United States: Agencies Issue Final Policy Statement For Complying With Dodd-Frank Section 342: What You Should Know

Six federal banking agencies recently published a final interagency policy statement establishing standards for assessing diversity policies and practices. The final standards, which became effective June 10, 2015, were created pursuant to Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The standards apply to all entities regulated by the six agencies and entities that contract with the agencies, which include the Office of the Comptroller of the Currency (OCC); the Board of Governors of the Federal Reserve System (FBG); the Federal Deposit Insurance Corporation (FDIC); the National Credit Union Administration (NCUA); the Consumer Financial Protection Bureau (CFPB); and the Securities and Exchange Commission (SEC). Thus, the standards apply not only to financial institutions, but to any publicly traded company or other entity regulated by one of the six agencies and to any entity that contracts with one of the six agencies. While the final standards are similar to those proposed by the agencies in October 2013, they help clarify some issues that had been left open.

Key Takeaways

The final policy statement's key provisions state that the standards are voluntary rather than mandatory, and that the agencies will not exercise enforcement power to ensure compliance with the standards – instead encouraging the impacted entities to engage in ongoing self-assessments. Despite the voluntary aspects of the standards, they should not be given short shrift from implementation and legal counseling perspectives.

Although a reaction may be that since the standards are voluntary with no penalty for not adopting them, it relieves a company from doing anything—that is decidedly a narrow, short-term view. Current and well-researched data show that companies with robust diversity and inclusion policies typically have stronger bottom lines than companies that do not. In addition to providing value to the community, companies that want to compete successfully in a changing demographic environment need to have a workforce that mirrors the changing consumer-demographic. Starting sooner rather than later in meeting that objective is the better approach.

From a legal counseling perspective, the voluntary nature of the final standards does not erase potential risks. Companies need to ensure that they navigate successfully between encouraging diversity and inclusion without venturing into unlawful quotas or classifications, or providing unintended support for a plaintiff's discrimination or reverse discrimination claims in litigation that could arise if, for example, adequate protections are not afforded at the outset to a company's self-assessment analysis. In this regard, care needs to be taken at the beginning in determining which standards are to be implemented; the degree of implementation; how the standards are to be developed; and the role legal counsel will play throughout the process.

Background

Congress intended section 342 of the Dodd-Frank Act to promote diversity and inclusion in the financial services industry. Its principal proponent, Congresswoman Maxine Waters of California, explained that section 342's objectives are to "not only give oversight to diversity, but to help the Agencies understand how to do outreach [and]...appeal to different communities."

Section 342 requires each of the nine agencies it covers to create an Office of Minority and Women Inclusion (OMWI) "responsible for all agency matters relating to diversity in management, employment and business activities." Also, it directs each of these agencies to establish standards for "assessing the diversity policies and practices of entities" regulated by the agencies, and for contractors that do business with the agencies.

The Proposed Policy Statement

As described in our earlier alert, on October 25, 2013, the agencies jointly proposed a "Policy Statement" describing how they would assess the diversity policies and practices of the entities they regulate (the "Proposed Policy Statement").

That Proposed Policy Statement listed four areas that each regulated entity should consider in creating its diversity and inclusion plan: (1) organizational commitment to diversity and inclusion; (2) workforce profile and employment practices; (3) procurement and business practices—supplier diversity; and (4) practices to promote the transparency of organizational diversity and inclusion. It also suggested that regulated entities assess themselves in each of these areas, encouraging them to voluntarily disclose the results to the relevant agency and to the public.

The Proposed Policy Statement, however, left several key questions unanswered, such as:

• Is a regulated entity required to have a diversity and inclusion policy?
• If so, must that policy include all or some of the standards in the Proposed Policy Statement?
• Do the agencies have enforcement power, such as the power to impose penalties, over any shortcomings in a regulated entity's diversity and inclusion policy?
• Are regulated entities required to make their diversity and inclusion policies available to the public?
• In the Proposed Policy Statement, what do "diversity" and "inclusion" mean?

The Final Policy Statement

The agencies' Final Policy Statement largely tracks their Proposed Policy Statement by maintaining the four broad areas of standards that an entity should include in its diversity and inclusion plan. It also adds a fifth area of standards—Self-Assessment—"to assist entities in viewing the final Policy Statement as an integrated whole."

The Final Policy Statement seeks to clarify the following issues that were left open by the Proposed Policy Statement:

• Legal Effect
  
  
  • Section 342 does not impose any new legal requirements on regulated entities
  • A regulated entity's use of the standards is voluntary and, as such, the agencies will not use their examination or supervisory processes

Meaning of Terms – Although regulated entities are not precluded from using broader definitions, the Final Policy Statement defines "diversity" as women and racial minorities (defined as Black Americans, Native Americans, Hispanic Americans, and Asian Americans), and defines "inclusion" as "a process to create and maintain a positive work environment that values individual similarities and differences, so that all can reach their potential and maximize their contributions to an organization."

Applicability to Small Entities – The Final Policy Statement recognizes that regulated entities are different based on such characteristics as size, geographic location, and structure, so that "a one-size fits all" approach is untenable. Nevertheless, the Statement "encourage[s] each entity to use these standards in a manner appropriate to its unique characteristics."

Extraterritorial Application – Although a multinational entity is not precluded from using these standards internationally to undertake a broader assessment of its organization, the Final Policy Statement applies only to an entity's U.S. operations.

Five Areas of Standards That Should Be Included in a Diversity and Inclusion Plan

(1) Organizational Commitment to Diversity and Inclusion

The standards in the first area of the Final Policy Statement are largely consistent with those in the Proposed Policy Statement; however, they add that the senior officer responsible for diversity and inclusion efforts should have relevant knowledge and experience.

Under these standards, 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 these standards, the following are suggested, contingent on an entity's size and other characteristics:

• Include diversity and inclusion as important considerations in an entity's strategic plan, especially in hiring, recruiting, retention, contracting 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 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, one who preferably has diversity and inclusion experience
• Take proactive steps to promote a diverse pool of candidates for hiring, recruiting, retention and promotion in the workplace, as well as in its selection of board members and senior leadership and management positions

(2) Workforce Profile and Employment Practices

Comments received by the agencies expressed concern as to whether the second area of standards in the Proposed Policy Statement could be interpreted as requiring the unlawful use of quotas, classifications, or preferences. The Final Policy Statement answers these inquiries in the negative and confirms that its standards require compliance only with applicable existing laws.

These standards recognize that many entities already promote fair inclusion of minorities and women in their workforce, and 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. In addition to EEO-1 reports, certain federal contractors must use a reporting mechanism as a way to evaluate the diversity of their workplace in accordance with the Office of Federal Contractor Compliance (OFCCP). Reflective of an entity's size and other characteristics, these standards relating to workforce profile and employment practices suggest that covered entities:

• Implement policies and practices related to workforce diversity and inclusion in a manner that complies with all applicable laws
• Ensure equal employment opportunities for all employees and applicants for employment, and do not engage in unlawful employment discrimination based on gender, race, or ethnicity
• Maintain policies and practices that create diverse applicant pools for both internal and external opportunities that may include:
  
  
  • Outreach to minority and women organizations
  • Outreach to educational institutions serving significant minority and women student populations
  • Participation in conferences, workshops, and other events to attract minorities and women, and to inform them of employment and promotion opportunities

Utilize both quantitative and qualitative measurements to assess its workforce diversity and inclusion efforts. An entity's efforts may be reflected, for example, in applicant tracking, hiring, promotions, separations (voluntary and involuntary), career development, and retention across all levels and occupations of the entity, including the executive and managerial ranks.

Hold management at all levels accountable for diversity and inclusion efforts, for example, by ensuring that such efforts align with business strategies and individual performance plans

(3) Procurement and Business Practices—Supplier Diversity

The agencies indicated that they also received many comments on the standards for policies and practices related to supplier diversity; however, upon "careful consideration," they "elected not to make any substantive changes" in the Final Policy Statement.

The standards in this third area 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, and by utilizing sub-contractors to fulfill various parts of the contract. The standards suggest that entities should use diverse subcontractors to fulfill prime contractors' obligations as a way of addressing this category. These standards provide the following recommendations contingent on an entity's size and other characteristics:

• 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

Despite commentators' concerns about transparency and publicity, the Final Policy Statement states that the agencies believe that the proposed standards in this area were "appropriate," and that they "have included them in the final Policy Statement with no material changes."

These standards state that transparency and publicity are an important aspect of assessing diversity policies and practices. They encourage an entity, in a manner reflective of the entity's size and other characteristics, 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

(5) Entities' Self-Assessment

As noted, this fifth area of standards that should be included in a diversity and inclusion plan was added by the Final Policy Statement. It retains, however, the concept of self-assessment in the Proposed Policy Statement. Specifically, these standards "encourage" entities to disclose their diversity and inclusion policies, as well as information concerning their self-assessments, to the public and to the applicable agencies. The Final Policy Statement provides that entities can self-select the information they wish to provide to the public and to the agencies. Further, entities can designate as "confidential," information they provide to agencies, which would be available to the public only through a Freedom of Information Act request.

In fulfilling these standards, an entity, in a manner reflective of its size and other characteristics, is encouraged to:

• Conduct self-assessments of its diversity policies and practices annually
• Monitor and evaluate its performance under its diversity policies and practices on an ongoing basis
• Provide information pertaining to the self-assessments of its diversity policies and practices to the OMWI Director of its primary federal financial regulator
• Publish information pertaining to its efforts with respect to the standards

How Agencies Will Use the Information

The Final Policy Statement provides that agencies may use the information they receive to monitor progress and trends concerning diversity and inclusion in the financial services industry and with contractors. Agencies may also highlight successful policies and practices, and publish information, such as best practices information, without disclosing the entity's identity or confidential information. Because the Final Policy Statement contains a collection of information within the meaning of the Paperwork Reduction Act of 1995, it also seeks comments in accordance with that statute.

Conclusion

The Final Policy Statement provides an operational blueprint for enacting and maintaining a robust diversity and inclusion program. However, the reactions to its standards have been mixed. Some critics argue that the definition of "diversity" is too narrow and that more federal oversight is needed than relying on an entity's own "self-assessment." On the other hand, regulated entities are arguably relieved by the permissive rather than mandatory approach taken by the agencies.

Although compliance with the standards is voluntary and the agencies do not exercise enforcement mechanisms, data confirms and knowledgeable regulated entities already agree that having a robust diversity and inclusion policy makes good business and community sense. However, regulated entities should consider such policies carefully, and be mindful that certain adoption of the standards could carry with it favorable as well as potentially unfavorable litigation consequences. Accordingly, the proper balance has to be struck between having a robust diversity and inclusion policy, and minimizing potential exposure such that the standards become the subject of litigation.

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