Just days after the release of the final diversity standards under Section 342 of the Dodd-Frank Act, several prominent lawmakers and business leaders have criticized the new standards for not going far enough to promote diversity and inclusion within the financial services industry.  The standards were issued jointly on June 9 by six federal agencies—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.  The standards apply both to any entity subject to regulation by these agencies, including financial institutions, mortgage companies, and all publicly traded companies.

Under Section 342, federal financial agencies are required to create Offices of Minority and Women Inclusion, each charged with “assessing the diversity policies and practices of entities” subject to regulation by the agencies.  Issued as a result of this directive, the new standards provide covered entities with a framework to conduct annual self-assessments of their diversity practices and commitments, to provide opportunities for minorities and women in hiring practices and vendor relationships, and to increase transparency with respect to diversity and inclusion practices.  The standards offer “assessment factors” for each of these areas.  The final standards, however, are “voluntary,” according to the agencies.

The voluntary nature of the standards has drawn sharp criticism from members of Congress and civil rights advocates.  Congresswoman Maxine Waters (D-CA), one of the chief architects of Section 342, said the new standards are disappointing in both structure and scope.  In essence, Waters views the final standards as hobbled by ambiguity and a lack of meaningful enforcement mechanisms.  In a June 18 press release issued by Waters and Congresswoman Joyce Beatty (D-OH), the two lawmakers criticized the federal agencies for paying little more than “lip service” to important diversity issues.  U.S. Senator Bob Menendez (D-N.J.) and SEC Commissioner Luis A. Aguilar also spoke out against the final standards.  According to Senator Menendez, the new standards “unfortunately fall short of what is necessary to achieve real progress” with respect to diversity in the financial industry.  Commissioner Aguilar issued a formal dissent to the final standards, pointing to the financial sector’s historically poor diversity record while expressing disappointment that the agencies responsible for the new standards chose “to do what is convenient for the companies, rather than the right thing for the long-term benefit of our country.”

Stuart Ishimaru, Executive Director the CFPB’s Office of Minority and Women Inclusion, responded to the criticism by noting that the standards are a “first step” and that the CFPB is developing plans to use the standards to engage with regulated entities and to encourage increased levels of diversity and inclusion.

Some observers see good reasons why regulated entities should and will pay attention to diversity issues, notwithstanding the voluntary nature of the final standards.  Many companies regard diversity and inclusion as the right thing to do from a corporate social responsibility perspective.  Moreover, regulated entities will likely find themselves in front of one or more of these agencies at some point, seeking regulatory approval or defending their actions.  Under these circumstances, opting to ignore the standards will not put the entity in a positive regulatory light.  In addition, many entities recognize the competitive advantage that diversity and inclusion offers when competing for diverse talent and attempting to expand market share into the expanding U.S. multicultural market.