Discrimination ‘has effectively been codified’ in asset manager selection, US heavyweights tell regulator

SEC advisory committee called for guidance on fiduciary duty for selection of asset management firms

An advisory committee convened by the US Securities and Exchange Commission (SEC) has found “widespread gender and racial bias” in asset manager selection and asset allocation decisions taking place “under the guise of fiduciary considerations”.

According to the SEC’s influential Asset Management Advisory Committee (AMAC), ethnic and gender-based discrimination “has effectively been codified” in the selection process for institutional mandates through the automatic exclusions of asset managers who are newer to the industry or do not already have a certain level of assets under management.

This has the “direct or indirect impact of eliminating nearly all asset management firms owned by women and people of colour from consideration”, it warned, despite data showing equal or better investment performance by diverse managers compared to peers lacking in diversity.

To address the disparity, AMAC members – including Wall Street heavyweights like Goldman Sachs, Fidelity, Vanguard and EY – have approved recommendations for SEC-registered advisers to disclose the extent to which diverse asset management firms are included in the pool of providers considered when making asset allocation recommendations.

In addition, investment advisers and asset managers should be required to disclose the gender and racial makeup of their rank-and-file workforce, senior management and ownership ranks, said committee members.

Diversity-related reporting rules should be applied on a mandatory basis, “given the failure of past initiatives in achieving relevant disclosure on a voluntary basis”, noted AMAC.

AMAC also called on the SEC to issue guidance to clarify the full range of factors which may be considered by fiduciaries in their selection of asset management firms. 

“We do not believe it is in the best interest of investors to have nearly all diverse managers ‘filtered out’ of consideration by an inappropriately limited set of fiduciary considerations,” they said.

Finally, AMAC proposed the designation of “an office at a government agency” to address discriminatory employment practices across the industry. Since this can occur in private contracting processes that are not covered by government procurement rules, it can be confusing for complainants to know where to report such practices, said members.

“The education the AMAC has received … has raised awareness that diverse perspectives, diverse work forces, diversity of those who have access to capital, fair competition for allocation of capital, and growing the diversity at the ownership level within the industry, are each accepted as being in the ‘public interest’. For the AMAC, it is clear that those in opposition to this truth, will be on the ‘wrong side of history’,” the committee concluded.

However, Commissioner Hester Pierce – one of two Republican commissioners at the SEC – was critical of the proposals in comments delivered ahead of AMAC’s presentation. She said: “The document as submitted largely shuts down such a free sharing of ideas with statements declaring that those with differing views are ‘on the wrong side of history,’ or that asset managers’ diligence checklists are motivated by discriminatory, rather than fiduciary, intent.”

While the SEC is not required to follow the advice of its advisory committees, it is likely to be sympathetic to the recommendations having already identified workforce diversity as a “top priority” under new Chairman Gary Gensler.

At the same meeting, AMAC also filed recommendations to improve issuer and service provider ESG disclosures. AMAC specifically asked the SEC to review whether third-party ESG disclosure frameworks were fit-for-purpose for wider use, and to establish best practices for ESG product disclosures – including for engagement and voting activities.

Financial sector diversity is also emerging as a regulatory priority across the Atlantic. Today, the UK’s Bank of England, Prudential Regulation Authority and the Financial Conduct Authority issued a joint paper detailing possible policy actions to improve diversity and inclusion within financial services.

Measures being considered include making board members and CEOs accountable for the performance of diversity initiatives, linking diversity metrics to remuneration, requiring the publication of diversity policies and targets, and mandatory disclosure of workforce gender and ethnicity.

The policy paper is open for public feedback until the end of September.