Credit Union Times recently published a guest editorial ("Let’s Help Make Them Do it" – Jan. 22, 2014) the basic premise of which was that the federal government should make financial institutions implement diversity policies and practices as mandated by Section 342 of the highly partisan and still controversial Dodd-Frank Act. In reality, that point of view was misguided and ill-informed.
The “Proposed Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies” developed by the NCUA and other banking regulators’ Offices of Minority and Women Inclusion are a compliance nightmare that should be keeping credit union CEOs and chief compliance officers awake at night. It is bad rulemaking that is based upon bad law that will lead to lots of bad lawsuits. And I am not the only one who thinks so.
In a Nov. 4, 2013, letter to the Office of the Comptroller of the Currency four members of the eight-member U.S. Commission on Civil Rights writing for themselves and not for the entire commission said, “We urge that the (Proposed Statement) be changed so that it does not require or encourage the use of classifications and preferences based on race, ethnicity and sex. Further, the Proposed Statement should affirmatively state that the Department of the Treasury, the Federal Reserve, the FDIC, the NCUA, the (CFPB) and the SEC should not assess the diversity policies and practice of regulated entities based on the entities’ use of numerical goals, metrics or percentages with regard to diversity in hiring or contracting, because such goals and metrics may lead to unlawful discrimination by the regulated entities.”
The four commissioners cited many examples, statutes and court cases to support their position. They went so far as to state that such classifications and preferences raised serious constitutional concerns.
The commissioners also said, “Banks and other regulated entities will be caught in a double bind. On the one hand, their regulators in the agencies will monitor their diversity efforts in hiring and contracting based on ‘metrics’ and ‘percentages,’ i.e., based on numerical quotas. On the other hand, federal civil rights law prevents these financial institutions from making hiring or contracting decisions based on race, ethnicity or sex.”
The commissioners concluded, “Increasing a group’s numbers in order to increase diversity is not a compelling interest sufficient to justify racial discrimination against members of another group.” They urged the agencies to substantially revamp the proposal.
In a Dec. 20, 2013, letter to the SEC, the U.S. Chamber worried about undefined, vague terminology in the rule, the potential for “reverse discrimination,” prescriptive rather than supposedly “voluntary” self-assessments, the potential legal liability from mandated public disclosures and the potential for exposing trade secrets.
Questions were also raised concerning what the agencies would do with the diversity assessment information – especially in examination and enforcement matters.
The Chamber was also particularly concerned that the agencies appeared not to understand the complexities of contemporary supply chains and the difficulties in mapping those suppliers’ diversity policies and practices as required by the proposed rule. That should be more than enough to give any “regulated entity’s” chief compliance officer a splitting headache, but that’s just the tip of this nightmarish “unintended consequences” iceberg.
The Dodd-Frank proposed diversity standards appear more likely to lead to costly and complex compliance burdens, escalated reputation risks and increased litigation exposures than they do to any tangible societal benefits. This joint proposal represents, like the Dodd-Frank Act Section 342 itself, a very flawed and brazen intrusion into governance practices that would best be left to each credit union’s own board of directors to decide.
This is a disastrous public policy train wreck that seems almost impossible to avoid unless the regulatory agencies totally reverse course.
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