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Proposed Diversity Standards Under Dodd-Frank

Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank” or “the Act”) to remedy the perceived failures of government regulators and to improve accountability and transparency in the U.S. financial system.i Among the mandates included in Dodd-Frank is a provision intended to address the “diversity” policies and practices of several federal agencies affected by Dodd-Frank and of the companies regulated by these agencies.  Six of these agencies, the Securities Exchange Commission, the Consumer Financial Protection Bureau, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration, (collectively, the “Agencies”) released proposed standards more than a year ago in connection with the provisions of the Act, which are expected to be finalized in the near future.

In this month’s column we summarize Section 342 of Dodd-Frank and the proposed standards of the Agencies tasked with implementing Congressional objectives.  We then discuss an important first step regulated entities should take in seeking to comply with these proposed standards – identifying a clear and workable definition of diversity.

Background

Section 342 of Dodd-Frank established Offices of Minority and Women Inclusion (“OMWI”) at several financial agencies and directs that they “shall be responsible for all matters of the agency relating to diversity in management, employment, and business activities.”  Section 342(b)(2) tasked Directors of these Offices with addressing standards and practices in three areas: (A) the employment practices of the agency; (B) the diversity policies and practices of the entities with which each agency contract; and (C) the diversity policies and practices of the entities that the agencies regulate.

Section 342(c)(1) mandates that “[t]he Director of each Office shall develop and implement standards and procedures to ensure, to the maximum extent possible, the fair inclusion and utilization of minorities, women, and minority-owned and women-owned businesses in all business and activities of the agency at all levels, including in procurement, insurance, and all types of contracts.”  Section 342(d) defines the reach of this language – it states that the provision applies to “the services of financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, financial services entities, underwriters, accountants, investment consultants, and providers of legal services.”  The Director has the power to make a referral to the agency administrator if he/she determines that the contractor has not made a good faith effort to include minorities and women in their workforce, which could lead to termination of the contractor’s relationship with a given agency. Section 342(c)(3)(A)-(B).

As mentioned, the statute extends beyond those entities that contract with the agencies.  Section 342(b)(2)(C) mandates that the respective OMWIs develop standards for “assessing the diversity policies and practices of entities regulated by the agency.”  Although the statute repeatedly refers to “diversity” or “diversity policies,” the statute provides no definitions for these words, and it does not describe the criteria that the agencies should use to assess the entities they regulate or prescribe remedial measures for the agencies should they find the diversity policies of a regulated entity to be deficient.

Joint Proposed Standards

In an effort to implement Section 342(b)(2)(C) consistently throughout the financial sector, the Agencies proposed joint standards on October 23, 2013. Proposed Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies and Request for Comment, 78 Fed. Reg. 64,052 (Oct. 25, 2013).ii  The proposed standards reflect a dual focus on voluntary self-assessments and public disclosure and awareness of the self-assessments, allowing for regulated entities and the public to better understand and evaluate “diversity policies and practices.”

The Agencies highlight four key areas that may be included in an assessment of diversity policies and practices.  We summarize the factors that the Agencies indicated may be included in such an assessment below.

Organizational Commitment to Diversity and Inclusion:  In assessing whether a regulated entity has an “Organizational Commitment to Diversity and Inclusion”, the entity should address whether 1) the leadership of the entity maintains public commitment to diversity and inclusion, 2) the entity includes diversity and inclusion considerations in the strategic plan, especially with regard to hiring, recruiting, retention and promotion, 3) senior officials have dedicated resources to oversee and direct the diversity efforts of the entity, and 4) these senior officials receive regular feedback and work to promote a culture that values differences in background and experiences.

Workforce Profile and Employment Practices:  In assessing the regulated entity’s “Workforce Profile and Employment Practices”, the regulated entity should address whether 1) it integrates diversity considerations into their process of looking towards future employment and leadership needs, 2) the policies and practices of the entity create diverse pools of applicants by reaching out to organizations and educational institutions that serve large minority and women populations, 3) the entity uses qualitative and quantitative metrics, such as those contained in annual EEO-1 Reports or Affirmative Action Plans filed with the Office of Federal Contract Compliance Programs (“OFCCP”), to evaluate and assess workforce diversity and inclusion efforts, and 4) the entity holds management accountable for diversity and inclusion efforts.

Procurement and Business Practices – Supplier Diversity:  In assessing the regulated entity’s “Procurement and Business Practices”, the entity should address whether: 1) the entity maintains a supplier diversity policy that attempts to provide a fair opportunity for minority and women-owned businesses to compete in the procurement of business and services, 2) the entity evaluates its supplier diversity through metrics and analytics if possible, and 3) it reaches out to minority and women-owned contractors or organizations of such contractors and publicizes procurement opportunities.

Practices to Promote Transparency of Organizational Diversity and Inclusion:  In all of these areas of self-assessment, the proposed standards encourage transparency and publicity of diversity and inclusion policies.  This informs a broad constituency – the investors and employees of the entity, diverse potential employees or suppliers that may now reach out to the entity, and customers.  The standards suggest annual publication of the entity’s commitment to diversity and inclusion, as well as their plans and progress for increasing diversity and inclusion, on its website.  Reports of progress might include current workforce and supplier demographics, developmental programs, and forecasts of potential employment and procurement opportunities.

Because Section 342 and the proposed standards explicitly state they will not mandate any particular policy for regulated entities, this section could prove to be the most noteworthy, tangible effect of Dodd-Frank on the diversity policies and practices of regulated companies.  The Agencies cite transparency, disclosure, and awareness as goals of the proposed standards multiple times, yet some entities that publicly commented on the proposed rules said this emphasis on disclosure is problematic.iii  The comments point out that companies do not design EEO-1 reports and Affirmative Action Plans filed with the Department of Labor, which the proposed standards cite, for public dissemination, and potential misuse of disclosed diversity information is a primary concern.

Practice Suggestions

Presumably most employers subject to regulation by the Agencies have long ago adopted diversity policies and practices.  However, the emphasis in the proposed standards on greater transparency and disclosure of such policies and practices undoubtedly will subject these employers to increased scrutiny from employees, customers, business partners, regulators and the public generally.  Accordingly, employers should take the opportunity now to update and improve their diversity policies and practices and ensure they are following best practices in the area of diversity.

As noted above, Section 342 and the proposed standards do not define what Congress intended by the word “diversity” or what the goals of a regulated company’s diversity policies and practices are or should be.  At first blush, the absence of clear standards from Congress or regulatory bodies may present a challenge to employers.  However, absent clear rules in this area, employers should embrace this as an opportunity to innovate and to creatively adapt their diversity objectives in a manner that also promotes their business goals and objectives.

Reports published by the Government Accountability Office (“GAO”) in 2005 and 2013 provide another potentially helpful source of guidance from the federal government regarding how private employers may approach the subject of diversity.iv  The GAO reports define “diversity management” as “a process intended to create and maintain a positive work environment that values individuals’ similarities and differences, so that all can reach their potential and maximize their contributions to an organization’s strategic goals and objectives.” See GAO-13-238, at 5.  An organizational approach informed by this definition could be consistent with the requirements of Section 342 and the Agencies’ proposed standards while also being broad and flexible enough to be adopted by most private employers, so long as the entity’s self-assessment still addressed the areas detailed above.

In recently released reports regarding their internal diversity efforts, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) appear to have taken a view of diversity that focused on representation statistics as tools for measuring diversity.  For example, the FDIC and OCC spend several pages comparing the representation of minorities and women in their workforce to nationwide participation rates, such as Civilian Labor Force statistics.v  This demographic-based approach appears to suggest a narrower definition of diversity than the one espoused by the GAO, which focused on improvement of the work environment, valuing individuals’ similarities and differences, and maximizing individuals’ contributions to the organization.  Although the FDIC’s and OCC’s narrow view of diversity may be capable of easier measurement and monitoring, such a focus on statistics presents other difficulties.  Numerous courts have grappled with the challenges of identifying a proper comparator group in discrimination cases,vi and commentators on diversity efforts have pointed out that simple numeric diversity does not ensure that the viewpoints of individuals will be effectively included and does not necessarily promote improved business performance.vii  An additional concern from calibrating the diversity lens with a focus limited to statistical comparisons is that it could lead companies to adopt de facto hiring and promotion quotas which themselves may increase the risk of claims of reverse discrimination.viii

In the face of these difficulties, we urge employers regulated by one or more of the Agencies to begin a re-examination of their policies and procedures by defining the type of “diversity” they wish to encourage and cultivate in their respective businesses.  This is a necessary step in informing the company policies and procedures being developed to achieve their stated diversity goals, and will put companies in a better position to assess their future success.  It will also provide meaningful context for any public disclosure implemented to comply with the goals of the proposed standards.

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[i] An Overview of The Dodd-Frank Wall Street Reform and Consumer Protection Act, Weil Gotshal & Manges Financial Regulatory Reform Center, http://financial-reform.weil.com/wp-content/uploads/2011/05/9357-FRROverview_v1.pdf (Last visited Jan. 25, 2015).

[ii] Available at http://www.gpo.gov/fdsys/pkg/FR-2013-10-25/pdf/2013-25142.pdf

[iii] Submitted comments available at https://www.fdic.gov/regulations/laws/federal/2013/2013-diversity-assessment.html

[iv] See U.S. Gov't Accountability Office, GAO-05-90, Diversity Management:  Expert-Identified Leading Practices and Agency Examples (2005); see also U.S. Gov't Accountability Office, GAO-13-238, Diversity Management: Trends and Practices in the Financial Services Industry and Agencies After the Recent Financial Crisis (2013).

[v] See Office of Inspector General, Department of the Treasury, OIG-15-017, Review of OCC’s Personnel Practices at 5 (December 1, 2014), available at http://www.treasury.gov/about/organizational-structure/ig/Audit%20Reports%20and%20Testimonies/OIG-15-017.pdf; and Office of Inspector General, Federal Deposit Insurance Corporation, Report No. EVAL-15-001, The FDIC’s Efforts to Provide Equal Opportunity and Achieve Senior Management Diversity at 4 (November 2014), available at http://www.fdicoig.gov/reports15%5C15-001EV.pdf

[vi] See, e.g., Meditz v. City of Newark, 658 F.3d 364, 371 (3d Cir. 2011) (citing Hazelwood School Dist. v. United States, 433 U.S. 299 (1977)).

[vii] See, e.g., Deloitte Point of View, Only skin deep? Re-examining the business case for diversity, Human Capital Australia, September 2011, available at https://www.ced.org/pdf/Deloitte_-_Only_Skin_Deep.pdf

[viii] For a discussion of voluntary affirmative action and applicable Title VII case law, see Jeffrey S. Klein and Nicholas J. Pappas, Legality of Voluntary Affirmative Action Plans, NYLJ, Oct. 2, 2006.

Reprinted with permission from the February 2, 2015 edition of the New York Law Journal © 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

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