United States: Recent Diversity Mandates Impacting US Financial Regulators And Financial Institutions

The lack of employment diversity in the financial services sector has been well documented. Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Section 342") was adopted to help correct racial and gender imbalances at financial institutions and their regulators by prescribing inclusion requirements at the specified US government agencies that regulate the financial services sector,1 entities that contract with the agencies and the private businesses they regulate. Even though Section 342 is not applicable to foreign private issuers, its requirements could evolve as a benchmark for all corporates generally.

The Statutory Requirements of Section 342 of Dodd-Frank

Pursuant to Section 342, each agency has established an Office of Minority and Women Inclusion, or OMWI. The OMWIs and their appointed directors are charged with:

  • developing diversity standards for the agency's workforce;
  • increasing participation of minority- and female-owned businesses in the agency's programs and contracts; and
  • assessing the diversity policies and practices of the financial entities regulated by the agency.

The Proposed Standards

Six of the regulating agencies2 have proposed joint standards (the "Proposed Standards") for assessing the diversity policies and practices at their regulated entities as required by Section 342.

The proposing agencies did not mandate an examination or supervisory assessment process, but instead focused on self-assessment and public disclosure. A model assessment process would include a quantitative and qualitative self-evaluation of the entities' diversity and inclusion policies and a voluntary report of the findings to the governing agency. Further, the entity would include on its public website information regarding its efforts to comply with the Proposed Standards, annual reports and other disclosure documents.

The Proposed Standards cover the following four key categories of assessment to be implemented in a manner reflective of the entity's size and other characteristics.

  • Organisational Commitment to Diversity and Inclusion. A diversity and inclusion policy should be approved and supported by senior management and the board, which should receive regular progress reports. A senior level officer who oversees and directs diversity efforts should be appointed and should ensure that there is regular equal employment and diversity and inclusion education and training. Finally, the entity must take proactive steps to promote a diverse pool of candidates for senior leadership and board positions.
  • Workforce Profile and Employment Practices. Management should be held accountable for the success of diversity and inclusion efforts. Entities should adopt metrics to evaluate and assess workforce diversity and inclusion efforts, in all areas of employment across all levels of the organisation. Policies and practices that create diverse applicant pools for both internal and external opportunities should be implemented, including (1) participation in conferences and other events and (2) outreach to organisations and educational institutions primarily aimed at serving minority and female populations.
  • Procurement and Business Practices–Supplier Diversity. Steps that can be taken in this regard include adopting (1) a supplier diversity policy providing for a fair opportunity for minority- and women-owned businesses to compete in the procurement of business and services, (2) procedures to evaluate and assess supplier diversity and (3) practices to promote a diverse supplier pool, including publicising procurement opportunities and outreach to minorities and women.
  • Practices to Promote Transparency of Organisational Diversity and Inclusion. Transparency in an entity's diversity and inclusion program is crucial to attaining the objectives of Section 342. Information on the entity's commitment to diversity and inclusion, its plans for achieving its goals, its progress against those goals and the metrics it uses to measure success should be made available to the public on the entity's website and annual shareholder reports.

Section 342 expressly provides that it should not be construed to impose any requirement on, or otherwise affect the lending policies and practices of, any regulated entity or require any specific action based on the findings of an assessment. Accordingly, the Proposed Standards do not impose consequences if an entity does not implement appropriate diversity and inclusion policies. They simply state that the agency will use the information as a resource for carrying out their diversity and inclusion responsibilities. The comment period on the Proposed Standards closed on 7 February 2014 and the agencies received more than 45 comments.

While Section 342 and the Proposed Standards may impact employment and recruiting practices in the financial services industry, many institutions have already implemented programs and policies that should satisfy the standards. Nevertheless, the regulated entities should revisit their current policies and initiatives in light of the Proposed Standards and the final standards once promulgated.

Our related client publication, discussing initiatives in both the US and the EU, is available at:

http://www.shearman.com/en/newsinsights/publications/2014/03/recent-diversity-mandates

Footnotes

1The agencies include: (1) the Office of the Comptroller of the Currency, (2) the Board of Governors of the Federal Reserve System, (3) the Federal Deposit Insurance Corporation, (4) the National Credit Union Administration, (5) the Bureau of Consumer Financial Protection, (6) the Securities and Exchange Commission, (7) the Department of the Treasury, (8) the Federal Reserve Banks and (9) the Federal Housing Finance Agency.

2 The Department of the Treasury, the Federal Reserve Banks and the Federal Housing Finance Agency did not participate in the Proposed Standards.

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