SEC’s AMAC recommends diversity disclosure requirements for fund boards

Active discrimination remains a barrier for women and minorities, report says

The Securities and Exchange Commission’s Asset Management Advisory Committee earlier this month recommended enhanced disclosures of diversity information in filings to provide transparency on gender and racial diversity on fund boards and advisory firms.

The report, which was produced by the subcommittee on diversity and inclusion, found that women and people of color remained dramatically underrepresented within the asset management industry and fund complexes, and that artificial barriers to entry have been constructed under the guise of fiduciary considerations.

“It is such an incredible industry, and yet it is probably one of the least diverse in the country,” says Gilbert Andrew Garcia, the subcommittee chair and a co-author of the report.

“Studies show that diverse firms perform just as well as non-diverse ones and at the upper end of the bell curve, minority-led firms are overrepresented,” adds Garcia, who is also a managing partner at $17bn asset manager Garcia Hamilton & Associates. “We wanted to dispel the myth that hiring a diverse firm is violating your fiduciary duty, or that somehow, it is going to cost you performance. All the data proves otherwise.”

Despite a push for diversity over the years, the Investment Company Institute revealed this year that as of 2019, only 10.7% of independent directors come from a racial or minority ethnic background, and only 30% identify as female.

In a statement to the AMAC, SEC chairman Gary Gensler said the asset management industry “has a lot of work to do to increase racial and gender diversity.”

“I have asked SEC staff to consider ways that we can enhance such transparency. For example, this could include requiring disclosure of aggregated demographic information about an adviser’s employees and owners. It also could include information about an adviser’s diversity and inclusion practices in its selection of other advisers,” he said.

Findings & Disclosures

Citing academic studies and testimony from women and people of color in the industry, the report found that there is widespread gender and racial bias in decisions made by those in positions of power, those who choose the people managing the money.

A study published in the Proceedings of the National Academy of Sciences, USA, conducted an online experiment with asset allocators from within the industry, which found that funds led by people of color might face the most barriers to advancement even after they have established themselves as strong performers.

“I’ve not encountered any other area of American public life where people publicly dispute the premise that the inclusion of people of color or the inclusion of women matters,” said Robert Raben, executive director of the Diverse Asset Managers Initiative, in his testimony to the Asset Management Advisory Committee last year.

“In asset management, and I find this to be true at the most elite levels, the conventional wisdom is that it’s irrelevant. CIOs and investment committee members will look you in the eye and say, ‘We just follow the numbers. Demography is irrelevant.’”

The report found that criteria such as AUM size and length of track record tended to exclude women and people of color directly and indirectly.

“The bar that’s set always moves,” Garcia says. “These artificial barriers limit the growth of minority communities in the industry, so we are not able to get to critical mass. The key is to try and eliminate these barriers.”

The subcommittee recommended that the SEC make it a requirement for investment advisers and fund boards to include gender and racial diversity disclosures in forms ADV and N-1A and suggested that the commission or staff release guidance to fiduciaries selecting asset managers, encouraging them to choose from a diverse group to promote best outcomes for investors.

Steve Rogers, independent director at Oakmark Funds and author of A Letter to My White Friends and Colleagues: What You Can Do Right Now to Help the Black Community, says he is in favor of using disclosures as a tool for increasing board diversity.

“I love the idea of board transparency because the model that was in existence before, or is presently in existence, has not resulted in the inclusion of Black folks, and in my opinion, identifying the best and the brightest,” he says.

“Disclosure is like sunshine, and sunshine is a way to get the light shone on something that needs to be healed, as well as something that needs to grow.”

Nicole Crum, partner at Sullivan & Worcester, agrees, saying that reporting information is always helpful, and it would make boards and firms face the problem.

“I think it is very important that this report explicitly acknowledges bias,” she says.

“A lot of people struggle with accepting that there is bias in the industry, that we, even well-meaning individuals have bias, and we need to implement mechanisms to address it. I think if the starting point can be that there is bias, then we can focus on fixing the problem.”

SEC commissioner Hester Peirce, however, urged caution regarding practical issues that may arise upon adoption of disclosure requirements, mainly around the definition of diversity, and how the commission could verify the accuracy of firms’ statements.

Crum agrees that it would be a struggle to make disclosures meaningful and consistent across the industry, as firms do not report every dimension of diversity.

“There is a data collection hurdle here. I think we need to get a good collection and set a standard on what needs to be collected and have enough of that under our belts to create a comprehensive disclosure,” she says.

Garcia says he hopes to see the regulator use D&I metrics as part of an audit process to incentivize good-faith use of disclosures.

“The fear of an enforcement action for not telling the truth or for inflating things when there’s an audit will hopefully keep things in check,” he says.

Rogers says it is not inappropriate for the regulator to make diversity disclosures a requirement, despite the hurdles.

“I am supportive of anything that strongly encourages people to do the right thing,” he says.

“When it was not being done, when there was no regulation, we see the absence of diversity, and when it is not being done voluntarily, I think we need [to require] more intentionality.”

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