On May 23, 2022, the SEC announced that it charged an institutional investment adviser (the “Investment Adviser”) for misstatements and omissions concerning environmental, social, and governance (“ESG”) factors it considers in making investments for certain mutual funds and accounts that it manages (collectively, the “Funds”).1 To settle the charges, the Investment Adviser agreed to a cease-and-desist order, censure and a penalty of $1.5 million, but declined to admit or deny the SEC’s findings.
The SEC found that between July 2018 and September 2021, the Investment Adviser represented or implied in the Funds’ prospectuses, statements to the Funds’ boards and responses to requests for proposals that its affiliated sub-adviser (the “Sub-Adviser”) utilized ESG principles and performed ESG quality reviews in researching all investments made by the Funds. However, in reality the Funds made investments from time to time that had not received ESG reviews. One of the Funds, for example, made 67 investments between January 1, 2019 and March 31, 2021 that did not include an ESG review prior to investment (out of 185 total investments). The SEC found that the Investment Adviser’s statements regarding ESG principles in the investment process were incomplete because they did not also state that the Sub-Adviser could and did select portfolio investments that were not necessarily subject to ESG review.
The SEC’s Order found that the Investment Adviser violated Rules 206(4)-7 and 206(4)-8 and Sections 206(2) and 206(4) of the Investment Advisors Act of 1940 and Section 34(b) of the Investment Company Act. In the SEC’s press release, Adam S. Aderton, Member of the SEC Enforcement Division’s Climate & ESG Task Force and Co-Chief of the Enforcement Division’s Asset Management Unit, remarked that this action demonstrates that “the Commission will hold investment advisers accountable when they do not accurately describe their incorporation of ESG factors into their investment selection process.”
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If you have any questions regarding the information discussed above, please contact your Investment Management Group attorney at Seward & Kissel LLP.