Deep down in the 2,300 pages of the Dodd Frank Act meant to reform the US financial sector is section 342. Spearheaded by Rep. Maxine Waters (D-CA), Sen. Bob Menendez (D-NJ), and other legislators, the tiny piece of the law was supposed to make American finance better reflect the demographic makeup of the country, namely that the industry add more minorities and women to its ranks. Now, nine months since it went into effect, the regulators tasked with putting in place the infrastructure to make it happen have so far fallen well short of its creators’ ideals.
In a statement to Quartz, Waters said she worked with Donna Sims-Wilson, then executive director of the National Association of Securities Professionals, a group that represents women and people of color in finance, to craft a rule that could help both those groups gain greater footing in the industry.
Most of section 342 (pdf download) centers around creating offices for minority and women inclusion, or OMWIs, at the main US financial regulators. Each agency’s office was given three main duties under Dodd Frank: monitoring its agency’s workforce diversity, its supplier diversity, and “assessing the diversity policies and practices of entities regulated by the agency.”
The first pair were relatively easy, and all the OMWIs have been set up and issuing regular reports. The latter proved more difficult, and the section’s vagueness was the first red flag for some.
“The language that went into the passage of the original section didn’t provide for any enforcement capability,” Orim Graves, NASP’s current executive director, told Quartz.
Beyond efforts like establishing internal employee groups and offering tips to minority and women-owned firms on how to get contractor work, the easiest way for a company to show its commitment to diversity is by releasing a routine form called the EEO-1. The Equal Employment Opportunity Commission collects one from every company in the country with more than 100 employees (or federal contractors with more than 50), and they show a company’s racial and gender breakdown, then makes those forms available to view in aggregate by industry (and even by city).
Here’s female representation in finance…
…and here’s minority representation. The important thing to notice is the inverse relationship that diversity has with authority.
The industry’s diversity problem, similar to most other industries, is pretty entrenched. And the industry appears to be well aware that it’s an issue. Though major tech companies have only recently started making their forms public, America’s largest banks—Bank of America (pdf, page 116), Wells Fargo (pdf, page 40), JPMorgan Chase, and Goldman Sachs (pdf, page 65), for instance—have been releasing such information for years as part of annual reports on their corporate goodwill. Citigroup has been releasing “diversity annual reports” since 1999. They also include efforts like hiring woman and/or minority-owned businesses as contractors or in-house employee networks for non-white, non-male workers.
Those efforts, however, are not universal. Canadian firm TD Bank, for example, has been rapidly expanding its US presence and makes its Canadian diversity data public (pdf) but declined a request from Quartz to publicize its US workforce data.
When the diversity standards proposed under section 342 were unveiled in October 2013, the regulators’ OMWI offices were supposed to make sure their regulated entities (banks, hedge funds, credit unions, etc.) were not only following the big banks’ examples by having diversity objectives and programs in place, but making their work towards them public.
“To promote the objectives of section 342, an entity’s diversity and inclusion program should be transparent,” the proposal read. “Transparency and publicity can be an important aspect of assessing diversity policies and practices,” perhaps through posting diversity information on firms’ websites and annual reports for shareholders.
The proposed standards sounded comprehensive, but they left plenty of wiggle room. They made no reference to punishing firms that are insufficiently diverse, nor did they even lay out what a sufficiently diverse firm looks like. In fact, the regulators said financial firms could assess themselves and gave them no obligation to make their diversity data public.
“The assessment envisioned by the Agencies is not one of a traditional examination or other supervisory assessment,” the proposal reads, in reference to how the assessments might be used. “Thus, the Agencies will not use the examination or supervision process in connection with these proposed standards.”
Some advocacy groups, mostly representing interests outside the financial industry, were a bit wary. They wanted to see the regulators use a little more of the authority it appeared they were given under Dodd Frank.
“While we are pleased that the proposed policy statement has incorporated standards related to transparency, we believe that there is more that the agencies can proactively do to ensure that the public has access to information about diversity and inclusion efforts by regulated entities,” reads a comment letter (pdf download) from the National Women’s Law Center.
Financial industry groups were much happier with the proposal. In a joint comment letter (pdf download), the American Bankers Association, Financial Services Roundtable, Consumer Bankers Association, and the Independent Community Bankers of America said they were pleased with the relatively hands-off approach.
“In particular, we appreciate that the approach embodied in the Proposed Standards recognizes that the regulated entities must themselves have ownership of the goal of promoting diversity,” it reads.
Regulators released the final standards in June, more than a year and a half after the proposal (and months after the extended comment deadline). In case there was any uncertainty left, the regulators made quite clear that they wouldn’t wouldn’t be rocking the boat. They put down a more solid definition of “diversity” to mean along racial/ethnic and gender lines, but left almost everything else up to financial firms:
- If regulated entities wanted to include lesbian, gay, or transgender employees, that was definitely an option: “This language is intended to be sufficiently flexible to encompass other groups if an entity wants to define the term more broadly.”
- If traditional definitions of diversity were hard to adhere to because of a firm’s size or where in the country it was located: ”The Agencies encourage each entity to use these standards in a manner appropriate to its unique characteristics.”
- If the idea of a new obligation in a law full of new obligations proved too much: “Use of the Standards by a regulated entity is voluntary.”
The self-policing nature of the final rule didn’t go unnoticed. Securities and Exchange Commission commissioner Luis Aguilar wrote a highly critical note about what appeared to be a heavily watered-down tool for increasing diversity in the industry:
Given the approach taken by the Final Policy Statement in implementing Section 342, future policy change to the demographics in the financial services industry now relies on the mere hope that companies will act in good faith to use the standards outlined in the Final Policy Statement and conduct effective self-assessments, and to use the information derived from these self-assessments to promote diversity and inclusion. I hope that they do, but the track record of many companies in the financial services industry belies that hope.
In a statement, Aguilar told Quartz that he laid the blame at the feet of the OMWI directors, who didn’t use their newly given powers to their fullest extent:
“In my view, changing the status quo will only work if those charged with implementing Section 342 also have the conviction and the backbone to advance the statutory goal of improving diversity and inclusion in the financial services industry,” he said in a statement.
In 2014, Bloomberg noted that some financial services companies publicly highlight their commitment to diversity, but then decline to publicize the EEO-1 forms that would gauge that commitment. When the New York City comptroller’s office suggested a shareholder vote on American Express releasing the form, the company recommended shareholders to vote against it in a 2015 proxy statement.
“We have a strong commitment to diversity and a long track record of success and results,” the company said in its proxy statement about the vote. The very next line: “Disclosure of the EEO-1 data would not provide an appropriate platform to have a discussion about diversity and would not enhance our commitment to diversity.”
When asked whether the issuance of diversity standards under Dodd Frank would change the company’s mind on the subject, a spokesperson told Quartz that American Express had no plans to change its approach to diversity data in the immediate future.
After everything was said and done, Section 342 felt like a missed opportunity. As Waters and Democratic Rep. Joyce Beatty of Ohio wrote in a joint statement in June 2015: “We remain disappointed that, almost five years after the Dodd-Frank Act was enacted, our federal financial services agencies continue to provide lip service to important issues related to the diversity and inclusion of women and minorities in the financial services sector.”