INVESTMENT ADVISERS—SEC clarifies that advisers may consider DEI factors in recommending or selecting other advisers - 14 October 2022

A new SEC staff FAQ implements a 2021 recommendation by the Asset Management Advisory Committee to clarify the intersection of fiduciary duties and diversity, equity, and inclusion (DEI).

SEC staff issued an FAQ stating that an investment adviser may consider factors relating to diversity, equity, and inclusion (DEI) in recommending other investment advisers to or selecting other advisers for its clients—if the use of such factors is consistent with a client’s objectives, the scope of the relationship, and the adviser’s disclosures.

Commissioners Caroline Crenshaw and Jaime Lizárraga said the FAQ is a “step in the right direction,” and urged that other recommendations also deserve prompt consideration.

DEI and fiduciary duty. The new FAQ explains that an investment adviser must have a reasonable belief that the advice it provides is in the best interest of the client based on the client’s objectives, and this typically includes consideration of a variety of factors.

As a result, the FAQ provides that an adviser that recommends other investment advisers to or selects other advisers for their clients may consider a variety of factors in making a recommendation or selection—including, but not limited to, factors relating to diversity, equity, and inclusion—provided that the use of such factors is consistent with a client’s objectives, the scope of the relationship, and the adviser’s disclosure.

Staff further stated that the adviser’s fiduciary duty does not mandate restricting such a recommendation or selection to investment advisers with certain specified characteristics, like minimum amount of assets under management or a minimum length of track record.

AMAC recommendations on DEI. In a statement, Crenshaw and Lizárraga noted that staff issued the FAQ in response to the SEC Asset Management Advisory Committee’s (AMAC) report and recommendations to the Commission on diversity and inclusion in July 2021.

The report highlighted certain apparent inequities in the industry, including that less than 1 percent of assets under management are managed by minority- or women-owned firms. The report also found that information related to an asset manager’s gender and racial diversity is “increasingly accepted as a material consideration in the selection of and/or retention of an investment advisory firm.”

The report made a number of recommendations, including that the Commission issue guidance to clarify that:

• A wide variety of factors may be considered by fiduciaries in their selection of asset management firms; and

• Fulfillment of one’s fiduciary duty in this context does not require automatic exclusion of asset managers who are diverse, newer to the industry, or do not already have a certain level of AUM.

Moving the needle. Lizárraga expanded on his statement in remarks at the Investment Company Institute’s (ICI) 2022 Securities Law Developments Conference. Lizárraga said it is heartening to see diversity initiatives undertaken by market participants, self-regulatory organizations, and industry trade associations.

But, said Lizárraga, more must be done to “move the needle” on the 1 percent statistic.

“I strongly believe the Commission must consider whether AMAC’s four recommendations can be fully implemented, at the Commission level,” said Lizárraga. “If that isn’t possible, I believe it is our responsibility to the public to explain why.”

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