-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-617		

TITLE:     Financial Services Industry: Overall Trends in 
Management-Level Diversity and Diversity Initiatives, 1993-2004

DATE:   06/01/2006 
				                                                                         
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GAO-06-617

     

     * Results in Brief
     * Background
          * Overview of the Financial Services Industry
          * Changing U.S. Demographic Characteristics and Definition of
     * Diversity in the Financial Services Industry At the Manageme
          * Overview of Management-Level Diversity
          * Certain Financial Sectors Are Somewhat More Diverse Than Oth
     * Initiatives to Promote Workforce Diversity in the Financial
          * Financial Services Firms Have Implemented a Variety of Diver
          * Several Financial Services Trade Organizations Have Promoted
          * Several Challenges May Have Affected the Success of Initiati
     * Minority- and Women-Owned Businesses Often Face Difficulties
          * Research Suggests That Business Characteristics May Affect M
          * Other Studies Suggest That Discrimination May Limit Minority
          * Many Minority- and Women-Owned Businesses May Also Face Diff
          * Some Commercial Banks Have Developed Programs for Minority-
     * Agency Comments and Our Evaluation
          * Minorities Account for 14 Percent of Management-Level Positi
          * AICPA Study Identified a Lack of Diversity in the Accounting
          * Efforts to Enhance Accounting Industry Diversity
     * GAO Contact
     * Staff Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Report to Congressional Requesters

United States Government Accountability Office

GAO

June 2006

FINANCIAL SERVICES INDUSTRY

Overall Trends in Management-Level Diversity and Diversity Initiatives,
1993-2004

Financial Services Industry Financial Services Industry Financial Services
Industry Financial Services Industry Financial Services Industry Financial
Services Industry Financial Services Industry Financial Services Industry
Financial Services Industry Financial Services Industry Financial Services
Industry Financial Services Industry Financial Services Industry Financial
Services Industry Financial Services Industry Financial Services Industry
Financial Services Industry Financial Services Industry Financial Services
Industry Financial Services Industry Financial Services Industry Financial
Services Industry Financial Services Industry Financial Services Industry
Financial Services Industry Financial Services Industry Financial Services
Industry Financial Services Industry Financial Services Industry Financial
Services Industry Financial Services Industry Financial Services Industry
Financial Services Industry Financial Services Industry Financial Services
Industry Financial Services Industry Financial Services Industry Financial
Services Industry Financial Services Industry Financial Services Industry
Financial Services Industry Financial Services Industry Financial Services
Industry Financial Services Industry Financial Services Industry

GAO-06-617

Contents

Letter 1

Results in Brief 3
Background 5
Diversity in the Financial Services Industry At the Management Level Did
Not Change Substantially 7
Initiatives to Promote Workforce Diversity in the Financial Services
Industry Face Challenges 14
Minority- and Women-Owned Businesses Often Face Difficulties in Obtaining
Capital, but Some Financial Services Firms Have Developed Strategies to
Assist Them 23
Agency Comments and Our Evaluation 29
Appendix I Objectives, Scope, and Methodology 30
Appendix II Overall Statistics on Workforce Diversity in the Financial
Services Industry 34
Appendix III Diversity in Key Positions in the Accounting Industry 36
Appendix IV GAO Contact and Staff Acknowledgments 42

Tables

Table 1: AACSB Demographic Data of Students Reported Enrolled in MBA
Degree Programs at AACSB Accredited Business Schools in the United States
by Racial/Ethnic Group (2000-2004) 19
Table 2: Workforce Representation at the Professional, CPA and
Partner/Owner Levels by Racial/Ethnic Group (2005) 39
Table 3: Workforce Representation at the Professional Level by
Racial/Ethnic Group and Firm Size 40

Figures

Figure 1: EEO-1 Data on Trends in Workforce Diversity in the Financial
Services Industry at the Management Level (1993, 1998, 2000, and 2004) 9
Figure 2: EEO-1 Data on Trends in Workforce Diversity in the Financial
Services Industry at the Management Level by Racial/Ethnic Group and
Gender (1993, 1998, 2000, and 2004) 11
Figure 3: EEO-1 Data on Workforce Diversity in the Financial Services
Industry at the Management Level by Sector (2004) 12
Figure 4: EEO-1 Data on Workforce Diversity in the Financial Services
Industry at the Management Level by Firm Size (2004) 13
Figure 5: EEO-1 Data (Percentage) on Workforce Diversity in the Financial
Services Industry by Position, Racial/Ethnic Group, and Gender (2004) 21
Figure 6: EEO-1 Data (Number of Employees) on Workforce Diversity in the
Financial Services Industry by Position, Racial/Ethnic Group, and Gender
(2004) 34
Figure 7: EEO-1 Data on Workforce Diversity in the Financial Services
Industry by Position and Racial/Ethnic Group (2004) 35
Figure 8: EEO-1 Data on Workforce Diversity in the Accounting Industry at
the Management Level by Firm Size, Gender, and Racial/Ethnic Group, and
Gender (2004) 37
Figure 9: EEO-1 Data on Workforce Diversity in the Accounting Industry at
the Management Level by Firm Size and Racial/Ethnic Group (2004) 38

Abbreviations

AACSB Association to Advance Collegiate Schools of Business ABA American
Bankers Association ACS American Community Survey AICPA American Institute
of Certified Public Accountants CPA certified public accountant ECOA Equal
Credit Opportunity Act EEO-1 data Employer Information Report data EEOC
Equal Employment Opportunity Commission GMAC(R) Graduate Management
Admission Council(R) HMDA Home Mortgage Disclosure Act IIABA Independent
Insurance Agents and Brokers of America MBA Masters of Business
Administration NAICS North American Industry Classification System PUMS
Public Use Microdata Sample SBA Small Business Administration SBO Survey
of Business Owners SIA Securities Industry Association SIC Standard
Industrial Classification

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.

United States Government Accountability Office

Washington, DC 20548

June 1, 2006

The Honorable Michael G. Oxley Chairman The Honorable Barney Frank Ranking
Minority Member Committee on Financial Services House of Representatives

The Honorable Sue W. Kelly Chairwoman The Honorable Luis V. Gutierrez
Ranking Minority Member Subcommittee on Oversight and Investigations
Committee on Financial Services House of Representatives

The Honorable David Scott House of Representatives

At a July 2004 hearing before the Subcommittee on Oversight and
Investigations of the House Committee on Financial Services, some members
and witnesses expressed concern about the financial services industry's
lack of workforce diversity, particularly in key management-level
positions.1 Witnesses stated that financial services firms (e.g., banks
and securities firms) had not made sufficient progress in recruiting
minority and women candidates for management-level positions. Concerns
were also raised about the ability of minority-owned businesses to raise
debt and equity capital.

This report follows up on the issues raised in the subcommittee hearing
and responds to your February 2005 request that we provide an overview on
the status of diversity in the financial services industry. Specifically,
our objectives were to discuss (1) what the available data show regarding
diversity at the management level in the financial services industry from
1993 through 2004, (2) the types of initiatives that the financial
services industry and related organizations have taken to promote
workforce diversity and the challenges involved, and (3) the ability of
minority- and women-owned businesses to obtain access to capital in
financial markets and initiatives financial institutions have taken to
make capital available to these businesses. You also asked that we include
information about the accounting industry, which we address separately in
this report. In an earlier report, we defined workforce diversity as ways
in which people in a workforce are similar and different from one another
including background, education, and language skills.2 For the purposes of
this report, we focused the diversity discussion on changes in
management-level representation over time by racial/ethnic minority groups
(for both women and men), including African-Americans, Asian/Pacific
Islanders (Asians), Hispanics or Latinos (Hispanics), and American
Indians/Alaskan Natives (American Indians). We also discussed changes in
management-level representation by whites (both women and men) over time.
Finally, we defined raising capital as debt or equity capital obtained in
conventional financial markets, such as from commercial banks or venture
capital funds.

1Diversity In the Financial Services Industry and Access to Capital for
Minority Owned Businesses: Challenges and Opportunities, Hearing Before
the Subcommittee On Oversight and Investigations of the House Committee on
Financial Services, 108th Cong. (2004).

To address objective one, we primarily analyzed the Equal Employment
Opportunity Commission's (EEOC) Employer Information Report (EEO-1) data
for the financial services industry for employers with 100 or more
employees for the years 1993, 1998, 2000, and 2004.3 The EEO-1 data
provide information on racial/ethnic and gender representation for various
occupations within a broad range of industries, including financial
services. We used the EEO-1 "officials and managers" job category as the
basis for our discussion of management-level diversity within the
financial services industry, as well as for its various sectors, such as
banking and securities firms. EEOC defines the job category of "officials
and managers" as occupations requiring administrative and managerial
personnel, who set broad policies, exercise overall responsibility for
execution of these policies, and direct individual departments or special
phases of a firm's operation. First-line supervisors who engage in the
same activities as the employees they supervise are reported in the same
job category as the employees they supervise rather than in the "officials
and managers" category. To address objectives two and three, we collected
publicly available information and interviewed officials from a variety of
financial services firms, including commercial banks, securities firms,
and private equity/venture capital organizations. We also interviewed
representatives from industry trade organizations, such as the American
Bankers Association (ABA); the Securities Industry Association (SIA);
Mortgage Bankers Association (Association); and the Independent Insurance
Agents and Brokers of America (IIABA); federal agencies, including EEOC;
the U.S. Department of Commerce's Minority Business Development
Administration (MBDA); the Small Business Administration (SBA); and
federal bank regulators; academics; and organizations that represent
minority- and women-owned businesses, such as the U.S. Hispanic Chamber of
Commerce and the National Association of Women Business Owners. We also
reviewed available government and industry studies that address workforce
diversity in the financial services industry and the ability of minority-
and women-owned businesses to obtain access to capital.

2GAO, Diversity Management: Expert-Identified Leading Practices and Agency
Examples, GAO-05-90 (Washington, D.C.: Jan. 14, 2005).

3Generally, private employers with fewer than 100 employees and certain
federal contractors who employ fewer than 50 employees are not required to
submit EEO-1 reports to EEOC. Although the EEO-1 data do not include these
smaller firms, the data do allow for the characterization of workforce
diversity for firms with 100 or more employees due to EEOC's annual
reporting requirement.

We conducted our work from July 2005 to May 2006 in Washington, D.C., and
New York City in accordance with generally accepted government auditing
standards. Appendix I describes the objectives, scope, and methodology of
our review in more detail. At your request, appendix II discusses overall
statistics on workforce diversity in the financial services industry, and
appendix III discusses workforce diversity in the accounting industry.

                                Results in Brief

From 1993 through 2004, overall diversity at the management level in the
financial services industry did not change substantially, but some
racial/ethnic minority groups experienced more change in representation
than others. During that period, EEO-1 data show that management-level
representation by minority women and men overall increased from 11.1
percent of all industry management-level positions to 15.5 percent.
Specifically, African-Americans increased their management-level
representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to
4.5 percent, Hispanics from 2.8 percent to 4.0 percent, and American
Indians from 0.2 percent to 0.3 percent. Representation by white women
remained constant at slightly more than one-third whereas representation
by white men declined from 52.2 percent to 47.2 percent (overall white
management-level representation declined from 88.9 percent in 1993 to 84.5
percent in 2004). Additionally, the EEO-1 data indicate that, within the
financial services industry, certain sectors have a somewhat more diverse
management-level workforce than others. For example, the EEO-1 data show
that depository institutions, such as commercial banks, and insurance
companies generally have a higher degree of representation by minorities
or white women at the management level than securities firms.

Although financial services firms and trade groups have initiated programs
to increase workforce diversity, including in management-level positions,
these initiatives face challenges that may help explain why overall
diversity at the management level did not change substantially from 1993
through 2004. According to officials from financial services firms we
spoke with, diversity is an important goal, and their companies' top
leadership is committed to implementing programs to recruit and retain
minority and women candidates. For example, to develop a pool of minority
candidates, financial services firms have established scholarship and
internship programs or partnered with groups that represent minority
professionals, such as the National Black Master of Business
Administration Association. Additionally, officials from a few firms told
us that in the last few years they have been linking managers'
compensation with their performance in promoting workforce diversity.
Moreover, some firms have developed performance indicators (e.g.,
representation by minorities and women in key positions) to measure their
progress in achieving workforce diversity. However, financial services
firm officials said that they still face challenges in recruiting and
retaining minority candidates. Some firm officials also said that gaining
employees' "buy-in" to diversity programs was a challenge, particularly
among middle managers who were often responsible for implementing key
aspects of such programs.

Research reports and our discussions with financial services firms and
relevant trade groups suggest that minority- and women-owned businesses
generally have difficulty obtaining access to capital in conventional
financial markets for several reasons. A 2004 report by the MBDA stated
that minority-owned businesses may have difficulty in obtaining capital
because they are often concentrated in service industries and lack
sufficient assets to pledge as collateral to obtain financing or because
many such businesses lack an established record of creditworthiness.4
Other studies suggest that lenders may discriminate in deciding whether to
make loans to minority-owned businesses. However, assessing lending
discrimination against minority- and women-owned businesses may be
complicated by limited data availability. In particular, the Federal
Reserve's Regulation B, which implements the Equal Credit Opportunity Act,
prohibits financial institutions from requiring information on race and
gender from applicants for nonmortage credit products.5 Federal financial
regulators and others have stated that Regulation B limits their capacity
to monitor potential business lending discrimination. While minority- and
women-owned businesses may have faced difficulties in obtaining capital
from conventional sources over the years, some financial institutions,
primarily commercial banks, said that they have developed strategies to
serve minority- and women-owned businesses. These strategies include
marketing financial products specifically to minority- and women-owned
businesses, although it does not appear that these financial institutions
actually changed their general underwriting standards for such businesses.
In addition, some financial institutions have established programs to
provide technical assistance (e.g., assistance in developing business
plans) to minority-owned and women-owned businesses so that these firms
are better positioned to obtain capital from conventional sources.

4U.S. Department of Commerce, Minority Business Development Agency,
"Expanding Financing Opportunities for Minority Businesses" (2004).

This report does not contain recommendations. We requested comments on a
draft of this report from the Chair, U.S. Equal Employment Opportunity
Commission (EEOC). EEOC provided technical comments, which we incorporated
as appropriate. We also obtained comments from officials at selected
industry trade associations, federal agencies, and organizations that
examine access to capital issues on selected excerpts of a draft of this
report. We have incorporated their comments as appropriate.

                                   Background

This section provides brief descriptions of the financial services
industry and its component sectors, the changing demographic
characteristics of the United States, and diversity management.

Overview of the Financial Services Industry

The financial services industry plays a key role in the U.S. economy by,
among other things, providing vehicles, such as insured deposits,
providing credit to individuals and businesses, and providing protection
against certain financial risks. We defined the financial services
industry to include the following sectors:

5The Equal Credit Opportunity Act (ECOA), 15 U.S.C. S:S: 1691-1691f, makes
it unlawful for a creditor to discriminate against an applicant in any
aspect of a credit transaction on the basis of the applicant's national
origin, religion, sex, color, race, age (provided the applicant has the
capacity to contract). Racial and gender information can be collected in
two very limited circumstances, neither of which results in publicly
available data regarding the race/ethnicity or gender of the bank's
nonmortgage credit applicants.

           o  depository credit institutions, which is the largest sector,
           include commercial banks, thrifts (savings and loan associations
           and savings banks), and credit unions;

           o  holdings and trusts, which include investment trusts,
           investment companies, and holding companies;

           o  nondepository credit institutions, which extend credit in the
           form of loans, but are not engaged in deposit banking, include
           federally sponsored credit agencies, personal credit institutions,
           and mortgage bankers and brokers;

           o  the securities industry, which is made up of a variety of firms
           and organizations (e.g., broker-dealers) that bring together
           buyers and sellers of securities and commodities, manage
           investments, and offer financial advice; and

           o  the insurance industry, including carriers and insurance
           agents, which provides protection against financial risks to
           policyholders in exchange for the payment of premiums.

           Additionally, the financial services industry is a major source of
           employment in the United States. The financial services firms we
           reviewed for this study, which have 100 or more staff, employed
           nearly 3 million people in 2004, according to the EEO-1 data.
           According to the U.S. Bureau of Labor Statistics, employment
           growth in management and professional positions in the financial
           services industry was expected to grow at a rate of 1.2 percent
           annually through 2012.

           According to the U.S. Census Bureau, the U.S. population is
           becoming more diverse by race and ethnicity. 6 In 2001, Census
           projected that the non-Hispanic, white share of the U.S.
           population would fall from 75.7 percent in 1990 to 52.5 percent in
           2050, with a similar increase from the minority population during
           the same period. Census further projected that the largest
           increases would be in the Hispanic and Asian populations.
           According to the Census Bureau's 2004 American Community Survey
           results, Hispanics are now the second largest racial/ethic group
           after whites.7 The rapid growth of minorities in the Unites States
           may also influence its economic activities. For example, according
           to Census, the number of firms owned by minorities and women
           continues to grow faster than the number of other firms. In
           particular, a recent Census report based on data from the 2002
           Economic Census stated that, between 1997 and 2002, Hispanics in
           the United States opened new businesses at a rate three times
           faster than the national average.8

           As we stated in a 2005 report, the composition of the U.S.
           workforce has become increasingly diverse, and many organizations
           are implementing diversity management initiatives.9 Diversity
           management is a process intended to create and maintain a positive
           work environment that values individuals' similarities and
           differences, so that all can reach their potential and maximize
           their contributions to an organization's strategic goals and
           objectives. On the basis of a literature review and discussions
           with experts, we identified nine leading diversity management
           principles: (1) top leadership commitment, (2) diversity as part
           of an organization's strategic plan, (3) diversity linked to
           performance, (4) measurement, (5) accountability, (6) succession
           planning, (7) recruitment, (8) employee involvement, and (9)
           diversity training.

           EEO-1 data indicate that overall diversity among officials and
           managers within the financial services industry did not change
           substantially from 1993 through 2004, but that changes by
           racial/ethnic group varied. The EEO-1 data also show that certain
           financial sectors, such as depositories, including commercial
           banks, are somewhat more diverse at the management level than
           others, including securities firms. Additionally, EEO-1 data do
           not show material differences in management-level diversity based
           on the size of individual firms within the financial services
           industry.

           Figure 1 shows the representation of minorities and whites at the
           management level within the financial services industry in 1993,
           1998, 2000, and 2004 from EEO-1 data.10 Management-level
           representation by minorities increased from 11.1 percent to 15.5
           percent during the period, while representation by whites declined
           correspondingly from 88.9 percent to 84.5 percent.
           Management-level representation by white men declined from 52.2
           percent to 47.2 percent during the period while the percentage of
           management positions held by white women was largely unchanged at
           slightly more than one-third.

           Figure 1: EEO-1 Data on Trends in Workforce Diversity in the
           Financial Services Industry at the Management Level (1993, 1998,
           2000, and 2004)

           Note: Percentages may not always add to 100 due to rounding.

           Existing EEO-1 data may actually overstate representation levels
           for minorities and white women in the most senior-level positions
           because the "officials and managers" category includes lower- and
           mid-level management positions that may have higher
           representations of minorities and white women. According to an
           EEOC official we spoke with, examples for "officials and managers"
           would range from the Chief Executive Officer from a major
           investment bank to an Assistant Branch Manager of a small regional
           bank. A revised EEO-1 form for employers that becomes effective
           with the 2007 reporting year divides the category of "officials
           and managers" into two hierarchical sub-categories based on
           responsibility and influence within the organization:
           "executive/senior level officials and managers" and
           "first/mid-level officials." According to a trade association that
           commented on the revised EEO-1 form, collecting information about
           officials and managers in this manner will enable EEO-1 to more
           accurately report on the discriminatory artificial barriers (the
           "glass ceiling") that hinder the advancement of minorities and
           white women to more senior-level positions.

           Figure 2 provides EEO-1 data for individual minority groups and
           illustrates their trends in representation at the management
           level, which varied by group. African-American representation
           increased from 5.6 percent in 1993 to 6.8 percent in 2000 but
           declined to 6.6 percent in 2004. Representation by Hispanics and
           Asians also increased, with both groups representing 4 percent or
           more of industry officers and managers by 2004. Representation by
           American Indians remained well under 1 percent of all
           management-level positions.

Changing U.S. Demographic Characteristics and Definition of Diversity Management

6See U.S. Census Bureau, National Population Projections (January 2001).

  Diversity in the Financial Services Industry At the Management Level Did Not
                              Change Substantially

7U.S. Census Bureau, American Community Survey (2004).

8U.S. Census Bureau, Survey of Business Owners: Hispanic-Owned Firms: 2002
(March 2006).

9 GAO-05-90 .

Overview of Management-Level Diversity

10Our review did not attempt to define appropriate benchmarks for
assessing the extent of management level diversity within the financial
services industry and, instead, focused on changes in representation over
time. While some analyses compare minority or gender representation in job
categories or industries with general population statistics, such studies
have limitations. For example, such analyses do not account for the
educational attainment, age, or experience requirements, among many
others, that may be necessary for particular positions, including
management-level positions within the financial services industry.
Further, we did not identify a feasible means to comprehensively adjust
available population or labor force data based on the qualification
requirements (e.g., education and experience) for management-level
positions in the financial services industry due to the large number of
such positions and their related qualification requirements. Such
adjustments would have to be made to determine the relevant civilian labor
force against which to assess the management-level diversity with the
financial services industry. However, the report does discuss some
potential management requirements, such as holding a Masters of Business
Administration degree.

Figure 2: EEO-1 Data on Trends in Workforce Diversity in the Financial
Services Industry at the Management Level by Racial/Ethnic Group and
Gender (1993, 1998, 2000, and 2004)

Note: Percentages may not always add exactly due to rounding.

Certain Financial Sectors Are Somewhat More Diverse Than Others, but Diversity
Does Not Vary by Firm Size

EEO-1 data show that the depository and nondepository credit sectors, as
well as the insurance sector, were somewhat more diverse in specific
categories at the management level than the securities and holdings and
trust sectors (see fig. 3). For example, in 2004, the percentage of
management-level positions held by minorities ranged from a high of 19.9
percent for nondepository credit institutions (e.g., mortgage bankers and
brokers) to a low of 12.4 percent for holdings and trusts (e.g.,
investment companies). The share of positions held by white women varied
from a high of 40.8 percent in the insurance sector to a low of 27.4
percent among securities firms. The percentage of white men in
management-level positions ranged from a high of 57.5 percent in the
securities sector to a low of 44.0 percent in both the depository (e.g.,
commercial banks) and nondepository credit sectors. Consistent with the
EEOC data, a 2005 SIA study we reviewed found limited diversity among key
positions in the securities sector.11

Figure 3: EEO-1 Data on Workforce Diversity in the Financial Services
Industry at the Management Level by Sector (2004)

Note: Percentages may not always add to 100 due to rounding.

EEO-1 data also show that the representation of minorities and whites at
the management level in financial services firms generally does not vary
by firm size (see fig. 4). Specifically, we did not find a material
difference in the diversity of those in management-level positions among
firms with 100 to 249 employees, 250 to 999 employees, and more than 1,000
employees. There were some variations across financial sectors by size.12
However, we note that SIA's 2005 study of securities firms did find
variation in diversity by firm size for a variety of positions within the
securities sector.13

11See Securities Industry Association, 2005 Report on Diversity Strategy,
Development and Demographics: Executive Summary (November 2005). The study
also found that total representation of minorities and women increased
between 2001 and 2005.

Figure 4: EEO-1 Data on Workforce Diversity in the Financial Services
Industry at the Management Level by Firm Size (2004)

Note: Percentages may not always add exactly due to rounding.

12For example, for the holdings and trust sector, the share of positions
held by white women are higher in firms with more than 1,000 employees
than smaller firms.

13SIA (2005). Unlike our analysis, the study of 48 securities firms
included positions such as assistants, analysts and associates, mid-level
positions, senior-level positions, retail brokers, and institutional sales
staff.

 Initiatives to Promote Workforce Diversity in the Financial Services Industry
                                Face Challenges

Officials from financial services firms and industry trade associations we
contacted stated that the rapid growth of minorities as a percentage of
the overall U.S. population and increased global competition have
convinced their organizations that workforce diversity is a critical
business strategy. Financial firm officials we spoke with said that their
top leadership was committed to implementing a variety of workforce
diversity programs to help enable their organizations to take advantage of
the full range of available talent to fill critical positions and to
maintain their firms' competitive position. However, officials from
financial services firms and trade associations also described the
challenges they faced in implementing these initiatives, such as ongoing
difficulties in recruiting and retaining minority candidates and in
gaining commitment from employees to support diversity initiatives,
especially at the middle management level.

Financial Services Firms Have Implemented a Variety of Diversity Initiatives

Over the past decade, the financial services firms we contacted have
implemented a variety of initiatives to increase workforce diversity,
including programs designed to recruit and retain minority and women
candidates to fill key positions. Some bank officials said that they had
developed scholarship and internship programs to encourage minority high
school and college students to consider careers in banking with the goal
of increasing the diversity of future applicant pools. Some firms have
established formal relationships with colleges and Masters of Business
Administration (MBA) programs to recruit minority students from these
institutions. Some firms and trade organizations have also developed
partnerships with groups that represent minority professionals, such as
the National Black MBA Association and the National Society of Hispanic
MBAs, as well as with local communities to recruit candidates, using
events such as conferences and career fairs. Officials from other firms
said that the goal of partnerships was to build long-term relationships
with professional associations and communities and to increase the
visibility of financial services firms among potential employees.

Officials from financial services firms also said that they had developed
programs to foster the retention and professional growth of minority and
women employees. Specifically, these firms have

           o  encouraged the establishment of employee networks. For example,
           a commercial bank official told us that, since 2003, the company
           had established 22 different employee networks that enabled
           employees from various backgrounds to meet each other, share
           ideas, and create informal mentoring opportunities.
           o  established mentoring programs. For example, an official from
           another commercial bank told us that the company had a Web-based
           program that allowed employees of all backgrounds to connect with
           one another and to find potential mentors.

           o  instituted diversity training programs. Officials from
           financial services firms said that these training programs
           increase employees' sensitivity to and awareness of workforce
           diversity issues and helped staff deal effectively with colleagues
           from different backgrounds. One commercial bank we contacted
           requires its managers to take a 3- to 5-day training course on
           dealing with a diverse workforce. The training stressed the
           concept of workforce diversity and provided a forum in which
           employees spoke about their differences through role-playing
           modules. The bank has also developed a diversity tool kit and
           certification program as part of the training.

           o  established leadership and career development programs. For
           example, an official from an investment bank told us that the head
           of the firm would meet with every minority and woman senior
           executive to discuss his or her career development. For
           lower-level individuals, the investment bank official said that
           the organization had created a career development committee to
           serve as a forum for discussions on career advancement.

           Officials from some financial services firms we contacted as well
           as industry studies noted that that financial services firms'
           senior managers were involved in diversity initiatives. For
           example, SIA's 2005 study on workforce diversity in the securities
           industry found that almost half of the 48 securities firms
           surveyed had full-time senior managers dedicated to diversity
           initiatives. According to a report from an executive membership
           organization, an investment bank had developed a program that
           involved lower-level employees from diverse backgrounds, along
           with their senior managers, to develop diversity initiatives.
           Moreover, officials from a few commercial banks that we
           interviewed said that the banks had established diversity
           "councils" of senior leaders to set the vision, strategy, and
           direction of diversity initiatives. The 2005 SIA study and a few
           of the firm officials we spoke with also suggested that some
           companies have instituted programs that link managers'
           compensation with progress made toward promoting workforce
           diversity. Officials from one investment bank said that managers
           of each business unit reported directly to the company's Chief
           Executive Officer who determined their bonuses in part based on
           the unit's progress in hiring, promoting, and retaining minority
           and women employees.

           According to some officials from financial services firms, their
           firms have also developed performance indicators to measure
           progress in achieving diversity goals. These indicators include
           workforce representation, turnover, promotion of minority and
           women employees, and internal employee satisfaction survey
           responses. An official from a commercial bank said that the
           company monitored the number of job openings, the number of
           minority and women candidates who applied for each position, the
           number of such candidates who interviewed for open positions, and
           the number hired. In addition, a few officials from financial
           services firms told us that they had developed additional
           indicators such as promotion rates for minorities and whites and
           compensation equity across ranks for minorities and whites.
           Officials from several financial services firms stated that
           measuring the results of diversity efforts over time was critical
           to the credibility of the initiatives and to justifying the
           investments in the resources such initiatives demanded.

           Financial services trade organizations from the securities,
           commercial banking, and insurance sectors that we contacted have
           been involved in promoting workforce diversity. The following are
           some examples:

           o  In 1996 SIA formed a "diversity committee" of senior-level
           executives from the securities industry to assist SIA's member
           firms in developing their diversity initiatives and in their
           efforts to market to diverse customers. This committee has begun a
           number of initiatives, such as developing diversity management
           tool kits, conducting industry demographic and diversity
           management research, and holding conferences. SIA's diversity tool
           kit provides step-by-step guidelines on establishing diversity
           initiatives, including identifying ways to recruit and retain
           diverse candidates, overcoming challenges, measuring the results
           of diversity initiatives, and creating strategies for transforming
           a firm's culture. In addition, since 1999 SIA has been conducting
           an industry-wide diversity survey every 2 years to help its
           members measure their progress toward increasing workforce
           diversity. The survey includes aggregated data that measure the
           number of minority and women employees in the securities industry
           at various job levels and a profile of securities industry
           activities designed to increase workforce diversity. In 2005, SIA
           held its first diversity and human resources conference, which was
           designed so that human resources and senior-level managers could
           share best practices and current strategies and trends in human
           resource management and diversity.

           o  The American Bankers Association collaborated with the
           Department of Labor's Office of Federal Contract Compliance
           Programs in 1997 to identify key issues that banks should consider
           in recruiting and hiring employees in order to create fair and
           equal employment opportunities. The issues include managing the
           application process and selecting candidates in a way that ensures
           the equal and consistent treatment of all job applications.

           o  The Independent Insurance Agents and Brokers of America (IIABA)
           established the IIABA Diversity Task Force in 2002 to promote
           diversity within the insurance agent community. The task force is
           charged with fostering a profitable independent agency force that
           reflects, represents, and capitalizes on the opportunities of the
           diverse U.S. population. Among its activities, the diversity task
           force is developing a database of minority insurance agents and
           minority-owned insurance agencies as a way to help insurance
           carriers seeking to expand their business with a diverse agent
           base and potentially reach out to urban areas and underserved
           markets. According to IIABA, the task force has just completed a
           tool kit for IIABA state associations, volunteer leadership, and
           staff. This step-by-step guide advises state associations on how
           to recruit and retain a diverse membership through their
           governance, products, service offerings, and association
           activities. In addition, IIABA participates in a program to
           educate high school and community college students on careers in
           insurance, financial services, and risk management and encourages
           students to pursue careers in the insurance industry.

           o  The Mortgage Bankers Association (Association) has established
           plans and programs to increase the diversity of its own
           leadership, as well as to promote diversity within the
           Association's member firms in 2005. The Association plans to
           increase diversity within its leadership ranks by 30 percent by
           September 2007 and has asked member firms to recommend potential
           candidates. To help member firms expand the pool of qualified
           diverse employees in the real estate finance industry, the
           Association has instituted a scholarship program called "Path to
           Diversity," which awards between 20 and 30 scholarships per year
           to minority employees and interns from member firms. Recipients
           can take courses at CampusMBA, the Association's training center
           for real estate finance, in order to further their professional
           growth and development in the mortgage industry.

           Although financial services firms and trade organizations we
           contacted have launched diversity initiatives, they cited a
           variety of challenges that may have limited their success. First,
           the officials said that the industry faces ongoing challenges in
           recruiting minority and women candidates even though firms may
           have established scholarship and internship programs and partnered
           with professional organizations. According to officials
           responsible for promoting workforce diversity from several firms,
           the industry lacks a critical mass of minority and women
           employees, especially at the senior levels, to serve as role
           models to attract other minorities to the industry. Officials from
           an investment bank and a commercial bank also told us that the
           supply (or "pipeline") of minority and women candidates in line
           for senior or management-level positions was limited in some
           geographic areas and that recruiting a diverse talent pool takes
           time and effort. Officials from an investment bank said that their
           firm typically required a high degree of specialization in finance
           for key positions. An official from another investment bank noted
           that minority candidates with these skills were very much in
           demand and usually receive multiple job offers.

           Available data on minorities enrolled in and graduated from MBA
           programs provide some support for the contention that there is a
           limited external pool that could feed the "pipeline" for some
           management-level positions within the financial services industry,
           as well as other industries. According to the Department of Labor,
           many top executives from all industries, including the financial
           services industry, have a bachelor's degree or higher in business
           administration. MBA degrees are also typically required for many
           management development programs, according to an official from a
           commercial bank and an official from a foundation that provides
           scholarships to minority MBA students. We obtained data from the
           Association to Advance Collegiate Schools of Business (AACSB) on
           the percentage of students enrolled in MBA degree programs in
           accredited AACSB schools in the United States from year 2000 to
           2004.14 As shown in table 1, minorities accounted for 19 percent
           of all students enrolled in accredited MBA programs in 2000 and 23
           percent in 2004. African-American and Hispanic enrollment in MBA
           programs was generally stable during that period, and both groups
           accounted for 6 and 5 percent of enrollment, respectively, in
           2004. Asian representation increased from 9 percent in 2000 to 11
           percent in 2004. Other data indicate that MBA degrees awarded may
           be lower than the MBA enrollment data reported by AACSB. For
           example, Graduate Management Admission Council(R) (GMAC(R)) data
           indicate that minorities in its survey sample accounted for 16
           percent of MBA graduates in 2004 versus 23 percent minority
           enrollment during the same year as reported by AACSB.15 Because
           financial services firms compete with one another, as well as with
           companies from other industries to recruit minority MBA graduates,
           their capacity to increase diversity at the management level may
           be limited.

Several Financial Services Trade Organizations Have Promoted Workforce Diversity

Several Challenges May Have Affected the Success of Initiatives Designed to
Increase Workforce Diversity in the Financial Services Industry

14AACSB, the world's largest accreditation association for business
schools, conducts an annual survey called "Business School Questionnaire"
of all its accredited schools. Participation in this survey is voluntary.
For the year 2004, the most recent year, 92.7 percent of the accredited
schools responded to the survey.

Table 1: AACSB Demographic Data of Students Reported Enrolled in MBA
Degree Programs at AACSB Accredited Business Schools in the United States
by Racial/Ethnic Group (2000-2004)

                                 Minority                     
Year White African-American Hispanic Asian American Indian Total minority 
2000   81%               5%       5%    9%               a            19% 
2001    80                6        5    10               a             20 
2002    80                5        5    10               a             20 
2003    78                6        5    11               a             22 
2004   77%               6%       5%   11%              1%            23% 

Source: GAO analysis of AACSB data.

Note: Percentages may not always add exactly due to rounding.

aLess than 1 percent.

Other evidence suggests that the financial services industry may not be
fully leveraging its "internal" pipeline of minority and women employees
for management-level positions. As shown in figure 5, there are job
categories within the financial services industry that generally have more
overall workforce diversity than the "officials and managers" category,
particularly among minorities. For example, minorities held 22 percent of
professional positions as compared with 15 percent of "officials and
managers" positions in 2004. See appendix II for more information on the
specific number of employees within other job categories, as well as more
specific breakouts of various minority groups by sector.

15GMAC(R) has been conducting its "Global MBA Graduate Survey" since 2000.
To obtain the demographic data for 2004, GMAC(R) mailed out 18,504 surveys
to graduating MBA students with a response rate of 34 percent.

According to a recent EEOC report, which used 2003 EEO-1 data, the
professional category represented a likely pipeline of internal candidates
for management-level positions within the industry.16 Compared with white
males, the EEOC study found that the chances of minorities and women
(white and minority combined) advancing from the professional category
into management-level positions were low. The study also found that the
chances of Asians (women and men) advancing into management-level
positions from the professional category were particularly low. Although
EEOC said there are limitations to its analysis, the agency suggests that
the findings could be used as a preliminary screening device designed to
detect potential disparities in management-level opportunities for
minorities and women.17

16See EEOC, Diversity in the Finance Industry (April 2006). In the study,
EEOC analyzed the 2003 EEO-1 data by an analytical technique referred to
as odds-ratio analysis to assess the potential chances of minorities and
women becoming managers as compared with white men. The analysis assumes
the pipeline for "officials and managers" job category generally consists
of professionals. However, the study also included "sales workers" as a
potential pool of managers in some analyses because in the securities
sector, stock brokers might become managers, according to EEOC.

17For example, EEOC said that the EEO-1 data do not show how many
employees are promoted from one job group to another over time, and so
promotion data are not available. Rather, the EEO-1 survey collects
information on the number of employees in various job categories at a
given point in time. In the absence of promotion data, EEOC views the
analysis as a screening tool to identify potential disparities.

Figure 5: EEO-1 Data (Percentage) on Workforce Diversity in the Financial
Services Industry by Position, Racial/Ethnic Group, and Gender (2004)

Note: Percentages may not always add to 100 due to rounding.

Following are descriptions of the job categories in EEO-1 data from EEOC:
(1) "officials and managers": occupations requiring administrative and
management personnel who set broad policies, exercise overall
responsibility for execution of these policies, and direct individual
departments or special phases of a firm's operations; (2) "professionals":
occupations requiring either college graduation or experience of such kind
and amount as to provide a comparable background; (3) "technicians":
occupations requiring a combination of basic scientific knowledge and
manual skill that can be obtained through 2 years of post high school
education; (4) "sales workers": occupations engaging wholly or primarily
in direct selling; (5) "office and clerical": includes all clerical-type
work regardless of level of difficulty, where the activities are
predominantly nonmanual; and (6) the category "other" includes craft
workers, operatives, laborers, and service workers.

Many officials from financial services firms, industry trade groups, and
associations that represent minority professionals agreed that retaining
minority and women employees represented one of the biggest challenges to
promoting workforce diversity. The officials said that one reason minority
and women employees may leave their positions after a short period is that
the industry, as described previously, lacks a critical mass of minority
women and men, particularly in senior-level positions, to serve as role
models. Without a critical mass, the officials said that minority or women
employees may lack the personal connections and access to informal
networks that are often necessary to navigate an organization's culture
and advance their careers. For example, an official from a commercial bank
we contacted said he learned from staff interviews that African-Americans
believed that they were not considered for promotion as often as others
partly because they were excluded from informal employee networks.

While firms may have instituted programs to involve managers in diversity
initiatives, some industry officials said that achieving commitment, or
"buy-in," can still pose challenges. Other officials said that achieving
the commitment of middle managers is particularly important because these
managers are often responsible for implementing key aspects of the
diversity initiatives, as well as explaining them to their staffs.
However, the officials said that middle managers may be focused on other
aspects of their responsibilities, such as meeting financial performance
targets, rather than the importance of implementing the organization's
diversity initiatives. Additionally, the officials said that implementing
diversity initiatives represents a considerable cultural and
organizational change for many middle managers and employees at all
levels. An official from an investment bank told us that the bank has been
reaching out to middle managers who oversee minority and woman employees
by, for example, instituting an "inclusive manager program." According to
the official, the program helps managers examine subtle inequities and
different managerial and working styles that may affect their
relationships with minority and women employees.

Minority- and Women-Owned Businesses Often Face Difficulties in Obtaining
 Capital, but Some Financial Services Firms Have Developed Strategies to Assist
                                      Them

Studies and reports, as well as interviews we conducted, suggest that
minority- and women-owned businesses have faced challenges obtaining
capital (primarily bank credit) in conventional financial markets for
several business reasons, such as the concentration of these businesses in
the service sector and relative lack of a credit history.18 Other studies
suggest that lenders may discriminate, particularly against minority-owned
businesses. However, assessing lending discrimination against
minority-owned businesses may be complicated by limited data availability.
Available research also suggests that factors, including business
characteristics, introduce challenges for both minority- and women-owned
businesses in obtaining access to equity capital.19 However, some
financial institutions, primarily commercial banks, have recently
developed strategies to market their loan products to minority- and
women-owned businesses or are offering technical assistance to them.

Research Suggests That Business Characteristics May Affect Minority- and
Women-Owned Businesses' Access to Commercial Loans

Reports issued by the MBDA, SBA, and academic researchers, as well as
interviews we conducted with commercial banks, minority-owned banks, and
trade groups representing minority- and women-owned businesses suggest
that minority- and women-owned businesses may face challenges in obtaining
commercial bank credit.20 The reports and interviews typically cite
several business characteristics shared by both minority-owned firms and,
in most cases, women-owned firms that may compromise their ability to
obtain bank credit as follows:

           o  First, recent MBDA reports found that many minority-owned
           businesses in the United States are concentrated in retail and
           service industries, which have relatively low average annual
           capital expenditures for equipment.21 Low capital expenditures are
           an attractive feature for start-up businesses, but with limited
           assets to pledge as collateral against loans, these businesses
           often have difficulty obtaining financing. According to the U.S.
           Census Bureau's 2002 Survey of Business Owners, approximately 61
           percent of minority-owned businesses and approximately 55 percent
           of women-owned firms operate in the service sectors as compared to
           about 52 percent of all U.S. firms.22

           o  Second, the Census Bureau's 2002 Survey of Business Owners
           indicated that many minority- and women-owned businesses were
           start-ups or relatively new and, therefore, might not have a
           history of sound financial performance to present when applying
           for credit. Some officials from a private research organization
           and a trade group official we contacted said that banks are
           reluctant to lend to start-up businesses because of the costs
           involved in assessing the prospects for such businesses and in
           monitoring their performance over time.

           o  Third, the relatively small size and lack of technical
           experience of some minority-owned businesses may affect their
           ability to obtain bank credit.23 For example, an MDBA report
           stated that minority businesses often need extensive mentoring and
           technical assistance such as help developing business plans in
           addition to financing.24

           Several other studies suggest that discrimination may also be a
           reason that minority-owned businesses face challenges obtaining
           commercial loans. For example, a 2005 SBA report on the small
           business economy summarized previous studies by researchers
           reporting on lending discrimination.25 These previous studies
           found that minority-owned businesses had a higher probability of
           having their loans denied and would likely pay higher interest
           rates than white-owned businesses, even after controlling for
           differences in creditworthiness and other factors.26 For example,
           a study found that given comparable loan applications-by
           African-American and Hispanic-owned firms and white-owned
           firms-the applications by the African-American and Hispanic-owned
           firms were more likely to be denied.27 Another study found that
           minorities had higher denial rates even after controlling for
           personal net worth and homeownership.28 The SBA report concludes
           that lending discrimination is likely to discourage would-be
           minority entrepreneurs and reduce the longevity of minority-owned
           businesses.

           Another 2005 report issued by SBA also found that minority-owned
           businesses face some restrictions in access to credit.29 This
           study investigated possible restricted access to credit for
           minority- and women-owned businesses by focusing on two types of
           credit-"relationship loans" (lines of credit) and "transaction
           loans" (commercial mortgages, equipment loans, and other loans)
           from commercial banks and nonbanks, such as finance companies.30
           The researchers found that minority business owners were more
           likely to have transaction loans from nonbanks and less likely to
           have bank loans of any kind. The researchers also found that
           African-American and Hispanic business owners have a greater
           probability of having either type of loan denied than white male
           owners.31 The researchers did not find evidence suggesting that
           women or Asian business owners faced loan denial probabilities
           different from those of firms led by white, male-owned firms.

           Although studies have found potential lender discrimination
           against minority-owned businesses, assessing such discrimination
           may be complicated by limited data availability. The Federal
           Reserve's Regulation B, which implements the Equal Credit
           Opportunity Act, prohibits financial institutions from requiring
           information on race and gender from applicants for nonmortgage
           credit products.32 Although the regulation was implemented to
           prevent the information from being used to discriminate against
           underserved groups, some federal financial regulators have stated
           that removing the prohibition would allow them to better monitor
           and enforce laws prohibiting discrimination in lending. We note
           that under the Home Mortgage Disclosure Act (HMDA), lenders are
           required to collect and report data on racial and gender
           characteristics of applicants for mortgage loans. Researchers have
           used HMDA data to assess potential mortgage lending discrimination
           by financial institutions. In contrast, the studies we reviewed on
           lending discrimination against minority and small business tend to
           rely on surveys of small businesses by the Federal Reserve or the
           Census rather than on lending data obtained directly from
           financial institutions.

           According to available research, many minority- and women-owned
           businesses face challenges in raising equity capital-such as, from
           venture capital firms. For example, one study estimated that only
           $2 billion of the $95 billion available in the private equity
           market in 1999 was managed by companies that focused on supplying
           capital to entrepreneurs from traditionally underserved markets,
           such as minority-owned businesses.33 Moreover, according to a
           study by a private research organization, in 2003 only 4 percent
           of women-owned businesses with $1 million or more in revenue had
           been funded through private equity capital as compared with 11
           percent of male-owned businesses with revenues of $1 million or
           more.34

           According to studies and reports by private research
           organizations, some of the same types of business characteristics
           that may affect the ability of many minority- and women-owned
           businesses to obtain bank credit also limit their capacity to
           raise equity capital.35 For example, industry reports and industry
           representatives that we contacted state that venture capitalists
           place a high priority on the management and technical skills
           companies; whereas some minority-owned businesses may lack a
           proven track record of such expertise.

           Although venture capital firms may not have traditionally invested
           in minority-owned businesses, a recent study suggests that firms
           that do focus on such entities can earn rates of return comparable
           to those earned on mainstream private equity investments.36 This
           study, funded by a private foundation, found that venture capital
           funds that specialize in investing in minority-owned businesses
           were relatively profitable compared with a private equity
           performance index. According to the study, the venture capital
           funds that specialized in minority-owned businesses invested in a
           more diverse portfolio of businesses than the typical venture
           capital fund, which typically focuses on high-tech companies. The
           study found that investing in broad portfolios helped mitigate the
           losses associated with the downturn in the high-tech sector for
           firms that focused on minority-owned businesses.

           While minority- and women-owned businesses may have traditionally
           faced challenges in obtaining capital, as noted earlier, Census
           data indicate that such businesses are forming rapidly. Officials
           from some financial institutions we contacted, primarily large
           commercial banks, told us that they are reaching out to minority-
           and women-owned businesses.

           Some commercial banks are marketing their financial products to
           minority- and women-owned businesses by, for example, printing
           financial services brochures in various languages and assigning
           senior executives with diverse backgrounds to serve as the
           spokespersons for the institutions efforts to reach out to
           targeted groups (e.g., a bank may designate an Asian executive as
           the point person for Asian communities). However, officials at a
           bank and a trade organization told us that the loan products
           marketed to minority- and women-owned businesses did not differ
           from those marketed to other businesses and that underwriting
           standards had not changed.

           Bank officials also said that their companies had established
           partnerships with trade and community organizations for minorities
           and women to reach out to their businesses. Partnering allows the
           banks to locate minority- and women-owned businesses and gather
           information about specific groups of business owners. Bank
           officials said that such partnerships had been an effective means
           of increasing their business with these target groups.

           Finally, officials from some banks said that they educate
           potential business clients by providing technical assistance
           through financial workshops and seminars on various issues such as
           developing business plans and obtaining commercial bank loans.
           Other bank officials said that their staffs work with individual
           minority- or women-owned businesses to provide technical
           assistance.

           Officials from banks with strategies to market to minority- and
           women-owned businesses said that they faced some challenges in
           implementing such programs. Many of the bank officials told us
           that it was time-consuming to train their staff to reach out to
           minority- and women-owned businesses and provide technical
           assistance to these potential business customers. In addition, an
           official from a bank said that Regulation B limited the bank's
           ability to measure the success of its outreach efforts. The
           official said that because of Regulation B the bank could only
           estimate the success of its efforts using estimates of the number
           of loans it made to minority- and women-owned businesses.

           We requested comments on a draft of this report from the Chair,
           U.S. Equal Employment Opportunity Commission (EEOC). We received
           technical comments from EEOC and incorporated their comments into
           this report as appropriate.

           We also requested comments on selected excerpts of a draft of this
           report from 12 industry trade associations, federal agencies, and
           organizations that examine access to capital issues. We received
           technical comments from 4 of the 12 associations, agencies, and
           organizations and incorporated their comments into this report as
           appropriate. The remaining eight either informed us that they had
           "no comments" or did not respond to our request.

           As agreed with your offices, unless you publicly announce the
           contents of this report earlier, we plan no further distribution
           until 30 days from the report date. At that time, we will send
           copies of this report to the Senate Committee on Banking, Housing,
           and Urban Affairs. We also will send copies to the Chair of EEOC,
           the Administrator of SBA, and the Secretary of the Department of
           Commerce, among others, and will make copies available to others
           upon request. In addition, the report will be available at no
           charge on the GAO Web site at http://www.gao.gov .

           If you or your staff have any questions about this report, please
           contact me at 202-512-8678 or at [email protected] . Contact
           points for our Offices of Congressional Relations and Public
           Affairs may be found on the last page of this report. GAO staff
           that made major contributions to this report are listed in
           appendix IV.

           Orice M. Williams Director, Financial Markets and Community
           Investment

           The objectives of our report were to discuss (1) what the
           available data show regarding diversity at the management level in
           the financial services industry, from 1993 through 2004; (2) the
           types of initiatives that the financial services industry and
           related organizations have taken to promote workforce diversity
           and the challenges involved; and (3) the ability of minority and
           women-owned businesses to obtain access to capital in financial
           markets and initiatives financial institutions have recently taken
           to make capital available to these businesses.

           To address objective one, we requested Employer Information
           Reports (EEO-1) data from the Equal Employment Opportunities
           Commission (EEOC) for the financial services industry. The EEO-1
           data, which is reported annually generally by firms with 100 or
           more employees, provides information on race/ethnicity and gender
           for various occupations, within various industries, including
           financial services.1 We used the racial/ethnic groups specified by
           EEOC; whites, not of Hispanic origin (whites); Asians or Pacific
           Islanders (Asians); Blacks, not of Hispanic origin
           (African-Americans); Hispanics or Latinos (Hispanics); and
           American Indians or Alaskan Natives (American Indians) for our
           analysis. The EEO-1 occupations are officials and managers,
           professional, technicians, sales workers, clerical workers, and
           others. The other category includes laborers, craft workers,
           operatives, and service workers. We defined the financial services
           industry to include the following five sectors: depository credit
           institutions (including commercial banks), holdings and trusts
           (including investment companies), non-depository credit
           institutions (such as mortgage bankers), securities firms, and
           insurance (carriers and agents). We also requested and analyzed
           EEO-1 data for the accounting industry.

           We chose to use the EEO-1 database because it is was designed to
           provide information on representation by a variety of groups
           within a range of occupations and industries, covered many
           employers, and had been collected in a standardized fashion for
           many years. Although the EEO-1 data generally do not capture
           information from small businesses with less than 100 employees, we
           believe, due to their annual mandatory reporting, they allow us to
           characterize the financial services industry of firms with 100 or
           more employees. We also corroborated the EEO-1 data with other
           available studies, particularly a 2005 study by the Securities
           Industry Association on diversity within the securities sector.2
           We did consider other sources of data besides EEO-1, but chose not
           to use them for a variety of reasons including their being more
           limited or less current.3

           We requested and analyzed the EEO-1 data, focusing on the
           "officials and managers" category, for the years 1993, 1998, 2000,
           and 2004 for financial services firms having 100 or more
           employees. We compared that data from the selected years to
           determine how the composition of management-level staff had
           changed since 1993. We also analyzed the data based on the number
           of employees in the firm or firm size. The four firm size
           categories we used were 100 or more employees, 100-249 employees,
           250-999 employees, and 1,000 or more employees. We also requested
           EEO-1 data for the accounting industry for 2004, and therefore did
           not perform a trend analysis. The scope of our work did not
           include developing appropriate benchmarks to assess the extent of
           workforce diversity within the financial services industry.

           EEOC collects EEO-1 data from companies in a manner that allowed
           us to specify our data request and analysis by financial sector
           (e.g., commercial banking or securities). EEOC assigns each firm a
           code based on its primary activity (referred to as the North
           American Industry Classification System [NAICS] or the Standard
           Industrial Classification [SIC]). For example, a commercial bank
           will have a specific code denoting commercial banking, whereas a
           securities firm would have its own securities code. In addition,
           EEOC assigns codes to companies and their subsidiaries based on
           their primary line of business. For example, a commercial bank
           with an insurance subsidiary would have a separate code for that
           subsidiary. By requesting the EEO-1 data by the relevant codes, we
           were able to separate the different financial services businesses
           within a firm and then aggregate the data by sector. Although the
           NAICS replaced the SIC in 1997, EEOC staff are to assign both
           codes to each firm that existed prior to 2002 to ensure
           consistency.4

           We conducted a limited analysis to assess the reliability of the
           EEO-1 data. To do so, we interviewed EEOC officials regarding how
           the data are collected and verified as well as to identify
           potential data limitations. EEOC has conducted a series of data
           reliability analyses for EEO-1 data to verify the consistency of
           the data over time. For example, EEOC reviewed the 2003 EEO-1 data
           for its report on diversity in the financial services industry.5
           As part of this review, EEOC deleted 81 of the 13,000
           establishments because the data for the deleted establishments
           were not consistent year to year. The EEOC staff do not verify the
           EEO-1 data, which are self-reported by firms, but they do review
           the trends of the data submitted. For example, EEOC staff look for
           major fluctuations in job classifications within an industry. On
           the basis of this analysis, we concluded that the EEO-1 data are
           sufficiently reliable for our purposes.

           To address objective two, we interviewed a range of financial
           services firms, including commercial banks and securities firms.
           We also interviewed representatives from a large accounting firm
           to discuss workforce diversity in the accounting industry. We
           chose these firms for a variety of reasons including whether they
           have ever received public recognition of their diversity programs
           or on the basis of recommendations from industry officials. We
           also interviewed representatives from industry trade organizations
           such as the American Bankers Association, the Securities Industry
           Association, the Independent Insurance Agents and Brokers of
           America, the American Institute of Certified Public Accountants,
           and Catalyst, which is a private research firm. We reviewed the
           trade organizations' available studies and reports to document the
           state of diversity within the different sectors of the financial
           services industry. In addition, we reviewed publicly available
           data on firms' programs by searching their Web sites. We also
           interviewed representatives of federal agencies such as the Bureau
           of Labor Statistics of the Department of Labor, the Minority
           Business Development Agency of the Department of Commerce, the
           Small Business Administration, and federal bank regulators.
           Additionally, we collected and analyzed demographic data on
           enrollment in accredited Masters of Business Administration (MBA)
           programs from Association to Advance Collegiate Schools of
           Business and MBA graduation data from the Graduate Management
           Admissions Council(R).

           To address objective three, we reviewed 20 available studies and
           reports from federal agencies, such as the Small Business
           Administration and the Minority Business Development Agency, and
           academic studies on the ability of minority- and women-owned
           businesses to access credit. We also interviewed officials from
           banks, investment firms and private equity/venture capital firms
           to discuss their initiatives to provide capital to minority- and
           women-owned businesses.6 Moreover, we interviewed officials from
           organizations that represent minority- and women-owned businesses
           such as the U.S. Hispanic Chamber of Commerce, the Pan Asian
           American Chamber of Commerce, National Black Chamber of Commerce,
           and the National Association of Women Business Owners. In
           addition, we interviewed officials from organizations that examine
           access to capital issues, such as the Milken Institute and the
           Kauffman Foundation.

           We conducted our work from July 2005 to May 2006 in Washington,
           D.C., and New York City and in accordance with generally accepted
           government auditing standards.

           This appendix provides Employer Information Report (EEO-1) data on
           the number of employees within the financial services industry by
           position (see fig. 6) and more specific breakouts of the various
           racial/ethnic groups by position (see fig. 7).

18A minority-owned business is defined by Census as a business in which a
minority owns 51 percent or more of the stock or equity in the business. A
woman-owned business is defined by Census as a business in which a woman
owns 51 percent or more of the stock or equity in the business.

19Equity capital can be raised from several sources including venture
capital funds, private stock sales, or issuing stock in public financial
markets.

20It should be noted that all small businesses may face challenges in
obtaining credit due to the risks and costs involved in such lending. See
Board of Governors of the Federal Reserve System, Report to the Congress
on the Availability of Credit to Small Businesses (September 2002).

21U.S. Department of Commerce, Minority Business Development Agency,
Expanding Financing Opportunities for Minority Businesses (2004). U.S.
Department of Commerce, Minority Business Development Agency, Keys to
Minority Entrepreneurial Success, Capital, Education, and Technology
(September 2002). U.S. Department of Commerce, Minority Business
Development Agency, State of Minority Business Enterprises: A Preliminary
Overview of the 2002 Survey of Business Owners (September 2005).

22U.S. Department of Commerce, Minority Business Development Agency, State
of Minority Business Enterprises: A Preliminary Overview of the 2002
Survey of Business Owners (September 2005). U. S. Census Bureau, "2002
Survey of Business Owners, Women-Owned Firms" (Jan. 26, 2006).

23U.S. Department of Commerce, Minority Business Development Agency, Keys
to Minority Entrepreneurial Success, Capital, Education, and Technology
(September 2002). U.S. Small Business Administration, Office of Advocacy,
Financing Patterns of Small Firms: Findings from the 1998 Survey of Small
Business Finance (September 2003).

24U.S. Department of Commerce, Minority Business Development Agency,
Expanding Financing Opportunities for Minority Businesses (2004).

Other Studies Suggest That Discrimination May Limit Minority-Owned Businesses'
Ability to Obtain Commercial Loans

25U.S. Small Business Administration, The Small Business Economy
(Washington, D.C.: 2005).

26Blanchard, Lloyd, John Yinger, and Bo Zhao (2005), "Do Credit Market
Barriers Exist for Minority and Women Entrepreneurs?" Syracuse University,
Center for Policy Research Working Paper No. 74. Blanchflower, David G, P.
Levine, and D. Zimmerman (1998). "Discrimination in the Small Business
Credit Market", National Bureau of Economic Research. Cavalluzzo, Ken and
John Wolken (2002). "Small Business Loan Turndowns, Personal Wealth and
Discrimination. Georgetown University." Coleman, Susan (2002).
"Characteristics and Borrowing Behavior of Small, Women-Owned Firms:
Evidence from the 1998 National Survey of Small Business Finances."
University of Hartford.

27Blanchard, Lloyd, John Yinger, and Bo Zhao (2005), "Do Credit Market
Barriers Exist for Minority and Women Entrepreneurs?" Syracuse University,
Center for Policy Research Working Paper No. 74.

28Cavalluzzo, Ken and John Wolken (2002). "Small Business Loan Turndowns,
Personal Wealth and Discrimination." Georgetown University.

29U.S. Small Business Administration (2005). Availability of Financing to
Small Firms Using the Survey of Small Business Finances. A report for the
U.S. Small Business Administration, Washington, D.C.

Many Minority- and Women-Owned Businesses May Also Face Difficulties Raising
Equity Capital

30Relationship loans are defined as a commitment by the lender to a
pre-set maximum amount of credit over a certain time period. Transaction
loans are injections of cash made after loan approval and used to acquire
tangible assets that can serve as loan collateral.

31See Small Business Administration (2005).

32The Equal Credit Opportunity Act (ECOA), 15 U.S.C. S:S: 1691-1691f.

33Milken Institute, The Minority Business Challenge: Democratizing Capital
for Emerging Domestic Markets (September 2000).

34Center for Women's Business Research, Access to Capital: Where We've
Been, Where We're Going (March 2005).

35Center for Women's Business Research, Access to Capital: Where We've
Been, Where We're Going (March 2005). Brush, C. G.; Carter, N.; Gatewood,
E.; Greene P. G.; and Hart, M. M. Gatekeepers of Venture Growth: A Diana
Project Report on the Role and Participation of Women in the Venture
Capital Industry (Oct. 20, 2001).

36Bates, Timothy and William Bradford (2003). "Minorities and Venture
Capital, A New Wave in American Business." Kauffman Foundation.

Some Commercial Banks Have Developed Programs for Minority- and Women-Owned
Businesses

                       Agency Comments and Our Evaluation

Appendix I: Objectives, Scope, and Methodology Appendix I: Objectives,
Scope, and Methodology

1Federal contractors with 50 or more employees are also required to report
EEO-1 data. However, we did not include these firms in our analysis. See
29 C.F.R. Part 1602, Subpart B.

2See Securities Industry Association, 2005 Report on Diversity Strategy,
Development and Demographics: Executive Summary (November 2005).

3We considered using data from Census' Current Population Survey (CPS),
Public Use Microdata Sample (PUMS), Special EEO Tabulation File, and the
American Community Survey (ACS). The CPS is reported by individuals and
includes smaller employers, and the PUMS is reported by households;
however due to small sample sizes, reliable estimates to specific minority
groups could not be derived. The Special EEO Tabulation File's most recent
data are based on the 2000 census and thus were more dated than other data
sources. The ACS only has data since 2002 and therefore did not allow us
to show shifts over a large span of time.

4EEOC implemented the NAICS in 2002.

5Equal Employment Opportunity Commission, Diversity in the Finance
Industry (April 2006).

6Banks included national, community, minority-owned banks, and one
women-owned bank. We also selected the firms based on our interviews with
organizations that represent minority- and women-owned businesses. We were
seeking firms that may have initiatives to assist minority- and
women-owned businesses in obtaining capital.

ADiver Appendix II: Overall Statistics on Workforce Diversity in the
Financial Services Industry

Figure 6: EEO-1 Data (Number of Employees) on Workforce Diversity in the
Financial Services Industry by Position, Racial/Ethnic Group, and Gender
(2004)

Figure 7: EEO-1 Data on Workforce Diversity in the Financial Services
Industry by Position and Racial/Ethnic Group (2004)

Note: Percentages may not always add exactly due to rounding.

Appendix III: D A Appendix III: Diversity in Key Positions in the
Accounting Industry

This appendix discusses workforce diversity of management-level positions
in the accounting industry for 2004 as depicted by Employer Information
Report (EEO-1) data. Additionally, it describes the findings of a report
by the American Institute of Certified Public Accountants (AICPA) that
assessed diversity within the accounting industry in a broad range of
positions. Finally, the appendix summarizes efforts by AICPA and a large
accounting firm to increase diversity in key positions.

Minorities Account for 14 Percent of Management-Level Positions in the
Accounting Industry

According to the 2004 EEO-1 data, minorities held 13.5 percent (5.9
percent for minority women and 7.7 percent for minority men) of all
"officials and managers" positions, white women held 32.4 percent while
white men held 54.1 percent of all official and manager positions in the
accounting industry (see fig. 8).1 Contrary to the financial services
sector where diversity among firms generally did not vary by firm size,
EEO-1 data also show that larger accounting firms are in general more
diverse than smaller firms. For example, minorities accounted for 17.8
percent of all officials and managers in accounting firms with 1,000 or
more employees. For firms with 100 to 249 employees, minority
representation for officials and managers accounted for 10.1 percent.

1Percentages may not always add exactly due to rounding.

Figure 8: EEO-1 Data on Workforce Diversity in the Accounting Industry at
the Management Level by Firm Size, Gender, and Racial/Ethnic Group, and
Gender (2004)

Note: Percentages may not always add to 100 due to rounding.

Within the minority category in the accounting industry, EEO-1 2004 data
show that Asians held 7.3 percent of all management-level positions, which
is more than the representation of African-Americans (3.0 percent) and
Hispanics (3.0 percent) combined (see fig. 9).

Figure 9: EEO-1 Data on Workforce Diversity in the Accounting Industry at
the Management Level by Firm Size and Racial/Ethnic Group (2004)

Note: Percentages may not always add exactly due to rounding.

AICPA Study Identified a Lack of Diversity in the Accounting Industry

AICPA's 2005 demographic study showed that, in 2004, minorities
represented 10 percent of all professional staff, 8 percent of all
certified public accountants (CPA), and 5 percent of all partners/owners
employed by CPA firms. 2 Correspondingly, the representation of whites
among professional staff, CPAs, and the partner/owner level at accounting
firms were all at 89 percent or above (see table 2). 3 In addition,
consistent to the 2004 EEO-1 data for the accounting industry, the AICPA
study found that the largest CPA firms were, in general, the most
ethnically and racially diverse (see table 3).4

2AICPA, The Supply of Accounting Graduates And the Demand for Public
Accounting Recruits - 2005 For Academic Year 2003-2004 (2005). AICPA
surveyed 5,821 certified public accounting firms, and 1,423 responded.

Table 2: Workforce Representation at the Professional, CPA and
Partner/Owner Levels by Racial/Ethnic Group (2005)

Gender and racial/ethnic group Professional staff CPA Partner/owner 
Minority                                      10%  8%            5% 
African-American                                2   1             1 
Hispanic                                        3   3             2 
Asian/Pacific Islander                          5   4             2 
American Indian                                 a   a             a 
White                                          89  92            95 
Other                                          1%   a             a 

Source: GAO analysis of AICPA data.

Note: Percentages may not always add to 100 due to rounding. AICPA data
are from The Supply of Accounting Graduates and the Demand for Public
Accounting Recruits (2005).

aLess than 1 percent.

3AICPA's study did not report representation levels of whites and
minorities by gender.

4The largest firms are defined as those with more than 200 members.

Table 3: Workforce Representation at the Professional Level by
Racial/Ethnic Group and Firm Size

                               More than                     Fewer than   All 
Gender and racial/ethnic          200    50-200     10-49         10   CPA 
group                       employees employees employees  employees firms 
Minority                          18%        8%        8%        10%   10% 
      o  African-American              3         2         2          2     2 
      o  Hispanic                      4         2         3          4     3 
      o  Asian/Pacific                                                        
      Islander                        11         4         3          4     5
      o  American Indian               a         a         a          a     a 
      o  Other                         a         1         a          1     1 
White                              82        91        92         89    89 
Other                               a        1%         a         1%    1% 

Source: GAO analysis of AICPA data.

Note: Percentages may not always add to 100 due to rounding. AICPA data is
from The Supply of Accounting Graduates and the Demand for Public
Accounting Recruits (2005).

aLess than 1 percent.

According to officials from AICPA and a large accounting firm we spoke
with, one reason for the lack of diversity in key positions in the
industry is that relatively few racial/ethnic minorities take the CPA exam
and thus relatively few minorities are CPAs. According to the 2004
congressional testimony of an accounting professor, passing the CPA exam
is critical for achieving senior management-level positions in the
accounting industry.5

Efforts to Enhance Accounting Industry Diversity

According to officials we spoke with from AICPA and an accounting firm,
similar to the financial services industry, the accounting industry had
also initiated programs to promote the diversity of its workforce. An
official from the large accounting firm we spoke with told us that his
firm's top management is committed to workforce diversity and has
implemented a minority leadership development program, which ensures that
minorities and women become eligible for and are recommended for
progressively more senior positions. As part of the commitment to
workforce diversity, the firm also has a mentoring program, which pairs
current partners with senior management-level minority and women staff to
help them achieve partnership status. In addition, the firm also requires
middle- and high-level managers to undergo diversity training to encourage
an open dialogue around racial-ethnic and gender issues. An AICPA official
said the organization formed a minority initiatives committee to promote
workforce diversity with a number of initiatives to increase the number of
minority accounting degree holders, such as scholarships for minority
accounting students and accounting faculty development programs. AICPA
also formed partnerships with several national minority accounting
organizations such as the National Association of Black Accountants and
the Association of Latino Professionals in Finance and Accounting to
develop new programs to foster diversity within the workplace and the
community.

5Diversity in the Financial Services Industry and Access to Capital for
Minority Owned Businesses: Challenges and Opportunities, Hearing before
the Subcommittee On Oversight and Investigations of the House Committee on
Financial Services, 108th Cong (2004).

Appendix IV: A Appendix IV: GAO Contact and Staff Acknowledgments

                                  GAO Contact

Orice M. Williams (202) 512-8678

                             Staff Acknowledgments

In addition to the individual named above, Wesley M. Phillips, Assistant
Director; Emily Chalmers; William Chatlos; Kimberly Cutright; Simin Ho;
Marc Molino; Robert Pollard; LaSonya Roberts; and Bethany Widick made key
contributions to this report.

(250257)

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Highlights of GAO-06-617 , a report to congressional requesters

June 2006

FINANCIAL SERVICES INDUSTRY

Overall Trends in Management-Level Diversity and Diversity Initiatives,
1993-2004

During a hearing in 2004 on the financial services industry, congressional
members and witnesses expressed concern about the industry's lack of
workforce diversity, particularly in key management-level positions.
Witnesses stated that financial services firms (e.g., banks and securities
firms) had not made sufficient progress in recruiting and promoting
minority and women candidates for management-level positions. Concerns
were also raised about the ability of minority-owned businesses to raise
capital (i.e., debt or equity capital).

GAO was asked to provide an overview on the status of diversity in the
financial services industry. This report discusses (1) what available data
show regarding diversity at the management level in the financial services
industry from 1993 through 2004, (2) the types of initiatives that
financial firms and related organizations have taken to promote workforce
diversity and the challenges involved, and (3) the ability of minority-
and women-owned businesses to obtain access to capital in financial
markets and initiatives financial institutions have taken to make capital
available to these businesses.

GAO makes no recommendations in this report.

Between 1993 through 2004, overall diversity at the management level in
the financial services industry did not change substantially, but
increases in representation varied by racial/ethnic minority group. During
that period, Equal Employment Opportunity Commission (EEOC) data show that
management-level representation by minority men and women increased from
11.1 percent to 15.5 percent (see figure below). Specifically,
African-Americans increased their representation from 5.6 percent to 6.6
percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8
percent to 4.0 percent, and American Indians from 0.2 percent to 0.3
percent. The EEOC data also show that representation by white women
remained constant at slightly more than one-third whereas representation
by white men declined from 52.2 percent to 47.2 percent.

Financial services firms and trade groups GAO contacted stated that they
have initiated programs to increase workforce diversity, including in
management-level positions, but these initiatives face challenges. The
programs include developing scholarships and internships, establishing
programs to foster employee retention and development, and linking
managers' compensation with their performance in promoting a diverse
workforce. However, firm officials said that they still face challenges in
recruiting and retaining minority candidates. Some officials also said
that gaining employees' "buy-in" to diversity programs was a challenge,
particularly among middle managers who were often responsible for
implementing key aspects of such programs.

Research reports suggest that minority- and women-owned businesses have
generally faced difficulties in obtaining access to capital for several
reasons such as these businesses may be concentrated in service industries
and lack assets to pledge as collateral. Other studies suggest that
lenders may discriminate in providing credit, but assessing lending
discrimination may be complicated by limited data availability. However,
some financial institutions, primarily commercial banks, said that they
have developed strategies to serve minority- and women-owned businesses.
These strategies include marketing existing financial products
specifically to minority and women business owners.

Workforce Representation in the Financial Services Industry at the
Management Level (1993, 1998, 2000, and 2004)
*** End of document. ***