SEC Settles Charges with Mutual Fund Adviser for ESG Related Violations

Who may be interested: Registered Investment Companies, Investment Advisers.

Quick Take: The SEC recently settled charges with an investment adviser relating to misstatements the Adviser made concerning its procedures and controls for incorporating environmental, social, and governance (ESG) considerations into its research and investment decision making process for ESG integrated mutual funds and separately managed account strategies.

The Adviser had developed an ESG rating tool in 2014, and since at least 2018, the Adviser indicated that it used an ESG integration policy for actively-managed investment decisions in ESG integrated products. Although the Adviser published a written ESG integration policy in 2018, according to the SEC order, from approximately 2018 to 2021 the Adviser failed to implement some provisions of its ESG integration policy, and the Adviser knew that its analysts were pushing back on some elements of the policy and failing to incorporate the policy into their analyses and recommendations.

The SEC’s order found that the Adviser failed to adopt and implement reasonable policies and procedures to ensure that its public representations about the ESG integration policy were not misleading. In this regard, the SEC’s order highlighted that the Adviser lacked policies to confirm whether its analysts were following the ESG integration policy, whether the ESG rating tool was consulted by analysts and whether analysts were documenting their consideration of ESG factors in their analyses and recommendations.

As a result, the SEC order found that the Adviser violated Section 206(2) of the Advisers Act, as well as Section 206(4) and Rules 206(4)-7 and 206(4)-8 thereunder. Without admitting or denying the findings in the order, the Adviser agreed to a cease-and-desist order, a censure, and to pay a civil penalty of $19 million to settle the charges.

The SEC’s order is available here.