by Betty Moy Huber and Alexandra Munson

The SEC’s Asset Management Advisory Committee hosted a meeting on July 16, 2020 to discuss the current state of diversity and inclusion (D&I) in the asset management industry. SEC Chairman Jay Clayton, SEC Commissioner Elad Roisman and Director of the SEC’s Division of Investment Management Dalia Blass opened the meeting. Each expressed an interest in understanding why minority- and women-owned firms make up only approximately 1.3% of the total assets under management in the global asset management industry. They asked what efforts the industry is taking to increase this percentage.

Meeting participants included Gilbert Garcia of the asset management firm, Garcia, Hamilton & Associates, Robert Raben of the public policy firm, The Raben Group, Juan Martinez of the Knight Foundation, Brenda Chia of the Association of Asian American Investment Managers, Ron Parker of the National Association of Securities Professionals, Solange Brooks of the New America Alliance and Robert Greene of the National Association of Investment Companies.

Key Themes

1. D&I Data in the Asset Management Industry is Lacking. The participants believe that asset managers do not provide enough disclosure about their D&I efforts, particularly about how many diverse candidates they consider in the hiring process. Mr. Raben noted that only 69 of 1,367 SEC-regulated entities answered a 2018 SEC voluntary survey on diversity. Brenda Chia stated that this lack of data impacts the industry’s ability to gauge the D&I efforts among firms. Robert Greene stressed that diversity disclosure “won’t happen” unless the SEC requires it.
2. Asset Managers’ Current Views of Diverse-Owned Firms. Several participants stated that asset managers have misconceptions about minority-owned firms that cause managers to deprioritize D&I in the industry. Juan Martinez described research studies that reveal the pervasive, yet misguided, belief among industry leaders that white-led firms have more “profitable returns” than diverse-owned firms. As a result, Mr. Raben noted that fund managers often disregard diverse, yet top-performing, candidates, and in so doing, may be “missing out” on hiring individuals who will help the firm maximize returns.
3. Minority Perspectives Can Improve, Rather than Hinder, Performance. The participants agreed that women- and minority-owned firms provide different perspectives necessary to prevent “group think” in the asset management industry. Solange Brooks emphasized this point by suggesting that greater D&I efforts could provide non-white people and organizations greater access to capital. According to Ms. Brooks, Latinos are “unnoticed in the financial services industry”, but possess $1.5 trillion in buying power. Increasing the availability of investment capital for these and other minority-owned firms, she argued, could ensure that “business leaders . . . reflect the composition of the citizenry.” Brenda Chia also noted that asset management firms can maximize their potential investment opportunities if they hire diverse candidates who are known to “think outside the box for opportunities often overlooked in urban and rural areas.”

Recommendations

The participants described steps that the SEC, other federal agencies and asset management firms can take to increase D&I in the asset management industry. All participants asked the SEC to take “immediate action” to encourage asset management leaders to bolster their D&I efforts.

1. Increased D&I Disclosures. Ron Parker summarized the view of several participants that greater data-sharing on D&I hiring practices could help identify “best practices” of asset managers and assist others “who may be lagging in their [D&I] efforts”. Most participants urged the SEC to find ways to incentivize registered investment advisors to make more public disclosures. Other participants pushed for the SEC to make disclosure mandatory, such as by including diversity questions in regular SEC audits.
2. Including Diverse Fund Managers in Regulatory Initiatives. Participants proposed that the SEC and other federal agencies make greater efforts to include diverse voices in regulatory decisions that relate to the asset management industry. Solange Brooks suggested that the SEC give minorities a seat at the table in determining any future stimulus packages in connection with the recent economic downturn. Ron Parker suggested that, in making regulatory decisions, federal agencies consult not just with the asset managers with the greatest amount of assets under management (who are predominantly white), but also with other minority-led firms or managers who may be differently impacted.
3. Partnerships with Minority-Owned Professionals. Many participants emphasized a need for white-owned firms to partner with women- and minority-owned firms. Robert Raben suggested widening the new-hire search pool to include diverse, top-performing candidates. At the partnership level, Juan Martinez proposed that white-owned fund managers collaborate with non-white fund managers to assist in fund management. Ron Parker suggested that financial managers, bankers and advisors use minority and women-owned firms in a subadvisory capacity to give those firms a greater voice in investment opportunities.

Betty Moy Huber is counsel, and Alexandra Munson is an associate, at Davis Polk & Wardwell LLP. Isabelle Russo, a legal assistant, contributed to this post.

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