Section 342: It’s not about quotas

On October 1, 2013, the National Credit Union Administration (“NCUA”) released the Proposed Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies and Request for Comment (hereinafter “PIPS”).  The PIPS was a collaboration of all the financial regulatory agencies’ Offices of Minority and Women Inclusion (”OMWI’) namely: the Office of the Comptroller of the Currency, the Federal Reserve Board of Governors, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, and the NCUA (“Agencies”).  Comment letters from advocacy groups, trade organizations, leagues, credit unions, and/or individuals in response to the PIPS are to be submitted to any one of the Agencies by December 24, 2013.  A comment letter dated December 4, 2013 was recently submitted by the African-American Credit Union Coalition (“AACUC”) commending the Agencies for proposing joint standards for diversity policies and practices, but noted the PIPS fell way short of the goals of Section 342 of the Dodd Frank Act.  Simply put, the PIPS clearly lacks an effective assessment methodology and ultimately leads diversity efforts to nowhere.

Section 342 of the Dodd Frank Act directs the Agencies to establish an “OMWI that shall be responsible for all matters of the agency relating to diversity in management, employment, and business activities.“ This responsibility includes assessing the diversity policies and practices of those entities regulated by each of the Agencies (e.g., credit unions).  However, Section III of the PIPS entitled “Proposed Approach to Assessment,” relegates the Agencies’ mandated duty of assessment to the entities it regulates by proposing a self-assessment and voluntary disclosure strategy. This approach would virtually render Section 342 ineffective and impotent!  Commissioner Luis Aguilar of the U.S. Securities and Exchange Commission (S.E.C., one of the Agencies), expressed his concern regarding voluntary self-assessments and voluntary disclosure.  He characterized this method as a “completely volitional approach” and stated “companies would not be required to take any proactive steps to enhance diversity in their workforce.”

The U.S. Government Accountability Office in its April 2013 report on diversity, pointed out the Housing and Economic Recovery Act of 2008 (HERA) presently directs the Federal Housing Finance Agency (FHFA, one of the Agencies) to require each of its regulated entities to report annually on actions they have taken regarding the inclusion and utilization of minorities and women, and minority and women-owned businesses in all business and activities of the regulated entities at all levels including: procurement, insurance, and all types of contracts.  In other words, government-sponsored enterprises (GSE’s) like Fannie Mae and Freddie Mac must report on its diversity practices on an annual basis to its regulator the FHFA.  Moreover, the S.E.C. approved a rule that would require disclosure of whether, and if so how, a nominating committee considers diversity in identifying candidates for the board of directors.  Regulated companies which include publically held corporations must also disclose: 1) if the nominating committee or the board has a policy with regard to the consideration of diversity in identifying nominees, 2) how this policy is implemented and 3) how the nominating committee or the board assesses the effectiveness of its policy.  The disclosure of this data must be reported on corporate proxy and informational statements.

This is not about quotas, nor is it about more regulation.  Rather, it is the utilization of business strategy and best practices.  For example, the National Football League implemented a diversity strategy called the “Rooney Rule” named after the former owner of the Pittsburgh Steelers and former chair of the NFL’s diversity committee.  This was a league policy that required minorities to be interviewed for top coaching and management operations positions.  Since the Rooney rule was implemented, the number of minority head coaches more than doubled from 2003 to the present, than in the prior seventy-five years of the league’s history.    Neither quotas nor set asides were involved, only opportunities for minority candidates to compete for positions at the highest levels were in the process.   Like the NFL, regulated entities and the companies that do business with them can adopt the same approach as part of an overall diversity strategic plan.

Credit unions and other regulated entities do not have to re-invent the wheel; present day models already exist.  The Agencies must require some type of reporting mechanism in order to effectively assess diversity practices.  Diversity is also a safety and soundness issue.   One of the envisioned purposes of Dodd Frank Section 342 is to mitigate the concentration risk that can arise as a result of a homogenous workforce including boards.  In the way Agencies monitor and examine other types of risks (e.g., interest rates, price, reputation, etc.), diversity should also fall within the scope of the examination and supervision process. Allowing regulated entities to self-assess and voluntary disclose their diversity policies and practices is nothing more than just window dressing.