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Feds demand diversity on Wall Street
by Carrie Budoff Brown
July 28, 2010 04:28 AM EDT
A little-noticed section of the Wall Street reform law grants the federal government broad new powers to compel financial firms to hire more women and minorities — an effort at promoting diversity that's drawing fire from Republicans who say it could lead to de facto hiring quotas.
Deep inside the massive overhaul bill, Congress gives the federal government authority to terminate contracts with any financial firm that fails to ensure the "fair inclusion" of women and minorities, forcing every kind of company from a Wall Street giant to a mom-and-pop law office to account for the composition of its work force.
Employment law experts say the language goes further than any previous attempt by the U.S. government to promote diversity in the financial sector — putting muscle behind federal efforts to help minority- and women-owned firms gain access to billions in federal contracts.
For advocates of the measure, it is a past-due shove to an elite industry that is heavily male and white — one in which Government Accountability Office studies show women and minorities have made only minimal gains in the past 15 years.
But to opponents, the provision signifies a brazen government intrusion into corporate practices, with language written so vaguely that some believe it could lead to an unofficial quota system.
"This expands exponentially the reach of the federal government in terms of auditing," said Peter Kirsanow, an attorney and Republican appointee to the U.S. Commission on Civil Rights. "This is an expansion of racial engineering that we haven't seen in a long time."
The law sets no quotas, not even ratios or goals for hiring. And the government has options other than termination at its disposal for contractors who fail to meet the "fair inclusion" standard, including referring the matter to the Labor Department.
But the law tiptoes up to the line of quotas, say critics — a group that includes Sen. Susan Collins (R-Maine); four Republican-leaning members of the U.S. Commission on Civil Rights who wrote a letter of opposition; and some in the conservative blogosphere, where a debate has raged for weeks outside the view of the mainstream media.
"It is very sweeping, from my review of the legislation," said Collins, who voted for the bill. "It talks not just about federal offices and agencies. It also talks about contractors and subcontractors, and so the implications are very unclear and can be read to require quotas, and that's an entirely different and controversial debate and does not belong in the financial bill."
Supporters of the move are cheering the law, saying that for years the legislative language behind diversity efforts lacked teeth.
"It is arguably the best part of the bill," said Gary Acosta, co-founder of the National Association of Hispanic Real Estate Professionals, which lobbied for the section.
Advocates have pushed for this change since the economic crisis hit, when billions in taxpayer dollars flowed into struggling Wall Street giants — without reaching many minority- and women-owned businesses. They didn't receive an adequate share of the legal, accounting and asset management contracts awarded through the $700 billion bank bailout bill and other emergency programs administered by the Treasury and the Federal Reserve, Democratic lawmakers and advocates say.
At the same time, they contend, the collapse of the subprime mortgage market disproportionately hit African-American and Latino homeowners.
"Considering the devastation that has taken place in the minority communities – that was done by irresponsible and predatory lending – this makes sense and helps them mitigate that," Acosta said of the financial industry. "Inclusion is a good thing, always. And sometimes we have to be compelled to make changes."
The 1,261-word section authored by Rep. Maxine Waters (D-Calif.) barely registered during the legislative debate. And even weeks after the legislation moved through the House and Senate, Washington groups tasked with protecting business interests on Wall Street and beyond say they have yet to study that part of the bill.
At its core, the section establishes at least 20 new Offices of Minority and Women Inclusion across the Treasury Department, Federal Reserve, Securities and Exchange Commission and other finance-related agencies. It orders the directors of these offices to develop standards that "ensure, to the maximum extent possible, the fair inclusion and utilization of minorities, women, and minority-owned and women-owned businesses in all business and activities of the agency at all levels, including in procurement, insurance, and all types of contracts."
This applies to "services of any kind," including investment firms, mortgage banking firms, asset management firms, brokers, dealers, underwriters, accountants, consultants and law firms, the legislation states. Every contractor and subcontractor must now certify that their workforces reflect a "fair inclusion" of women and minorities.
The government still must write the rules for the new diversity standards before deciding which contractors meet the bar and which fall short.
If the director determines a firm failed to make a "good faith effort," the contract can be severed or referred to the Labor Department's Office of Federal Contract Compliance for review.
"Too often, diversity is lacking among the workforce of contractors," reads a set of talking points from Waters' office. "It is important that just as the Federal government provided them with a contracting opportunity that they provide opportunities to minorities and women, who are underrepresented within the financial services industry."
Waters couldn't be reached for comment.
Diana Furchtgott-Roth, senior fellow at the Hudson Institute and chief economist at the Labor Department under President George W. Bush, nudged the issue into the mainstream last month with a column posted on RealClearMarkets.com.
The question is how these offices will define "fair inclusion," she wrote, and they could decide that it means an employer's work force must match the demographics of the area in which it operates or risk losing a contract.
"This is just extraordinarily costly to firms. It is a big change in employment law," Furchtgott-Roth said in an interview. "What if there aren't any Native Americans who qualify for the open slots at Bank of America? What would they do?"
Advocates of the language say "fair inclusion" can be loosely defined this way: If a contractor in, say, Brooklyn or Miami doesn't employ any minorities, it could be a problem. But the expectations would be different in Maine, for example, which has the highest proportion of whites in the country.
"Your workforce doesn't have to be exact, but you have to try to make an effort," said Pamela Bethel, a partner at O'Riordan Bethel law firm who testified before Waters' committee on behalf of the National Association of Minority and Women-Owned Law Firms. "Nobody is suggesting you hire someone who isn't qualified, but if you look just a little harder outside your country club, you might find someone who is qualified."
Also of concern to some on the right is that the law creates another layer of bureaucracy that small businesses will need to navigate.
Collins said there are already three federal offices similar in scope: the Civil Rights Center at Department of Labor, the Office of Federal Contract Compliance at Labor, and the Equal Employment Opportunity Commission. In addition, each federal agency is required to have an Office of Small and Disadvantaged Business Utilization whose mission is to assist minority and women owned businesses, Collins said.
But Marc Morial, president of the National Urban League, which pressed for the bill language, said existing efforts to ensure that women- and minority-owned firms receive contracts have "no visibility, no teeth."
"If they were doing their job, certainly people like me would know about it," Morial said. "This statute means business — and you can no longer pay lip service and (play) pretend games."
Meredith Shiner contributed to this report.
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