Toomre Capital Markets LLC

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Racial, Gender Quotas Coming via FinReg Bill?

Diana Furchtgott-Roth over at Real Clear Markets raises concerns about Section 342 of the pending Dodd-Frank financial regulation bill. This section has not been publicized much at all during the contentious reconciliation process.

Section 342 apparently "declares that race and gender employment ratios, if not quotas, must be observed by private financial institutions that do business with the government. In a major power grab, the new law inserts race and gender quotas into America's financial industry." Through the establishment of at least twenty Offices of Minority and Women Inclusion, this section aims to assure "to the maximum extent possible the fair inclusion" of women and minorities, individually and through businesses they own, in the activities of the agencies, including contracting.

Toomre Capital Markets LLC ("TCM") applauds the broad diversity goal that this section attempts to address. For far too long, the financial services industry and its service providers have been dominated by white males. It is reassuring to know that my teenage daughter, based solely on her capabilities, might have some possibility of obtaining employment in the investment banking sector should she desire so. In short, females and minorities will have a "fair" chance for opportunities and employment.

The devil is in the details of implementation, though: How does one define "fair"? As Ms. Furchtgott-Roth explains,

How to define "fair" has bedeviled government administrators, university admissions officers, private employers, union shop stewards and all other supervisors since time immemorial - or at least since Congress first undertook to prohibit discrimination in employment.

Sometimes, "fair" has been defined in relation to population numbers, for example, by the U.S. Department of Education in its enforcement of Title IX, passed in 1972 as an amendment to the 1964 Civil Rights Act, which pertains to varsity athletic opportunities for male and female undergraduates.

Title IX was intended to protect against sex discrimination, but not to allow the use of quotas. Indeed, it specifically prohibited arbitrary leveling of student numbers by gender.

Yet in 1997 the courts essentially sided with an interpretation of the law promulgated by the Department of Education that left universities with no choice but to adopt a proportionality standard for college sports if they wished to avoid lawsuits. If 55% of the students are female, then 55% of the varsity sports slots have to go to women. Financial institutions might have to meet a similar proportionality standard.

Lest there be any narrow interpretation of Congress's intent, either by agencies or eventually by the courts, the bill specifies that the "fair" employment test shall apply to "financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, financial services entities, underwriters, accountants, investment consultants and providers of legal services." That last would appear to rope in law firms working for financial entities.

Contracts are defined expansively as "all contracts for business and activities of an agency, at all levels, including contracts for the issuance or guarantee of any debt, equity, or security, the sale of assets, the management of the assets of the agency, the making of equity investments by the agency, and the implementation by the agency of programs to address economic recovery."

TCM wonders how "fair" will be interpreted and implemented for this major piece of legislation. Since financial services are widely provided throughout the American economy, will the requirement be that the composition of their employees must mimic that of the American population in general? Will slightly more than half of all employees be required to be female? Will financial services firms be required to employ certain percentages of each recognized minority class? If so, the Dodd-Frank financial regulation bill is likely to have far more of an impact than the well-publicized changes regarding derivatives.