horizon there is no better time to take a closer look at current policies and update areas as needed. Most financial employers already have well-established diversity programs that comply with these proposed joint standards and eventually the OMWI's requirements. Every company should have Equal Opportunity policies that affirm their commitment to workplace equality that is free from discrimination, harassment, and retaliation, and that provide procedures for reporting discrimination or harassment.
Additionally, financial employers should statistically assess their demographics. Most companies probably already have this information handy and will have previously reported such statistics on an EEO-1 Employer Information Report. Regulated entities should develop outreach programs, if possible, such as partnering with organizations promoting minorities or recruiting in minority and female-based schools.
Aside from the regulatory requirements, employers should seek to embrace these diversity initiatives as part of a culture they want to promote and one which will enhance their reputation in their industry.
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