United States: The Final Regulations For Section 342 Of Dodd-Frank Are Almost Ready...Are You?

Last Updated: March 27 2015
Article by Stephanie Wilson and Raeann Traficante

Most Read Contributor in United States, October 2017

Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act was included in the Act to promote diversity and inclusion in the financial services industry. As explained by proponent, Congresswoman Maxine Waters of California, Section 342's objectives are to "not only give oversight to diversity, but to help the Agencies understand how to do outreach [and] how to appeal to different communities."

The scope of Section 342 is broad. It covers the 12 regional Federal Reserve Banks, the Consumer Financial Protection Bureau (CFPB), the Federal Reserve Board of Governors (FBG), the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC), and the Department of the Treasury Department Offices (collectively, the Agencies), as well as all entities that contract with or are regulated by an Agency.

Under Section 342, each Agency must create an Office of Minority and Women Inclusion (OMWI) that will "be responsible for all [A]gency matters relating to diversity in management, employment and business activities." Likewise, regulated entities must "promote transparency and awareness of diversity policies and practices" in their own business operations. As a consequence, each Agency is directed to establish standards for "assessing the diversity policies and practices of entities" that the Agency regulates.

The Proposed Standards On October 25, 2013, the CFPB, FBG, FDIC, NCUA, OCC, and SEC proposed joint standards (the "Proposed Standards" or "Standards") to promote consistency among the six Agencies. Comments from the public were sought concerning the Proposed Standards and the comment period closed on February 7, 2014. Although no firm date has been announced formally, final rules are expected at any time. While it is anticipated that the final rules will track the Proposed Standards, there is no guarantee that will be the case. The final rules may delineate more definite requirements and impose direct penalties for failure to comply with Section 342's provisions. Also unclear is how much lead time the final rules will allow covered entities to come into compliance.

In developing the Proposed Standards, the OMWI Directors from each Agency held roundtable discussions with members of groups representing financial services professionals, communities and consumer advocates. During these discussions, it was agreed that a "one-size-fits-all approach" was inappropriate for implementing the Standards. In keeping with this recognition, the Standards provide that an assessment of an entity's diversity and inclusion policy should take into account the 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)."

The Proposed Standards Describe Four Categories that Should Be Included in a Diversity and Inclusion Plan The Standards set forth the following four broad categories that each entity should include in its diversity and inclusion plan:

  • Organizational Commitment to Diversity and Inclusion
  • Workforce Profile and Employment Practices
  • Procurement and Business Practices – Supplier Diversity
  • Practices to Promote Transparency of Organizational Diversity and Inclusion

(1) Organizational Commitment to Diversity and Inclusion An entity's leadership should demonstrate its commitment to diversity and inclusion in a way that promotes and fosters a corporate culture of diversity and inclusion. In implementing this objective, the following measures are suggested:

  • Include diversity and inclusion as important considerations in an entity's strategic plan, especially in hiring, recruiting, retention and promotion
  • Institute a diversity and inclusion policy that is approved and supported by senior leadership, including senior management and the board of directors
  • Provide regular progress reports or updates to the board and/or senior management
  • Conduct equal employment opportunity and diversity inclusion education and training
  • Nominate a senior level official to oversee and direct the entity's diversity efforts
  • Take proactive steps to promote a diverse pool of candidates for hiring, recruiting, retention and promotion

(2) Workforce Profile and Employment Practices This category recognizes that many entities already promote fair inclusion of minorities and women in their workforce. As such, many entities have a diversity and inclusion policy that is evaluated using certain tools to identify areas of improvement. As an example, if an entity has 100 or more employees, it must complete an annual Equal Employment Opportunity Report ("EEO-1") that enables an entity to evaluate the diversity of its workforce. The Proposed Standards encourage entities that are not required to file an EEO-1 to use this reporting mechanism as a way to evaluate the diversity of their workplace. In implementing this objective, the Proposed Standards suggest that covered entities:

  • Use the EEO-1 report, if required to file one, to evaluate and assess workforce diversity and inclusion efforts
  • Use metrics to evaluate and assess workforce diversity and inclusion efforts, such as recruitment, applicant tracking, hiring, promotions, separations (voluntary and involuntary), career development support, coaching, executive seminars and retention across all levels and occupations of the organization, including executive and managerial ranks
  • Hold management accountable for diversity and inclusion efforts
  • Create diverse applicant pools for both internal and external opportunities by (a) engaging in outreach efforts to women and minority organizations; (b) engaging in outreach efforts to educational institutions serving significant minority and women student populations; and (c) participating in conferences, workshops, and other events to attract minorities and women.

(3) Procurement and Business Practices—Supplier Diversity The Proposed Standards recognize that a number of entities have been able to widen their range of available business options by increasing outreach to minority-owned and women-owned businesses. Many contractors utilize sub-contractors to fulfill various parts of the contract. The Proposed Standards suggest that entities should use diverse subcontractors to fulfill prime contractors' obligations as a way of addressing this category. The Proposed Standards provide the following recommendations:

  • Implement a supplier diversity policy that provides for a fair opportunity for minority-owned and women-owned businesses to compete in procurements of business goods and services
  • Maintain methods to evaluate and assess supplier diversity, which may include metrics and analytics related to:
    • Annual contract spending by the entity
    • Percentage spent with minority-owned and women-owned business contractors by race, ethnicity, and gender
    • Percentage of contracts with minority-owned business sub-contracts
    • Demographics of the workforce for contractors and subcontractors
  • Engage in practices to promote a diverse supplier pool that may include:
    • Outreach to minority-owned and women-owned contractors and representative organizations
    • Participation in conferences, workshops and other events to attract minority-owned and women-owned firms and inform them of contracting opportunities
    • An ongoing process to publicize the entity's procurement opportunities

(4) Practices to Promote Transparency of Organizational Diversity and Inclusion The Proposed Standards state that transparency and publicity are an important aspect of assessing diversity policies and practices. They encourage an entity to make available to the public annually through its public website or other appropriate communication methods:

  • Its diversity and inclusion plan
  • Its commitment to diversity and inclusion
  • Its progress toward achieving diversity and inclusion in its workforce and procurement activities that may include
    • Current workforce and supplier demographic profiles
    • Current employment and procurement opportunities
    • Forecasts of potential employment and procurement opportunities
    • The availability and use of mentorship and developmental programs for employees and contractors

Conclusion Like Section 342, the Proposed Standards do not provide a mechanism for enforcing Section 342 and do not set forth penalties for failure to comply. In addition, although the Proposed Standards contemplate that the definition of "assessment" should include self-assessment, they do not propose that the definition include an Agency's "examination or supervision process"; instead, entities are encouraged to voluntarily disclose to their appropriate Agency the results of such self-assessment. Instead of an Agency-related penalty, the Proposed Standards contemplate that transparency and public disclosures will serve as checks and balances on an entity's diversity and inclusion efforts. The Standards provide that the Agencies are expected to use a covered entity's information "as a resource in carrying out their diversity and inclusion responsibilities."

The Proposed Standards do not define diversity or inclusion, and as shown above do not mandate that certain provisions be contained in a diversity and inclusion policy. As a result, covered entities have flexibility and can exercise creativity in their policies. Although how much time covered entities will be given to comply with Section 342 is uncertain, entities should begin now to create their diversity and inclusion programs or reevaluate existing ones. A good place to start is by analyzing what diversity and inclusion policies and practices are already in place, and determining how effective they are.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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