Financial Services Industry Seeing Increase in Requests from Federal Regulatory Agencies for Diversity and Inclusion Policy

November 30, 2016Articles

Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act" or "Act) mandated certain federal regulatory agencies establish an Office of Minority and Women Inclusion (OMWI) and establish standards for "…the racial, ethnic, and gender diversity of the workforce and senior management of the agency." The diversity provision also mandated the development of standards for "assessing the diversity policies and practices of entities regulated by the agency." (Codified at 12 U.S.C. 5452) In response, the six federal agencies with regulated entities established Joint Standards for assessing their regulated institutions in June of last year. 80 Fed. Reg. 33016-33025 (June 10, 2015)). In February 2016, the Office of Management and Budget approved the collection of voluntary self assessment from regulated entities. As a result, regulated entities recently have received requests from their appropriate agency to voluntarily submit self-assessment of their diversity policies and practices. Caution should be exercised in making the decision on whether and how to respond to such requests.

The purpose of Section 342 of the Act is to promote diversity and inclusion in “all business and activities” within the financial services industry. (§342(c)(1)). The scope of the diversity provision is broad. The provision applies to the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), the Department of Treasury, the Regional Federal Reserve Banks, the National Credit Union Administration (NCUA), the Consumer Financial Protection Bureau (CFPB), the Federal Reserve Board of Governors (FBG), the Federal Housing Finance Agency (FHFA), and the Office of the Comptroller of the Currency (OCC). (§342(g)). As stated above, only the six agencies with regulated entities (FDIC, OCC, SEC, NCUA, CFPB and FBG) developed the Joint Standards for assessing the diversity policies of their institutions.

Correspondence from the appropriate agency (the primary regulatory agency), like the FDIC, is being sent to regulated entities with a copy of the Joint Standards which includes standards for outreach efforts and self-assessment. The agency also requests the entity submit to it a self-assessment of the entity’s diversity and inclusion practices. Consistent with Section 342 of the Act, the agency correspondence makes clear that while there is no mandate that the Joint Standards be adopted by the employer, they may be used as guidelines by the employer in developing its policies and procedures. The letter also makes clear that submission of the self-assessment of diversity efforts is voluntary.

Most employers correctly are wary of disclosing confidential self-assessments to regulators. While the Joint Standards offer an incentive for voluntary self-disclosure by allowing the employer to designate the information submitted as "confidential, commercial information," it is unclear whether such designation will protect the information from unwanted disclosure in response to a Freedom of Information Act request. Careful consideration should be given as to whether to respond with any information on a voluntary basis. It should be noted, however, that even if the employer chooses to ignore the request, the regulatory agency retains authority to "reach out to regulated discuss diversity and inclusion practices and methods of assessment." What form such discussion will take is an unknown, but since Section 342 does not provide a mechanism for enforcement and does not set forth any penalty for failure to comply, the old adage "less is more" generally should be followed.

Given the mandate for the financial services industry to "promote transparency and awareness of diversity policies and practices" in conducting business, it is prudent to prepare diversity policies and procedures which include outreach efforts. However, such policies must be carefully drafted not to run afoul of existing law. Working with state and national industry trade groups to understand industry practices is recommended as well. Finally, employers should be very careful when reviewing company data for the purpose of self-assessment. Legal counsel should always be sought during self-assessment and before any final recommendations are made.

Contact your Dinsmore attorney with questions.