By Diana Furchtgott-Roth

WASHINGTON -I was searching the bill for a provision about derivatives. What did I find but Section 342, which declares that race and gender employment ratios, if not quotas, must be observed by private financial institutions that do business with the government. In a major power grab, the new law inserts race and gender quotas into America's financial industry.

In addition to this bill's well-publicized plans to establish over a dozen new financial regulatory offices, Section 342 sets up at least 20 Offices of Minority and Women Inclusion. This has had no coverage by the news media and has large implications.

The Treasury, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the 12 Federal Reserve regional banks, the Board of Governors of the Fed, the National Credit Union Administration, the Comptroller of the Currency, the Securities and Exchange Commission, the new Consumer Financial Protection Bureau...all would get their own Office of Minority and Women Inclusion.

Each office would have its own director and staff to develop policies promoting equal employment opportunities and racial, ethnic, and gender diversity of not just the agency's workforce, but also the workforces of its contractors and sub-contractors.

What would be the mission of this new corps of Federal monitors? The Dodd-Frank bill sets it forth succinctly and simply - all too simply. The mission, it says, is to assure "to the maximum extent possible the fair inclusion" of women and minorities, individually and through businesses they own, in the activities of the agencies, including contracting.

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

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

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

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

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

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

This latest attempt by Congress to dictate what "fair" employment means is likely to encourage administrators and managers, in government and in the private sector, to hire women and minorities for the sake of appearances, even if some new hires are less qualified than other applicants. The result is likely to be redundant hiring and a wasteful expansion of payroll overhead.

If the director decides that a contractor has not made a good-faith effort to include women and minorities in its workforce, he is required to contact the agency administrator and recommend that the contractor be terminated.

Section 342's provisions are broad and vague, and are certain to increase inefficiency in federal agencies. To comply, federal agencies are likely to find it easier to employ and contract with less-qualified women and minorities, merely in order to avoid regulatory trouble. This would in turn decrease the agencies' efficiency, productivity and output, while increasing their costs.

Setting up these Offices of Minority and Women Inclusion is a troubling indictment of current law. Women and minorities have an ample range of legal avenues already to ensure that businesses engage in nondiscriminatory practices. By creating these new offices, Congress does not believe that existing law is sufficient.

Cabinet-level departments already have individual Offices of Civil Rights and Diversity. In addition, the Equal Employment Opportunity Commission and the Labor Department's Office of Federal Contract Compliance are charged with enforcing racial and gender discrimination laws.

With the new financial regulation law, the federal government is moving from outlawing discrimination to setting up a system of quotas. Ultimately, the only way that financial firms doing business with the government would be able to comply with the law is by showing that a certain percentage of their workforce is female or minority.

The new Offices of Women and Minorities represent a major change in employment law by imposing gender and racial quotas on the financial industry. The issue deserves careful debate - rather than a few pages slipped into the financial regulation bill.

Diana Furchtgott-Roth is a contributing editor of RealClearMarkets and an adjunct fellow at the Manhattan Institute.