SEC charges company with ESG policy violations

Securities SEC Enforcement ESG

On November 22, the SEC announced a settlement with a Delaware-based investment adviser (respondent) resolving allegations that the company violated federal laws concerning the investment process that the respondent’s equity group utilized while advising an environmental, social and governance (ESG) separately managed account strategy and two ESG mutual funds. According to the order, from April 2017 until February 2020, the respondent allegedly had several policy and procedure failures involving the ESG research its investment teams used to select and monitor securities. Specifically, from April 2017 to June 2018, the respondent allegedly failed to have any written policies and procedures for ESG research in one product, and when policies and procedures were established, it allegedly failed to abide by them consistently. The SEC found, among other things, that the respondent’s policies and procedures required its personnel to complete a questionnaire for every company it planned to include in each product’s investment portfolio prior to the selection. However, personnel completed many of the ESG questionnaires after securities were already selected for inclusion and relied on previous ESG research, which allegedly was often conducted in a different manner than what was required in its policies and procedures. The SEC alleged that the respondents violated provisions of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7. Without admitting or denying the SEC’s findings, the respondent agreed to a censure and to pay a $4 million penalty. The order also provides that the respondent must cease and desist from committing or causing any violations and any future violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 promulgated thereunder.