SEC States That Considering Diversity When Recommending Investment Advisers Is Consistent With An Advisor's Fiduciary Duty

Earlier this month, the SEC issued an FAQ concerning "an adviser's fiduciary duty when considering factors relating to diversity, equity, and inclusion (DEI) in the selection or recommendation of other investment advisers."  Specifically, the SEC stated that diversity could be considered when selecting an investment advisor.  The SEC proclaimed that "an adviser . . . may consider a variety of factors in making a recommendation or selection [of another adviser], 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."

This development is particularly noteworthy when considering the recent spate of activity by certain states precluding the consideration of ESG criteria by various investment vehicles or advisors.  In effect, there is a looming confrontation between a federal regulatory agency that permits--or mandates--its regulated entities to utilize various ESG criteria, whether diversity or environmental, and states that prohibit the inclusion of such ESG criteria.  Regardless of how this contradiction is ultimately resolved, whether by the courts or in the political arena, businesses operating in the United States will have to navigate these competing legal regimes carefully until the regulatory landscape is harmonized.