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SBC Capital Markets Diverse Entrepreneurs Hearing

Senate Committee on Banking, Housing, and Urban Affairs

Subcommittee on Securities, Insurance, and Investment

Examining How Capital Markets Serve Diverse Entrepreneurs and Investors

Tuesday, December 13, 2022

Topline

  • Menendez decried the lack of diversity in corporate America and promoted his Improving Corporate Governance Through Diversity Act, which would require companies to disclose information related to the racial, gender, and ethnic makeup of their corporate boards and senior management.
  • The discussion centered on the successes of the JOBS Act, with Scott and Quaadman calling for a renewed JOBS Act to promote American competitiveness.

Witnesses

Opening Statements

Subcommittee Chairman Robert Menendez (D-N.J.)

In his opening statement, Menendez said leadership in corporate America is overwhelmingly white and disproportionately male, noting that racial minorities held only twelve percent of board seats in 2019, while over forty percent of U.S. boards are composed of only white directors. He added that of the $70 trillion of global financial assets under management, less than one percent are managed by women or minority-owned firms. He also discussed the lack of progress companies have made on increasing the diversity of their senior leadership, explaining that his Improving Corporate Governance Through Diversity Act of 2021 would require companies to disclose information related to the racial, gender, and ethnic makeup of their corporate boards and senior management. Menendez concluded by citing the trickledown effect of underrepresentation.

Subcommittee Ranking Member Tim Scott (R-S.C.)

In his opening statement, Scott discussed the three ways to create wealth in America: homeownership, owning your own business, and having an equity position in the marketplace. He said there is more opportunity today in the United States than at any other time in our history, noting minorities are now receiving a growing share of investment capital to start and scale their businesses. Scott added that over half of U.S. households have access to American capital markets, while celebrating the fact that forty percent of American households that own stocks have annual incomes of less than $70,000.

Testimony

Gilbert Andrew Garcia, CFA, Managing Partner, Garcia Hamilton & Associates, L.P.

In his testimony, Garcia said the Investment Consultant industry, many of whom are Securities and Exchange Commission (SEC) registrants, could improve these statistics. Garcia explained these consultants often serve as the allocators to the asset management industry, and act as gatekeepers for many foundations, endowments, and pension funds by recommending money managers to them for hire. He noted these consultants lack diversity both internally and externally in their manager recommendations, while some consultants receive economic benefit from managers without clear public disclosure. Garcia said there will be no opportunity for diverse firms to compete if consultants continue to only recommend the largest managers.

Garcia explained how consultants frequently avoid the consideration of minority–owned firms by setting arbitrary and unnecessary barriers such as length of track record, firm asset size, and amount of insurance. He added that some consultants are simply moving the goal post to improve their abysmal diversity statistics, noting consultants are circumventing established federal and state laws and practices by creating a new term called “substantially diverse,” with diverse ownership as low as twenty five percent.

Garcia concluded by suggesting two additional goals for the SEC’s Diversity and Inclusion Strategic Plan. He said diversity and inclusion should be elevated to a core value and a material fact for consideration through all SEC activities and called on the SEC to promote business diversity practices among SEC registrants. He also called on the SEC to start including diversity data on their Form ADV disclosures.

Thomas Quaadman, EVP, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce 
In his testimony, Quaadman discussed the success of the JOBS Act, noting it revived U.S. public listings and encouraged more companies to enter the public markets. He said we are in an eroding competitive environment, noting the number of competitive companies within the U.S. is flat. He added that Chinese venture capital now rivals American venture capital and discussed how foreign financial centers are vying for capital that traditionally would have gone to American companies. Quaadman said the SEC has the authority to address these issues but noted none of the 53 rule proposals on the SEC’s docket address capital formation or competition.

Quaadman listed a number of bills before the Senate Banking Committee that the Chamber of Commerce believed would enhance the economy’s competitive environment, including: the Helping Startups Continue to Grow Act, the Equal Opportunity for All Investors Act, the SEED Act of 2021, the Gig Worker Equity Compensation Act, the Expanding American Entrepreneurs Act, and the Empowering States to Protect Seniors from Bad Actors Act.

Quaadman said closing the racial equity gap would add $8 trillion to the economy and called on Congress to expand and strengthen community development financial institutions (CDFIs).

Question & Answer

The JOBS Act

Scott said the passage of the JOBS Act was a gamechanger, noting that since 2014, roughly ninety percent of companies have gone public using the Emerging Growth Company (EGC) status created by the JOBS Act.

Scott asked Quaadman how legislation extending the EGC-scaled regulatory regime to ten years would benefit companies and the broader economy. Quaadman said the legislation would allow regulations to be tailored to each company and allow companies to grow into the appropriate levels of controls and processes.

Menendez asked both witnesses if there was anything else they wanted to say. Quaadman emphasized that it is important that Congress pass some new form of the JOBS Act. He said the U.S. is facing new and renewed global competition and will lose its competitive edge without a new JOBS Act.

Racial Wealth Gap

Menendez asked Quaadman to expand on the Chamber of Commerce’s research on how the racial wealth gap contributes to access to credit. Quaadman said that by having less access to capital, Black entrepreneurs are forced to start businesses that have a higher failure rate and that this creates a vicious cycle.

Retail Investors

Scott said increased retail market investor participation is a good thing for America and asked Quaadman how he felt about more main street investors getting involved in the market. Quaadman said that would be a very positive thing and create wealth for main street.

SEC Asset Management Advisory Committee Recommendations

Menendez noted a year has passed since the SEC Asset Management Advisory Committee (AMAC) issued its diversity recommendations and asked Garcia how he would rate the SEC’s progress in responding to AMAC’s recommendations. Garcia said it is extremely disappointing that only the two least impactful recommendations have been implemented and said both AMAC and the public deserve to know why the SEC is not implementing the recommendations.

Fiduciary Duty

Menendez said using fiduciary duty as an excuse to exclude women and minority-run firms runs contrary to existing data, which suggests diverse-lead firms outperform their non-diverse counterparts. He asked if Garcia agreed that a firm’s diversity, particularly at the management level, is material information that investment advisers should be able to consider when making recommendations to their clients. Garcia agreed, adding that advisers could be in violation of their fiduciary duty by excluding such firms.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.