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Does the SEC’s Diversity Requirement Have Teeth?

By Melissa J. Anderson

As part of Dodd-Frank, the financial industry is now required to disclose efforts toward diversity and inclusion.

Section 342 of the law directed various regulatory agencies to establish 20 Offices of Minority and Women Inclusion. These offices would monitor diversity and inclusion at government agencies dealing with the financial services industry, as well as Wall Street itself – the law applies to law firms, accounting firms, and investment banks as well. These offices had to be up and running but the end of January.

The section, proposed by Representative Maxine Waters, says that if a firm is seen to have not made “a good faith effort to include minorities and women in its workforce,” they may lose government contracts or face other disciplinary action.

Diversity advocates have cheered on the bill as an important step in boosting women and minority participation on Wall Street – which has been seen as an important step toward ending “groupthink” behavior, on which many blame the recent economic disaster.

But since Dodd-Frank was passed last year, many have pointed out the Section’s wording is somewhat toothless.

For example, in a New York Times article, Lawrence Z. Lorber, an employment law specialist at the law firm Proskauer Rose said, “The problem with this clause is that it’s largely redundant.” He continued, “Most of these firms and agencies are already covered by multiple nondiscrimination laws. If you require more extensive disclosure of diversity practices, what you’ll get is a lot of very long reports essentially saying the same thing.”

In the same article, Mark A. Calabria, director of financial regulation studies at the Cato Institute, said, “The language of the clause is so vague that it could do nothing at all,” Mr. Calabria said. “But in the hands of a regulator who really wanted to make an issue out of diversity hiring, it could have a substantial impact.”

What it seems is that the diveristy-clause’s implementation will come down to the presiding regulator’s views on diversity and enforcement.

The matter was discussed a recent event hosted by Deloitte and the Financial Women’s Association of New York. The panel’s diversity experts included Kenneth A. Bertsch, CEO and President of the Society of Corporate Secretaries and Governance Professionals; Francis H. Byrd, Senior Vice President Corporate Governance and Risk Practice Leader, The Laurel Hill Advisory Group LLC, Janice Reals Ellig, Co-CEO, Chadick Ellig; and Nicole M. Sandford, Partner, Deloitte & Touche, LLP.

Bertsch pointed out that from what he had seen thus far, most of the disclosures required by the diversity clause had been “boilerplate.”

Ellig pointed out that the wording of the section didn’t force firms to take any action at all. She said, “It says ‘if’ you have a diversity policy, then you have to disclose [it]’ …They didn’t put teeth in it at all.”

Sandford said that she felt the disclosure requirement wouldn’t be an effective means to build diversity in the financial industry – being forced to comply with diversity disclosures won’t improve the power or influence of diverse individuals, and could create a culture of tokenism. She said, “If you’re going to have much movement, you’re going to have to change minds. …We aren’t necessarily in favor of the SEC coming back with more prescriptive disclosures.”

The panelists felt that a focus on the “business case for diversity” was important for creating true inclusion of diverse individuals within industry leadership. Byrd explained, “If it’s just seen as a social issue, the components will just sit around and lag.”

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