On May 23, 2022, the Securities and Exchange Commission (“SEC”) announced the inaugural enforcement action against an investment adviser by its much hyped ESG Task Force. As expected, this case does not find fault with the concept of ESG or conduct suggesting actual wrongdoing. Instead, consistent with bread and butter policy for the SEC’s Enforcement Division, the SEC charged BNY Mellon Investment Advisers (“BNYMIA”) for failing to act consistently with its ESG disclosures to investors and having inadequate policies and procedures to prevent the misleading disclosures. While the penalty of $1.5 million could be seen as small for this SEC, BNYMIA was charged with negligent fraud under Section 206(2), Section 206(4) and Rule 206(4)-8 under the Advisers Act, in addition to compliance violations.
The Order alleged that BNYMIA represented to advisory clients and investors in offering documents and other disclosures that its sub-adviser implemented ESG principles when making investment decisions by conducting proprietary ESG quality reviews on all investments. BNYMIA also made similar representations in due diligence and “request for proposal” responses, as well as to its advisory fund boards of directors. However, the SEC found that for certain fund clients, BNYMIA’s affiliated sub-adviser was permitted to and did select investments that did not go through that ESG quality review.
The SEC also, predictably, charged BNYMIA with compliance program and policy and procedure violations. The Order alleged that BNYMIA lacked written policies and procedures reasonably designed to prevent misleading statements in marketing materials and disclosures to fund boards about the sub-adviser’s use of ESG quality reviews. Notably, the SEC found that BNYMIA compliance personnel were unaware for a period of time that certain investments did not receive the ESG quality reviews, and thus lacked relevant facts when implementing the policies and procedures. This is consistent with our Firm’s takeaways from the SEC Division of Examinations recent ESG Risk Alert, which can be found here.
This case promises to be the first of many from the ESG Task Force, and is a stark reminder that the SEC’s Enforcement Division has plenty of existing tools at their disposal to pursue what they believe are exaggerated claims and deficient practices in the ESG space, even before any rules changes championed by Chair Gensler. The timing of this case also may not be coincidental. The SEC released proposed new rules relating to ESG disclosures on May 25, 2022, which can be found here.