AMAC Discusses ESG, Private Funds, Diversity and Inclusion, COVID-19 Impact
September 24, 2020
The SEC’s Asset Management Advisory Committee (AMAC) held a meeting on September 16. In his opening remarks, SEC Chairman Jay Clayton discussed his interest in promoting access and choice for Main Street investors to private markets while focusing on fees and investor protections. He also welcomed continued discussions on improving diversity and inclusion in the asset management industry. Regarding the panel on Diversity and Inclusion, Commissioner Hester Peirce asked the AMAC to consider the role that regulation may play in excluding people from participating in the industry. Commissioner Elad Roisman discussed his view on ESG disclosure that “investors should be provided clear information about asset managers’ goals and assumptions in order to understand the variety of ESG investment products that are available.” He also applauded private sector efforts “to bring clarity and consistency to this area.” In her opening remarks, the newest SEC Commissioner, Caroline Crenshaw, discussed the CFTC’s recent report on climate change in connection with the ESG panel.
The ESG Subcommittee, led by Michelle McCarthy Beck of TIAA Financial Solutions, reviewed its workstreams and said that it expects to make final recommendations to the AMAC in December. For three of its workstreams – Performance Management, ESG Rating Systems, and Issuer Disclosure – the subcommittee provided a spectrum of options that range from “Do nothing” to “Moderate intervention” to “Strong intervention.” In the Values vs. Value workstream, the subcommittee is considering the following questions:
- How should ESG be treated within the context of the Investment Company Act Names Rule? Is ESG fundamental or is it a strategy?
- If ESG is about values, that is an investor choice. How should that impact disclosure?
- If ESG is about value, it is about financial metrics. How should that impact disclosure?
For the Performance Management workstream, Aye Soe of S&P Dow Jones Indices discussed research on ESG performance during the COVID-19 crisis, and whether ESG funds require additional performance disclosures. Regarding the ESG Rating Systems workstream, the subcommittee has broadened the objective to provide recommendations related to “truth in labelling” and concerns about the potential for “greenwashing” in ESG funds. For the Issuer Disclosure workstream, Jeffrey Ptak of Morningstar Research Services described the need for investors to obtain comprehensive, meaningful, and comparable information. The subcommittee will not be making recommendations on the Proxy workstream, due to the SEC’s recent rulemaking and guidance regarding proxy voting issued in July.
Other members of the AMAC asked questions including whether the subcommittee should consider advertisements as well as formal disclosures, and whether managers of ESG funds should be required to follow ESG best practices themselves.
Prior to the AMAC meeting, the IAA sent the AMAC the Active Managers Council’s white paper on sustainable investing a chart from which was included in the subcommittee’s presentation.
Private Investment Subcommittee
The Private Investment Subcommittee began by discussing supply and demand dynamics in U.S. asset management, including information about the size of the industry, the growth of retirement assets, and the growth in equity raised in private vs. public offerings. The subcommittee is continuing to focus on design principles related to the structure of offering private investments to retail investors. A panel discussion on private investment returns, moderated by Eric Sirri, a former director of the SEC’s Division of Trading and Markets and currently a Professor at Babson College and board member of Natixis Funds, Loomis Sayles Funds, and Natixis ETFs, focused on private investment returns, fees, and expenses. Other panelists included Noel O’Neill of Cambridge Associates, Bryan Jenkins of Hamilton Lane, Professor Josh Lerner of Harvard Business School, and Professor Ludovic Phalippou of the University of Oxford. The panelists discussed concerns about fees and private equity funds potentially misleading investors with selective disclosures of return rates, specifically by relying on the Internal Rate of Return (IRR) to convey earnings and gross numbers. However, several of the panelists agreed that private equity funds can provide desirable returns for investors and diversification benefits.
Diversity and Inclusion
AMAC member Gilbert Garcia, of Garcia, Hamilton & Associates, moderated two panels on diversity and inclusion in the asset management industry. The first featured consultants, including Michael Manning of NEPC, Michael Miller of Colonial Consulting, and Clayton Jue of Leading Edge. The second represented asset allocators and included Cheryl Alston of the Employees’ Retirement Fund of the City of Dallas, Michael Frerichs of the Illinois State Treasurer, and A.J. Hernandez of the New York State Common Retirement Fund. Panelists discussed commitments inside firms to increase diversity, training, and the need to maintain a long-term approach. The AMAC hopes to make recommendations to the SEC in December. These recommendations may focus on requiring disclosure by firms of diversity-related data, and possibly also requiring firms to consider diverse firms in their hiring of asset managers. Panelists discussed raising the profile of diversity, defining what it means to be a diverse firm, and increasing diversity broadly across the industry. Panelists emphasized the value of diversity and inclusion and the need for transparency, engagement, and accountability.
Impact of COVID-19
The final topic of the meeting was the impact of COVID-19 and its effects on the asset management industry. The session started with a discussion of the effects on exchange-traded products, which included market volatility, particularly in fixed income. There was also a discussion of operational issues, including e-delivery, remote work, e-authorization, dematerialization, i.e., the movement from physical certificates to electronic records, and a future crisis playbook.
TAGS: AMAC, COVID-19, Coronavirus, Diversity & Inclusion, ESG, Private Funds