A little-noticed provision in the recent financial-reform bill will drive up costs and inefficiencies.
The Dodd-Frank Wall Street Reform & Consumer Protection Act is supposed to shield consumers from problems in the financial services sector that many believe led to the financial meltdown. But Section 342 of the act introduces a brash example of social engineering that masquerades as consumer protection and financial reform. This section imposes gender and racial employment quotas on the financial services industry, which accounts for one-tenth of our economy. The quota provisions will affect over 50,000 financial services firms and other businesses, and the consequences will be enormous.
Dodd-Frank requires at least 29 federal bureaus to open Offices of Minority & Women Inclusion, involving ten branches of the Treasury Department, the Federal Reserve and its 12 regional banks, the Securities & Exchange Commission and the Federal Deposit Insurance Corp. The new diversity offices will implement rules to ensure “the fair inclusion and utilization” of minorities and women in all firms doing business with each agency. The offices will terminate contracts with any service provider that fails to meet these as yet undetermined standards. Just running these offices is estimated to cost over $58 million annually, says David Patten in a recent story on Newsmax.com.
These new offices will also assess the “diversity policies and practices” at all entities that fall under their regulatory eye, including banks, broker-dealers, registered investment advisors and now hedge funds. Along with more than 40,000 financial services firms, another 10,000-plus businesses, including accounting and law firms that do business with these government offices, will be subject to this new diversity oversight of their hiring.
What does this mean for the financial services sector? Assuming each firm hires at least one new worker to satisfy the new law, this provision could raise costs $4 billion or more annually, depending how far forthcoming regulations will extend. Firms doing business with the government will face additional expenses because they will now have to monitor the hiring practices of their subcontractors as well. In addition to these reporting burdens, firms must prove to their regulators and to government offices with which they do business that they are meeting or working toward racial and gender hiring guidelines. In many cases this will require additional hiring beyond the needs of the business.
Forcing America’s private firms to hire on the basis of racial and gender “guidelines,” rather than solely on need and qualifications, is inefficient and makes our businesses less competitive than their global counterparts. Moreover, four out of the eight members of the U.S. Commission on Civil Rights wrote a letter to Congress stating that this section of the act would likely “promote discrimination,” and urged its removal from the bill.
There is a better, more cost-efficient solution: Let private companies come up with their own approaches. Deloitte’s 19-year-old Women’s Initiative, for example, has boosted the percentage of female partners, principals and directors from 7% in 1994 to 23% in 2010. And minorities and females currently make up 60% of kpmg’s workforce.
While the idea of encouraging greater participation of minorities and women in the financial services sector is admirable, the government is overreaching when it mandates gender and racial quotas for private businesses. An affirmative action provision has no place in a financial services reform bill and puts additional government burdens and costs on an already struggling sector of our economy, putting our recovery at risk.
The megabills that fly through Congress provide legislators the opportunity to insert politically motivated provisions–under the radar. As Rahm Emanuel famously said after President Obama had been elected, “Never allow a crisis to go to waste.” The financial crisis has given the President and Congress cover to impose their political agenda on private business activity. Watch out: Your industry could be next.