Section 2: Best Practices For Asset Managers When Selecting Diversity-Certified Broker-Dealers to Execute Transactions in the Secondary Markets

*courtesy of ChatGPT / https://chat.openai.com/

Section 1

Underwriting Consortium Selection: When a corporate issuer of debt or an Initial Public Offering (IPO) is considering using a diversity-certified broker-dealer to serve within an underwriting consortium, there are several important qualifications and factors that the corporation should consider. These qualifications can help ensure that the chosen broker-dealer is capable of effectively contributing to the underwriting process while aligning with the corporation’s commitment to diversity and inclusion. Here are some key qualifications to consider (and what NOT to give consideration to):

1. Financial Capability: The diversity-certified broker-dealer should have a solid financial track record and sufficient capital to effectively participate in the underwriting process. Financial stability is crucial to fulfilling its responsibilities within the consortium.
2. Experience and Expertise: The broker-dealer should possess experience and expertise in underwriting and capital markets. This includes a strong understanding of the specific debt or equity instruments being issued, market dynamics, pricing strategies, and investor relations.
3. Diversity Credentials: One of the primary reasons for choosing a diversity-certified broker-dealer is to promote diversity and inclusion. The broker-dealer should provide clear evidence of its diversity credentials, such as being certified as a minority-owned, service-disabled veteran-owned, women-owned, or other diversity-certified business.
4. Industry Relationships: A broker-dealer with established relationships in the industry can contribute to a successful underwriting process. Strong relationships can facilitate investor engagement, distribution of securities, and overall deal execution.
5. Distribution Capabilities: The broker-dealer should have a solid distribution network that can help reach a diverse range of investors having a long-term investment horizon. This is especially important when aligning with the issuer’s diversity and inclusion goals.
6. Track Record: Research the broker-dealer’s past involvement in similar transactions. A strong track record of successful underwriting engagements demonstrates their ability to perform effectively.
7. Compliance and Regulatory Knowledge: The broker-dealer should have a deep understanding of the regulatory landscape and compliance requirements governing underwriting activities. This ensures that the issuer’s offering remains in compliance with relevant laws and regulations.
8. Technology and Infrastructure: In today’s digital age, having robust technological capabilities is important. The broker-dealer should be equipped with the necessary tools and infrastructure to manage the underwriting process efficiently.
9. Team Expertise: Evaluate the expertise of the broker-dealer’s team members who will be directly involved in the underwriting process. Their qualifications, experience, and ability to work collaboratively within the consortium are essential.
10. Communication Skills: Effective communication is vital throughout the underwriting process. The broker-dealer should be able to clearly communicate with the issuer, other consortium members, regulatory authorities, and potential investors.
11. Alignment with Corporate Values: Ensure that the broker-dealer’s values align with the issuer’s commitment to diversity and inclusion, and align with the Issuer’s corporate philosophy towards supporting under-resourced communities and philanthropic initiatives intended to improve the well-being of recipients (e.g. educational grants, medical breakthroughs, victims of natural disasters This includes not only diversity certification but also a demonstrated dedication to promoting diversity and inclusion in their business practices.
12. References and Reputation: Seek references and reviews from other issuers or clients who have worked with the broker-dealer in similar capacities. A positive reputation within the industry is indicative of their professionalism and performance.

By carefully evaluating these qualifications and conducting thorough due diligence, a corporate issuer can select a diversity-certified broker-dealer that not only contributes to the success of the underwriting consortium but also aligns with the issuer’s broader goals and values.

While the above qualifications provide insight as to what a corporate issuer should consider when selecting a diversity-certified broker-dealer for an underwriting consortium, some qualifications might be considered less important in comparison to others. It’s important to note that the significance of these qualifications can vary depending on the specific circumstances and priorities of the issuer. Here are some qualifications that might be considered less important in the decision-making process:

1. Geographical Location: While geographical location can play a role in certain cases, it’s often less important compared to factors such as expertise, experience, and diversity credentials. In today’s interconnected financial markets, location can be less relevant due to the ability to communicate and collaborate effectively across distances.
2. Size of the Broker-Dealer: The size of the broker-dealer’s organization might be of lesser importance compared to their ability to effectively contribute to the underwriting process. While larger broker-dealers might have broader resources, smaller ones could provide more personalized attention and specialized expertise.
3. Brand Recognition: While a well-known brand can offer a sense of credibility, it might be considered less important when compared to the broker-dealer’s track record, capabilities, and alignment with the issuer’s diversity and inclusion goals.
4. Specific Industry Focus: While industry expertise can be valuable, it might be considered less crucial in cases where the issuer is primarily looking for underwriting support. However, if the issuer seeks additional advisory services, industry specialization could become more important.
5. Length of Time in Business: While a broker-dealer’s longevity can be a sign of stability, it might not necessarily be a critical factor. A newer diversity-certified broker-dealer with relevant expertise and a strong track record can also be a suitable choice.
6. Number of Employees: The number of employees at the broker-dealer might be considered less significant compared to the qualifications and expertise of the specific team members who will be involved in the underwriting process.
7. In-house Research Department: While having an in-house research department can be beneficial for larger broker-dealers, it might be less important for an underwriting consortium role where the focus is primarily on the distribution and sale of securities.
8. Physical Office Space: In many cases, the physical office space of the broker-dealer might not be a crucial consideration, especially if the broker-dealer is able to conduct business effectively through digital communication and remote collaboration.
9. Individual Awards and Recognitions: While individual awards and recognitions can highlight the accomplishments of key team members, they might be considered less significant compared to the overall capabilities and collective expertise of the broker-dealer’s team.
10. Personal Relationships: While personal relationships can be beneficial, especially in building trust, they might be considered less important compared to the broker-dealer’s ability to meet the issuer’s specific needs and objectives.

It’s important to remember that the relative importance of these qualifications can vary based on the issuer’s unique circumstances, goals, and priorities. As such, the issuer should conduct a thorough assessment and prioritize qualifications that align with their overall objectives for the underwriting process and their commitment to diversity and inclusion.

Section 2

Asset Manager / Fund Manager Best Practices for Selecting Diversity-Certified Broker-Dealers for Secondary Market Trade Execution

When an asset manager is considering using a diversity-certified broker-dealer for order execution, there are several important considerations to keep in mind. These considerations revolve around the asset manager’s fiduciary duty to their clients, compliance with regulations, and their commitment to diversity and inclusion. Here are some key factors to consider:

1. Fiduciary Responsibility: The asset manager’s primary duty is to act in the best interests of their clients. Any decision to use a diversity-certified broker-dealer should not compromise the quality of order execution or the pursuit of the best execution available for clients.
2. Execution Quality: The asset manager should assess the diversity-certified broker-dealer’s ability to provide competitive execution quality in equities or FICC products, which includes factors such as price improvement, execution speed, and order fill rates. The broker-dealer’s diversity certification should not take precedence over achieving the best execution outcome.
3. Regulatory Compliance: The use of a diversity-certified broker-dealer should align with all relevant regulations, including those related to better/best execution, market access, and anti-discrimination laws. The asset manager should ensure that the broker-dealer’s diversity certification is recognized and respected by regulatory bodies.
4. Transparency and Reporting: The diversity-certified broker-dealer should provide transparent reporting on order execution quality and other relevant metrics. This allows the asset manager to monitor and evaluate the broker-dealer’s performance over time.
5. Competitive Pricing: The asset manager should assess the broker-dealer’s pricing structure to ensure that the costs associated with execution are competitive with those of other broker-dealers providing similar services.
6. Expertise and Technology: The diversity-certified broker-dealer should have the necessary expertise and technology to effectively execute orders across various asset classes and markets. The asset manager should evaluate the broker-dealer’s technological capabilities and access to liquidity.
7. Risk Management: The asset manager should consider the risk management practices of the diversity-certified broker-dealer. This includes evaluating their ability to handle potential market disruptions, cybersecurity threats, and other operational risks.
8. Diversity Commitment: The asset manager should assess the broker-dealer’s commitment to diversity and inclusion beyond just its certification. This could involve evaluating the diversity of the broker-dealer’s leadership team, workforce, and supplier relationships.
9. Long-Term Relationship: The decision to use a diversity-certified broker-dealer should be part of a long-term strategic relationship. The asset manager should consider the broker-dealer’s stability, reputation, and ability to adapt to changing market conditions.
10. Documentation and Due Diligence: The asset manager should maintain thorough documentation of the due diligence process undertaken when selecting a diversity-certified broker-dealer. This documentation can help demonstrate the asset manager’s commitment to best practices and regulatory compliance.

Ultimately, the asset manager’s decision to use a diversity-certified broker-dealer should be well-informed, taking into account both the pursuit of best execution and the broader goals of diversity and inclusion. Balancing these considerations ensures that the asset manager continues to fulfill their fiduciary duty while also promoting diversity within the financial industry.

While considering the use of a diversity-certified broker-dealer for order execution, certain factors might be of lesser importance compared to the more critical considerations that revolve around execution quality, regulatory compliance, and client interests. Here are some of the least important considerations:

1. Tokenism: Selecting a diversity-certified broker-dealer solely for the purpose of checking a box or appearing socially responsible without regard for their execution capabilities and expertise is not a sound decision. The focus should always be on execution quality and the best interests of clients.
2. Personal Relationships: While relationships can play a role in business decisions, selecting a broker-dealer based solely on personal relationships without thoroughly evaluating their execution capabilities, technology, and performance could compromise the asset manager’s fiduciary duty.
3. Sole Emphasis on Certification: A diversity certification is a positive aspect, but it should not be the primary reason for selecting a broker-dealer. Execution quality, technology, regulatory compliance, and risk management are more critical factors.
4. Symbolic Gesture: Choosing a diversity-certified broker-dealer merely as a symbolic gesture to demonstrate commitment to diversity and inclusion, without considering their ability to provide competitive execution, would not align with the asset manager’s responsibilities.
5. Short-Term Cost Savings: Making a decision based solely on short-term cost savings without considering execution quality, technology, and long-term relationship potential could lead to suboptimal execution outcomes.
6. Lack of Market Expertise: While diversity and inclusion are important, selecting a diversity-certified broker-dealer that lacks the necessary expertise in executing trades within specific asset classes or markets can negatively impact order execution performance.
7. Sacrificing Best Execution: Choosing a diversity-certified broker-dealer that consistently provides inferior execution quality or does not prioritize best execution practices could potentially harm the asset manager’s clients and breach fiduciary duty.
8. Diversity Certification Alone: Relying solely on the diversity certification without conducting proper due diligence on the broker-dealer’s overall capabilities, reputation, and track record can result in a subpar execution experience.
9. Diversity without Performance Evaluation: While diversity is important, it should not replace the need for rigorous evaluation of the broker-dealer’s execution performance, technological infrastructure, and risk management practices.
10. Minimal Transparency: Ignoring the need for transparency and reporting on execution quality, costs, and other relevant metrics from the diversity-certified broker-dealer can hinder the asset manager’s ability to monitor the execution process effectively.

In summary, while diversity and inclusion are important considerations, they should not overshadow the fundamental responsibilities of an asset manager. The primary focus should always be on fulfilling a fiduciary duty, achieving better/best execution for clients, and ensuring that the chosen broker-dealer is capable of meeting these objectives.