Over the last several months we have all heard about the Dodd-Frank Act. The purpose of the act is to bring financial accountability to Wall Street and transparency to protect consumers.

However, a less well-known objective of the act is to create diversity accountability within the financial services sector, which has long suffered from criticisms of racial and gender exclusion. As noted by U.S. Rep. Maxine Waters when she presented the amendment that eventually became Section 342 of the act:

“Minorities, women, and minority- and women-owned businesses continue to face challenges in accessing employment opportunities within these agencies and participating in the contracting opportunities provided by these agencies. For example, according to the Office of Personnel Management, in 2006 women accounted for 44.2 percent of federal employees and minorities accounted for 28.3 percent of federal employees. However, these levels have declined since 2000 when women made up 45 percent of federal employees and minorities made up 30.2 percent.

In addition, women and minorities are underrepresented in government positions related to the financial services sector. According to the Office of Personnel Management, minorities comprise only 17.4 percent of federal economists; 18.1 percent of federal financial management positions; and 18.7 percent of financial institutions examiners. Women comprise 32.5 percent of federal economists; 39.1 percent of federal financial management positions; and 34 percent of financial institution examiners.”

Of the 67 contracts the Department of the Treasury has entered into as part of its administration of the Troubled Asset Relief Program (TARP), nine were awarded to small, women- or minority-owned businesses. Of the 12 firms pre-qualified by the Treasury Department to act as fund managers for the Legacy Securities Public-Private Investment Program, only one was a minority-owned business. Therefore, the goal of the amendment is to maximize the inclusion of women, minorities, and minority- and women-owned businesses in all business activities conducted by the federal government in the financial services sector.

Section 342 of the act created the new Offices of Minority and Women Inclusion (OMWI) at a number of federal agencies. Each Federal Banking and Security Regulation Agency (in all, approximately 20 offices) must establish an OMWI that will address diversity in employment and contracting. The OMWI will coordinate technical assistance to minority- and women-owned businesses and seek to improve diversity in the work force of the agencies. In short, the act creates a new diversity watchdog at each of these federal agencies with the responsibility to track not only the diversity efforts of the federal government, but those of its contractors as well. It also provides a mechanism for transparency and accountability within the federal financial regulatory system with respect to diversity.

THE OFFICE OF MINORITY AND WOMEN INCLUSION

Each OMWI is responsible for its agency’s management of diversity in employment and contracting. This includes attracting new diverse candidates for the agency by recruiting at predominantly minority colleges and universities and women’s colleges, as well as monitoring the hiring and utilization of diverse employees by contractors and subcontractors.

The contractors subject to OMWI oversight include 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. Although the act does not provide the OMWI with any enforcement authority, the OMWI must disclose the diversity performance of the agency, as well as that of its contractors and subcontractors, and report the results to Congress each year. The idea is to promote the fair inclusion and utilization of minorities, women, and minority- and women-owned businesses in all business activities of agencies at all levels, through transparent reporting by each agency.

WHAT DOES THIS MEAN FOR DIVERSE ATTORNEYS?

So what will the OMWI mean for diverse attorneys? First, the OMWI should mean increased employment for diverse attorneys not only within the agencies themselves, but also as contractors and subcontractors for legal services. With respect to employment, the federal government, which employs approximately 26,000 full-time attorneys and hires thousands of attorneys per year, is one of the country’s largest employers of attorneys.

Attorneys work in all branches of the federal government, but the executive branch, which includes the regulatory agencies subject to the act, employs the greatest number of attorneys. And of those attorneys employed in the agencies of the executive branch, the greatest concentrations are in the departments of Justice, Treasury, and Defense. Therefore, by requiring the agencies of the Treasury to actively recruit and hire qualified diverse attorneys and report their efforts to Congress, more diverse candidates will be considered for government attorney positions. This should be even more significant as the baby boomers begin to retire and new positions become available. Consequently, the trend noted by Waters of the declining number of minority and women employees in the financial services sector of the federal government should begin to reverse.

Second, many private practitioners within the financial services sector of the legal industry began their careers and were trained within the federal agencies. By increasing the number of diverse attorneys within the agencies, the pool of available diverse attorneys in the private sector of the financial services industry will be increased in the future. This will have the domino effect of increasing the number of diverse attorneys available to contract with the government pursuant to the diversity procurement requirements of the act. This, in turn, addresses Waters’ concern regarding the paucity of contracts issued to minority- and women-owned firms by the financial agencies.

Finally, and perhaps of greater significance to diverse attorneys currently in private practice, is the potential for contract and/or subcontract legal work through the federal agencies. Last year the Treasury Department paid more than $27 million to outside law firms overseeing the financial bailout alone. One firm received nearly $1.4 million dollars, and its contract allowed up to $5 million dollars of work. To comply with the law and maintain this lucrative contract in the future, the firm would have to put forth its best effort to utilize diverse attorneys on this contract. As such, the opportunity for minority- and women-owned firms to eventually contract directly with the agency or subcontract through an established firm may increase over the next few years.

The impact is not limited to a single agency. A significant portion of many federal agencies’ legal work is contracted out to private firms. The Federal Deposit Insurance Corp., which is one of the agencies covered under the act, contracts a significant amount of work to outside attorneys and firms. As of July 31, 2010, the FDIC listed over 900 law firms on its “List of Counsel Available.” Outside firms provide a broad range of legal services to the FDIC, which include: liquidation of failed insured depository institutions; bankruptcy and creditors’ rights; collections; foreclosures; real estate and financial transactions, including debt restructuring; general business and corporate law advice; professional, director, and officer liability issues; and other litigation services.

Many minority- and women-owned firms handle these types of matters for non-governmental clients and could readily handle this work for the agencies if given the opportunity. By requiring agencies like the FDIC to monitor and report how dollars are spent for contracted legal services, the act will lead to transparency within the contracting systems of the agencies and, hopefully, fewer diverse attorneys and firms will be excluded from the opportunity to participate in this work. By also monitoring the subcontracting of majority firms, these firms too may be inclined, through direct employment or subcontracting opportunities, to hire or work with diverse attorneys and/or minority- and women-owned firms. This will not only improve diversity and transparency within the financial service agencies, but within the financial services industry as a whole.

A Step in the right direction

It should be clear, the new OMWI does not establish quotas but requires each agency to monitor and report to Congress regarding its internal and external efforts to include women and minorities within the employment and contracting opportunities of the agency. Further, the act requires the agencies to establish standards and procedures to measure their efforts on an ongoing basis.

Contractors too, including law firms, must maximize their women and minority recruiting efforts to preserve their business with federal agencies, comply with the act, and avoid losing very lucrative contracts.

Although it is too early to tell if this effort will be successful in helping to diversify the financial services industry, the regulatory agencies, or the legal contractors and subcontractors retained by the agencies, the OMWI is a big step in the right direction.

Wesley R. Payne is a partner at White & Williams. He is the chair of the firm’s diversity committee, a member of the executive committee, and co-chair of the firm’s homeless advocacy practice group. He primarily focuses his practice in the areas of insurance defense, bad faith, extra-contractual damages and coverage litigation. Payne may be reached at paynew@whiteandwilliams.com.