On July 7, 2021, the SEC Asset Management Advisory Committee (the “AMAC”) approved recommendations by its Subcommittee on Diversity and Inclusion1 (the “Subcommittee”) that are focused on identifying areas where increased transparency on matters of diversity and inclusion would benefit investors in determining what is “material” to their selection of investment advisers and investment funds. The AMAC adopted recommendations that fall under the following four categories:
1. Disclosure Enhancements – The AMAC recommended that the SEC:
a. Require enhanced disclosure in SEC filings by registered investment advisers, particularly on Form ADV, regarding gender and racial diversity in the workforce, officer ranks, and ownership ranks;
b. Require enhanced disclosure in SEC filings by registered investment companies, particularly on Form N-1A, regarding gender and racial diversity of the registered investment company’s board(s), as well as in the workforce, officer ranks, and ownership ranks of advisory and sub-advisory firms engaged by the company; and
c. Require enhanced disclosure in SEC filings, particularly on Form ADV, by registered investment advisers that serve as either asset allocators or consultants for asset aggregators and/or allocators regarding whether and to what extent the adviser’s policies include diverse asset management firms in the pool of those considered and/or selected for investment by the adviser’s clients, and to enhance focus in examinations on the adequacy of conflicts-of-interest disclosure by such advisers.
2. Guidance to Fiduciaries Selecting Asset Managers – The AMAC recommended that the SEC provide guidance to fiduciaries selecting asset managers that clarifies that a wide range of factors (e.g., factors other than assets under management or length of performance track record) may be considered by fiduciaries in their selection processes in order to seek to prevent diverse managers from being filtered out by narrow diligence checklists.
3. SEC Staff Study of the Pay-to-Play Universe – The AMAC recommended that the SEC study whether current “pay-to-play” rules (and potential loopholes in the rules) disproportionately exclude smaller, diverse firms from competing for government, municipal and institutional assets.
4. Procedure for Managing Reports of Discriminatory Practices – The AMAC recommended that the SEC:
a. Establish centralized and uniform practices for directing parties that contact the SEC with complaints related to discriminatory employment and contracting processes in the securities industry to an office at a government agency that is designed and more appropriately equipped to investigate any valid complaints;
b. Catalogue and maintain records associated with such complaints in a manner that can be evaluated over time; and
c. Publish a list of resources on its website for victims of discriminatory practices in the securities industry.
Seward & Kissel will continue to monitor the SEC’s response to these recommendations, including what steps are taken towards implementation, including any proposed amendments to Form ADV or Form N-1A.
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If you have any questions regarding the information discussed above, please contact your Investment Management Group attorney at Seward & Kissel LLP.