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Congresswoman Maxine Waters

Representing the 43rd District of California

Federal Bank-Diversity Standards Are Weak: House Dems, Activists

June 22, 2015
In The News

WASHINGTON — Too little, too late.

That is how some consumer groups and lawmakers describe new federal guidelines meant to encourage banks and other financial companies to hire, promote and properly treat racial minorities and other historically disadvantaged groups.

The guidelines, issued June 9 and mandated by the Dodd-Frank Act, provide a framework for financial institutions to conduct "self-assessments" of their diversity practices. However, the standards are voluntary, companies get to decide whether to submit the results to their regulators, and it is unclear whether companies have to conduct any tests at all.

Financial services industry representatives say anything more prescriptive would have exceeded the regulators' authority under Dodd-Frank, but numerous lawmakers and consumer advocates have attacked the standards as toothless. They argue the self-assessment policy will do little to improve diversity in financial workplaces.

"The standards … feel weak," said Sasha Werblin, economic equity director at the Greenlining Institute in Berkeley, Calif. "When you have something that says, 'If you want to do it you can, but if you don't want to you don't have to,' they're not going to prioritize that."

Rep. Maxine Waters from California, the ranking Democrat on the House Financial Services Committee, and Joyce Beatty, D-Ohio, accused regulators of providing "lip service" to diversity efforts.

The rules "appear to do nothing to bring transparency to this industry, which has a long history of failing to promote diversity in its work force," they said in a joint news release. "The final [policy] is fraught with ambiguity, fails to make the disclosure of diversity data mandatory for financial institutions and prevents the public from easily accessing the information it was designed to provide."

The guidelines, issued by six agencies, give firms a road map for assessing a company's overall commitment to diversity; the inclusion of minorities and women in their hiring practices and workplace culture; consideration of minority- and women-owned businesses among vendors they choose; and the transparency of diversity and inclusion efforts.

But, according to legal experts, Dodd-Frank bars the agencies from using any information from a bank or credit union's assessment in enforcement proceedings against the institution.

The regulators stressed that the guidelines stop short of imposing any new legal requirements and that they will not be incorporated into the supervisory process. Institutions are "encouraged," but not required, to submit assessment results. "Use of the standards by a regulated entity is voluntary," they said.

The six agencies are the Federal Reserve Board, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corp., the National Credit Union Administration, the Office of the Comptroller of the Currency and the Securities and Exchange Commission.

However, regulatory officials have signaled that the standards are not the end of their efforts to promote inclusion.

Most of the six agencies declined to comment for this article, but Stuart Ishimaru, who heads the CFPB's minority and women inclusion office, said in an email relayed by an agency spokesman that the standards are only a "first step."

"The CFPB is developing plans to use these standards to engage with its regulated entities, to encourage increased levels of diversity and inclusion, and to share information that would better inform the agency and the public on activities engaged in by the entity," Ishimaru said in the email.

"As we move forward with these efforts, the CFPB will continually look to the question of whether the standards and these processes can be improved, and what further guidance may help financial institutions improve diversity and inclusion."

The final guidelines also drew rebukes from Sen. Bob Menendez, D-N.J., and Luis Aguilar, an SEC commissioner, who dissented from the agency's decision to back them. Their criticism that the guidelines are only voluntary reiterated concerns that had surfaced when regulators first proposed the guidelines in October 2013.

Aguilar said the voluntary standards make it difficult for policymakers to obtain meaningful data about diversity practices.

"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 ... and conduct effective self-assessments, and to use the information derived from these self-assessments to promote diversity and inclusion," he said. "I hope that they do, but the track record of many companies in the financial services industry belies that hope."

Greenlining's Werblin noted that a number of banks have already established advanced diversity and inclusion programs on their own. But there are state jurisdictions where the assessment of diversity practices is required. In California, for example, insurance firms must do such assessments, though the state did not create minimum standards for them to meet.

"What we've seen is that when institutions are required to report this data, they view it as, 'OK, we have to make this a priority,'" Werblin said. By contrast, the federal regulators have "given financial institutions the ability to not meet those standards."

But industry representatives counter that the agencies were limited in their ability to impose tougher requirements.

"The agencies did what Congress required them to do under Dodd-Frank. It didn't require that there be mandatory regulations," said Alan Kaplinsky, a partner at Ballard Spahr.

Deborah Meshulam, a partner at DLA Piper, said it is "an open question" whether the statute would have allowed the agencies to be more aggressive. And even if the law permitted a tougher stance, such as agency-run assessments, the statutory limits on the regulators' use of data for enforcement activities would discourage regulators from taking it.

"In some ways, [making it voluntary] makes sense," she said. If the agencies had to do the assessments instead, "just think about how many resources would be required to conduct these assessments and only to be at a place in the end where you can't require enforcement."

However, the agencies' light touch does not preclude them going further in the future, Meshulam added.

"They've given regulated entities the opportunity to conduct it themselves in a way that is consistent with their size and the way in which they operate," she said. "Perhaps there could be a change of view among the agencies where they felt they were not getting any voluntary disclosure, so maybe they would change their approach and make it part of the examination."

Most institutions will still want to show that they are conducting assessments and adopting the voluntary standards, Kaplinsky said.

They "are going to take heed and they will follow the guidelines and make sure that their diversity and inclusion policies are in conformity," he said. "It's the right thing to do, and from a public relations standpoint I don't think any institution is going to want to be singled out as an institution that decided not to adopt diversity and inclusion policies."

Rachel Witkowski contributed to this article.