February 4, 2015 | Filed under: Compliance,Featured,Legal |
In the wake of the financial crisis, many financial institutions, including lenders, were on the brink of collapse. While many weathered the storm, many other institutions large and small failed. In a controversial move at the time, the federal government infused trillions of dollars into the U.S. economy to help stabilize Wall Street, the economy, and the housing collapse.
To accomplish this task, the government relied heavily on the private sector by hiring consultants, attorneys, accountants, and other professionals to brainstorm about what went wrong and how to prevent a significant downturn going forward. Indeed, tens of millions of dollars were awarded by the Treasury Department in legal and vendor contracts.
Despite both government and private sector commitment to diversity and inclusion efforts through policies and programs, of the various contracts procured as a result of the financial crisis, a very small number of these contracts were awarded to minority- or women-owned firms. Specifically, many firms were hired with a limited or closed request for proposal (RFP) process. In some instances, the RFP process acted as a barrier to minority- and women-owned firms. For example, the RFPs often set forth requirements of $100 million and $25 billion in assets which were impossible for the vast majority of smaller minority- and women-owned firms to meet.
This statistic is even more material considering that minority-owned firms account for 18% of the national total. And, these contractors account for 40% of the firms pursing government contracts. This is due, in large part, to the fact that government contracts are perceived as a way to enter a marketplace and, therefore, a precursor for success.
The leadership landscape of the financial industry did not look much better. Few minorities held leadership positions in the financial services industry. Approximately 6.3% of African-Americans and 5% of Hispanics held management positions in the private financial services industry between 2005 and 2008. In 2008, the executive or senior level officers and managers included 27% of women and 10% minorities.
Against this historical backdrop, to correct this imbalance, Representative Maxine Waters (D-CA) introduced Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Section 342 was enacted as part of the Dodd-Frank in July 2010. The overall goal of Section 342 is to increase the representation of minorities and females in the financial services industry through the establishment of diversity mandates for financial institutions and their respective regulating agencies.
Section 342 establishes an Office of Minority and Women Inclusion (OMWI) at each of the federal financial agencies to institutionalize access for minorities and women. During a Congressional hearing regarding minorities and women in financial reform, Representative Waters argued for the placement of a senior level officer at each federal financial agency so that the official can competently speak to the federal agencies’ major and day-to-day decisions impact on diversity and inclusion.
Under Section 342, directors of the OMWI are required to develop standards by which the internal policies and procedures of the respective entities may be assessed. The directors worked together, and, on October 25, 2013, the entities regulated by the Office of Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Bureau of Consumer Financial Protection, and the Securities Exchange Commission (collectively, Joint Agencies) issued joint proposed standards for regulated financial institutions.
The Joint Agencies proffered four factors that a financial institution should include in its diversity and inclusion strategy:
- 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.
Organizational Commitment to Diversity and Inclusion
To demonstrate organizational commitment to diversity and inclusion, financial institution leaders must value diversity and inclusion so that it permeates throughout the entire organization.
A financial institution successfully establishes its leadership’s commitment to diversity and inclusion through adopting and implementing the following standards, relative to its size and characteristics:
- Including diversity and inclusion elements within the financial institution’s strategic plan, including hiring, recruitment, retention, and promotion;
- Implementing a diversity and inclusion policy which is adopted and endorsed by senior leadership, management, and/or the board of directors;
- Ensuring that senior leadership, management, and/or the board of directors receive periodic updates regarding the financial institution’s progress;
- Appointing a senior level official to oversee and implement diversity and inclusion efforts; and
- Taking proactive steps to hire, recruit, retain, and promote diverse talent.
Workforce Profile and Employment Practices
To satisfy this factor, a successful entity will promote the inclusion of minorities and women by creating a pipeline from which to draw talent and encouraging a company culture that favors diversity and inclusion.
The Joint Agencies propose those entities subject to the Equal Employment Opportunity Commission (EEOC) and the Office of Federal Contract Compliance Contract Compliance Programs (OFCCP) EEOC and OFCCP reporting requirements evaluate diversity and inclusion progress. Entities not subject to EEOC and OFCCP are encouraged to use reporting requirements as an analytical tool to measure progress.
A financial institution successfully establishes a culture that demonstrates a commitment to diversity and inclusion through adopting and implementing the following standards, relative to its size and characteristics:
- Using metrics to evaluate the financial institution’s diversity and inclusion efforts concerning recruiting, hiring, retention, and promotion;
- Holding management accountable for diversity and inclusion efforts; and
- Implementing policies and procedures that foster a diverse applicant pool such as;
- Participating in conferences and events to attract minority and female talent;
- Reaching out to minority and female organizations; and
- Reaching out to educational institutions that serve significant minority and female populations.
Procurement and Business Practices – Supplier Diversity
A major catalyst for Section 342 was the lack of government contracts awarded to minority- and women-owned firms during the financial crisis. To that end, the OMWI is tasked with ensuring that minorities and women have access to government contracts. To further this goal, the Joint Agencies set forth standards that a financial institution may incorporate to ensure that minority- and women-owned firms have access to the entity’s contracts.
An entity can broaden the range of contractor options through outreach to minority- and women-owned businesses. By using a broader range of contractor options, the financial institution increases its competitive advantage.
To successfully establish supplier diversity, the Joint Agencies suggest implementing the following standards relative to the entity’s relative size and characteristics:
- Creating and implementing a supplier diversity policy whereby minority- and women-owned businesses can compete for contracts;
- Evaluating the entity’s supplier diversity metrics such as the percentage of contracts awarded to minority- and women-owned businesses as well as the amount of money spent; and
- Creating and implementing a diverse supplier pool.
Practices to Promote Transparency of Organizational Diversity and Inclusion
Finally, the Joint Agencies suggest that an entity’s diversity and inclusion program should be transparent and made public. The idea is that the greater awareness that is generated regarding an entity’s diversity and inclusion practices the more likely it is that the public will have access to said practices.
A financial institution demonstrates transparency by displaying the entity’s diversity and inclusion strategic plan on the website as well as the entity’s commitment to diversity and progress in the area.
Notably, the final rule has not yet been issued. A final rule is expected to be issued later this year and most believe that final rule language will be very close to the proposed rule. Compliance managers and leaders are encouraged to take proactive steps now in anticipation of this final rule given the scope and breath of Section 342.
Mr. Sharett is a partner in Bricker & Eckler’s Litigation and Class Action Groups. He can be reached at: ASharett@bricker.com.
Keesha Warmsby is a member of Bricker & Eckler’s Litigation group. She can be reached email@example.com