SEC Charges Investment Adviser with ESG-Related Policy and Procedure Failures

Who may be interested: Boards of Directors of, and investment advisers to, funds focused on Environmental, Social and Governance (ESG) investments.

Quick Take: An investment adviser recently settled SEC charges for failure to adopt and adhere to policies and procedures governing how ESG factors would be evaluated in selecting securities for certain funds managed by the adviser.

Recently, the SEC charged an investment adviser with a compliance policy violation arising from an initial failure to implement, and then, after implementing, the failure to adhere to, policies and procedures setting forth how the adviser would evaluate ESG factors in selecting securities for two mutual funds and a separately managed account program advised by the adviser and marketed as ESG investment products.

The SEC’s order found that the adviser violated Rule 206(4)-7 under the Advisers Act by initially failing to adopt written policies or procedures for ESG research, and once policies and procedures were established, by failing to consistently apply the procedures over a period of several years. As part of its ESG policies, the adviser was required to complete a questionnaire prior to selecting a security that would be used in considering whether, and how much of, a fund’s assets should be invested in the security. This ESG questionnaire procedure was presented in pitch books to various third parties and shared with the funds’ board of trustees. However, the SEC order found that such questionnaires were commonly filled out only after a fund’s portfolio investments had already been selected.

To settle the charges, the adviser agreed to a cease-and-desist order, a censure, and a $4 million penalty.

The SEC’s Press Release can be found here.

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