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Regulation and Compliance > Federal Regulation > SEC

SEC Issues FAQ on Fiduciary DEI Duties

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The Securities and Exchange Commission released guidance Thursday clarifying an advisor’s fiduciary duty when considering factors relating to diversity, equity and inclusion in selecting or recommending other advisors.

The question addressed in the FAQ: “Under its fiduciary duty, may an investment adviser that recommends other investment advisers to or selects other advisers for its clients consider 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 disclosures?”

The SEC’s answer: Yes.

An investment advisor, the SEC states, “is required to have a reasonable belief that the advice it provides is in the best interest of the client based on the client’s objectives. Such a reasonable belief that advice is in the best interest of the client typically includes consideration of a variety of factors.”

Accordingly, the FAQ continues, “an advisor that recommends other investment advisors to or selects other advisors 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 disclosures.”

Further, the advisor’s fiduciary duty “does not mandate restricting such a recommendation or selection to investment advisers with certain specified characteristics, such as a minimum amount of assets under management or a minimum length of track record,” the SEC said.

Dylan Bruce, financial services counsel at the Consumer Federation of America, told ThinkAdvisor in an email that the FAQ is an “important clarification for investment advisers that they may incorporate DEI considerations in their recommendations or selections of other advisers for their clients.”

As the two Democratic commissioners, Caroline Crenshaw and Jaime Lizárraga, noted in a joint statement Thursday, the SEC issued the FAQ in response to the 2021 Asset Management Advisory Committee’s report and recommendations to the agency on diversity and inclusion, which addressed the “well-known and widely acknowledged” lack of gender and racial diversity in the asset management industry.

The report’s goal was to shine a light on potential discrimination and barriers to women and minorities in the industry, and as the report stated, “its focus was on disclosure, not on mandating any business decisions or practices by SEC registrants,” the commissioners said.

“While today’s FAQ is a step in the right direction, we believe all of the recommendations laid out in the AMAC report deserve our prompt consideration,” Crenshaw and Lizárraga wrote.

Karen Barr, president and CEO of the Investment Adviser Association in Washington, said in another email that the FAQ affirms “the importance of allowing fiduciaries to consider a variety of factors to meet their clients’ financial objectives. The SEC’s explicit recognition that advisers may look at diversity, equity, and inclusion factors in their selection or recommendation of other advisers, provided they are consistent with a client’s objectives, is a significant step to removing barriers to entry and addressing the lack of gender and racial diversity in the asset manager industry.”

The FAQ, according to Bruce, also clarifies “that these considerations, like any considerations for adviser recommendations, cannot contravene the fiduciary duties that advisers owe to their clients. As the FAQ states, DEI considerations are part of a constellation of factors that investment advisers may use to make appropriate recommendations that are in their clients’ best interests.”


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