On September 16, 2020, the SEC’s Asset Management Advisory Committee, or AMAC, hosted a webcast to further discuss diversity and inclusion issues in the asset management industry initially addressed at its last meeting on July 16, 2020.  AMAC has held these meetings to provide incremental updates on its efforts to prepare and deliver to the SEC final recommendations on improving D&I in the asset management industry.  In his opening remarks, SEC Chairman Jay Clayton indicated a hope that these continued discussions would help the SEC and the asset management industry find solutions toward a “shared goal” of expanding the opportunities available to diverse asset managers.

After Chairman Clayton’s remarks, Gilbert Garcia of the asset management firm Garcia, Hamilton & Associates moderated two panels comprised of asset management consultants and leaders of professionally-managed pension funds.  Consultants included Michael Manning of NEPC, Michael Miller of Colonial Consulting and Clayton Jue of Leading Edge; and pension fund leaders included Cheryl Alston of the Employees’ Retirement Fund of the City of Dallas, Michael Frerichs of the Illinois State Treasurer and Anyoti (A.J.) Hernandez of the New York State Common Retirement Fund.  These panelists discussed D&I best practices that they have implemented or recommend implementing in their respective positions.

D&I Best Practices and Recommendations

  1. Providing Minority-Led Firms Greater Access to Opportunities. Many panelists argued that, as a threshold matter, a D&I best practice is giving diverse asset managers and firms access to the same investment opportunities available to their non-diverse peers.  Cheryl Alston explained that some funds rely on a “preferred vendor list” that often excludes diverse firms to submit requests for proposal.  To combat this issue, Ms. Alston’s pension fund, the Employees’ Retirement Fund of the City of Dallas, permits any firm to participate in the request for proposal process. Michael Frerichs suggested implementing the Garcia Rule which would require pension funds and other regulated entities to include at least one “emerging asset management firm”, i.e., firms owned by women, minorities, veterans or disabled Americans, as well as firms less than $1 billion in asset size, in every manager search.  Clayton Jue noted that asset management consultants tend to focus solely on the firms with the largest assets under management, which often excludes emerging firms and managers who tend to be smaller in size.  Mr. Jue recommended consultant firms assign certain staff members to be devoted to sourcing out and identifying emerging firms with good track records.
  2. Mandating the Transparency of D&I Data. Some panelists argued that the SEC was well-positioned to inspire meaningful change for minority-owned asset managers.  From the consultant side, Michael Miller suggested that the SEC could better regulate D&I issues in the asset management space by mandating disclosure of “each advisors’ client assets in the hands of diverse managers”.  Requiring disclosure rather than making it voluntary would, in Mr. Miller’s view, help regulators routinely track the issues and place pressure on advisors to hire diverse managers, firms and clients.  Panelists on the pension fund side agreed.  Michael Frerichs, for instance, enjoined the SEC to require biennial disclosure of data on race, gender, ethnicity, religion, nationality, disability, veteran status and sexual orientation, and annual public disclosure on the race and gender of asset manager nominees, directors and executives.  J. Hernandez also underscored the importance of disclosure and transparency as well as developing a comprehensive metric system that could assess diversity of asset managers and advisors at all levels of seniority.
  3. Staying Flexible and Following Market Practice. Despite requests from some panelists to have SEC-mandated D&I disclosures, other panelists pointed out that stakeholders in the asset management space have already started requesting D&I data points on their own.  Clayton Jue noted that his consulting firm has seen an increasing number of investor clients committed to considering D&I in their investment decisions.  Michael Miller similarly explained that more investor clients, particularly companies, are requesting information on emerging firms and seeking ways to diversify their portfolios.  Finally, Michael Frerichs pointed out that 86% of S&P 500 companies published sustainability reports research, which included D&I data points.  According to Mr. Frerichs, these voluntary disclosures should flag to asset managers that D&I is becoming a more important and potentially material issue that should be regularly reported to investors.

Isabelle Russo, legal assistant, contributed to this post.