Reporting from Washington —
The recently enacted financial reform legislation tries in numerous ways to change how Wall Street companies and their federal regulators act, but a little-noticed provision aims for something potentially more difficult and controversial — altering how they look.
To promote diversity in the largely white male world, the law requires each of the 30 federal financial agencies and departments, including the Securities and Exchange Commission and all 12 Federal Reserve banks, to establish an Office of Minority and Women Inclusion.
Those offices will have vaguely defined powers to boost diversity at their agencies and the companies they regulate and to increase federal contracting opportunities for minority- and women-owned businesses. Banks and other financial firms that fail to make "a good-faith effort to include minorities and women in their workforce" could lose their government contracts.
"This is a wake-up call for Wall Street: women, black Americans, Asian Americans, Latino Americans, they all pay for your bailouts," said Michael Yaki, a member of the U.S. Commission on Civil Rights. "Firms must take steps to be more reflective of America."
The provision, championed by Rep. Maxine Waters (D-Los Angeles), has been hailed as groundbreaking by minority and women's advocates. But banking industry leaders and some Republicans are concerned about potentially burdensome regulations and costly new oversight that they see as unnecessarily duplicating — and perhaps going well beyond — other federal diversity initiatives.
"This will destroy the financial industry," warned Diana Furchtgott-Roth, a senior fellow at the Hudson Institute who was the Labor Department's chief economist under President George W. Bush.
"If the CEOs of American financial institutions have to be worried about the diversity regulations, whereas those in other countries are worrying about their profits, we are going to fall behind," she said.
Industry groups, regulatory agencies and analysts are just starting to grapple with the potential ramifications of the provision, which takes effect in January.
The effect is hard to gauge because the law gives the director of each Office of Minority and Women Inclusion the authority to develop standards for equal employment for their agency as well as at the companies they regulate and contract with for such services as asset management.
If the legislation is interpreted broadly, the diversity requirements could reach down to subcontractors that provide food or janitorial services — something not required under current rules, said Jon A. Geier, an employment law expert at the Paul Hastings law firm.
"My clients are wondering what more will they have to do?" he said. "I can't tell them yet. It could be substantial. It could be a paper tiger."
The directors of the new offices have limited enforcement power. They can recommend to the agency's head that a contract be terminated or refer a case to the Labor Department for sanctions, but can't force any action.
The diversity requirements in many ways duplicate those already mandated by other laws for the federal workforce and contractors.
Sen. Susan Collins (R-Maine) has criticized the provision for creating another bureaucratic hurdle for small companies hoping to get government business. She said each federal agency already has an Office of Small and Disadvantaged Business Utilization to help minority- and women-owned firms, not to mention the Equal Employment Opportunity Commission and the Labor Department's Office of Federal Contract Compliance Programs that cover the same territory.
But the requirements for banks and other financial firms under regulatory oversight are new. And they're vague: The provision says only that the new offices must assess the diversity policies and practices of regulated companies.
At the least, the provision adds to the great uncertainty in the industry caused by the sweeping financial reform bill as firms await detailed rules on hundreds of provisions to be drafted by individual agencies.
"This is one of the provisions that has a large question mark," said James Ballentine, senior vice president for government relations at the American Bankers Assn., an industry trade group.
As the president and chief executive of Community West Bank in Goleta, Calif., Lynda Nahra is the type of person the provision aims to help. But she thinks it's unnecessary.
"Do we need an office in each federal regulatory agency?" she said. "I think that's overkill, and it's not the best use of money."
The House Financial Services Committee added the provision in 2009 at the urging of Waters and other members of the Congressional Black Caucus. Part of the motivation was the limited participation by firms owned by women or minorities in emergency programs undertaken by the Treasury Department and the Federal Reserve to address the financial crisis.