Why is there a Diversity Section in the Dodd-Frank Act?
The Dodd–Frank
Wall Street Reform and Consumer Protection Act of 2010 was one of the most
sweeping banking laws that have been enacted in many years. Of course, the legislation was passed against
the backdrop of one the largest financial crises in world history. The legislation has many sections and several
of the provisions have been heavily discussed.
However, one section of the act, Section 342, has not received much
discussion or fanfare at all. What is Section
342? It is the section that establishes
the Office of Minority and Women Inclusion.
Are you Aware that the FFIEC has released Guidance Standards
for Diversity in Hiring and Procurement?
On Oct. 25, 2013, the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, Federal Deposit
Insurance Corp., National Credit Union Administration, Consumer Financial
Protection Bureau, and Securities and Exchange Commission (SEC) which is
collectively known as the FFIEC, issued a proposed interagency policy
statement on diversity. Section 342 of the
Dodd-Frank Act requires these agencies to develop standards for regulated
entities to assess diversity. The final rule was issued and took effect on June
10, 2015.
First Things First-What is this all about?
One of the things that the Dodd-Frank Act addresses is the
effort being made by financial institutions in the area of inclusion of women
and minorities in the overall hiring and procurement processes. The
legislative discussion of Section 342 of the Dodd-Frank Act helps to describe
what it is that this section of the law is designed to do.
The Agencies believe that a goal of Section 342 is to promote
transparency and awareness of diversity policies and practices within the
entities regulated by the Agencies. The establishment of standards will provide
guidance to the regulated entities and the public for assessing the diversity
policies and practices of regulated entities. In addition, by facilitating
greater awareness and transparency of the diversity policies and practices of
regulated entities, the standards will provide the public a greater ability to
assess diversity policies and practices of regulated entities. The Agencies
recognize that greater diversity and inclusion promotes stronger, more
effective, and more innovative businesses, as well as opportunities to serve a
wider range of customers.[1]
Put another way, the Dodd-Frank Act is trying to get
financial institutions to get to know their entire assessment area not only as
customers, but as potential employees and contractors. We believe
that this fits in with a larger direction to financial institutions that they
should get to know the credit and financial needs of the communities they
serve. Much like the Community Reinvestment Act, there is nothing
in the law or the guidance that directs institutions to lower standards or to
set quotas. Instead, the idea here is to make sure that the employment
and procurement processes are inclusive. The fact is that there are
many “diamonds in the rough” that go overlooked and as a result, are unbanked
or underemployed.
Will This Require a Whole new Reporting Process?
The guidance requires an annual statement on the diversity
practices of the Banks and credit unions.
Based upon the standards in the rule, it is not likely that a whole new
data collection regime will be required. Instead, it will be the duty of
the Board and senior management to include diversity considerations in the
strategic plan and ongoing monitoring of performance.
According to the proposed guidance, the expectation
will be that institutions will
- Include diversity and
inclusion considerations in the strategic plan
- Will have a diversity
and inclusion plan that is reviewed and approved by the Board
- Will have regular
reports to the Board on progress
- Will provide training
to all affected staff
- Will designate a
senior officer as the person responsible for overseeing and implementing
the plan
What does
Diversity Mean?
For purposes of this definition, “minority” is defined as
Black Americans, Native Americans, Hispanic Americans, and Asian Americans,
which is consistent with the definition of “minority” in sSection 342(g)(3) of
the Act.
The final Policy Statement also states that this definition
of diversity “does not preclude an entity from using a broader definition with
regard to these standards.” This language is intended to be sufficiently
flexible to encompass other groups if an entity wants to define the term more
broadly. For example, a broader definition may include the categories
referenced by the Equal Employment Opportunity Commission (EEOC) in its
Employer Information Report EEO-1 (EEO-1 Report), [2] as
well as individuals with disabilities, veterans, and LGBT individuals.
While this may seem like a long list of new requirements, in
our opinion that is not the case at all. When developing a strategic plan
and assessing the credit needs of the community, the idea of diversity should
be part and parcel of the basic considerations and projections. It is
clear that regulators will increasingly focus on financial institutions ability
to identify the financial needs of the communities they serve and to match how
the banks activities meet those needs. In addition, we believe that
examiners will ask financial institutions to document the reasons why they are
not able to offer certain products. The same will be true in the area of
hiring and procurement. Financial institutions will need to be able to
document diversity efforts and to have a good explanation for the lack of
diversity.
It should be emphasized that we do not believe that this
guidance is leading towards hiring or procurement quotas. Instead, the
requirement will be for complete and clear documentation of the efforts
made to ensure that diverse candidates are being considered.
Why is this a Good Thing?
Diversity has been, and will always be a strength. Of
course a diverse loan portfolio is one that can absorb fluctuations in various industries
without much turmoil. Diverse ideas and experiences have always
lead to innovation. In point of fact, there has been a history of
exclusion of several communities of potential customers by financial intuitions
for some time. The whole point of the Community Reinvestment Act was to
get financial institutions to look at all communities for potential
clients.
Earvin “Magic” Johnson has developed a multi-Billion-dollar
business based upon the idea that diversity is strength. His companies
have invested in neighborhoods that were traditionally under banked and lacked
access to funding. The success of this company is a good example of how
strategic diversity creates opportunities in communities that often get
overlooked.
Self-Assessment
One of the more controversial points of the regulation is
that it appears to rely on self-assessments. There are no examinations
standards that are mentioned in the guidance. While some commenters
decried the idea that self-policing is too vague; it appears that the
expectation is that financial institutions will develop a policy, monitor
compliance with that policy and make the results available to the public.
Self–assessment is both an opportunity and a curse.
The opportunity exists for an institution to self-define itself. By
setting standards that are based on a comprehensive understanding of the
community vis-à-vis the capabilities of the bank, an institution has the
opportunity to create a strong impression with regulators. At the end of
the day this is what regulators will willingly accept and applaud.
Implications
While it is too early to tell whether the
final guidance will have significant costs associated with it, it is obvious
that there will be an emphasis on diversity planning and programs for financial
institutions. We suggest that the approach should be part of the overall
strategic planning process
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