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SEC Finds Fault(s) with Fund Advisor’s ESG Representations

Regulatory Compliance

The Securities and Exchange Commission has charged an investment advisor for “misstatements and omissions about Environmental, Social, and Governance (ESG) considerations in making investment decisions for certain mutual funds that it managed.”

The SEC’s May 23 order finds that from July 2018 to September 2021, BNY Mellon Investment Adviser represented or implied in various statements that all investments in the funds had undergone an ESG quality review, even though, according to an SEC press release, that was not always the case. The order finds that numerous investments held by certain funds did not have an ESG quality review score as of the time of investment.

ESG Focus

Earlier this year the SEC listed ESG-related advisory services and investment products—including mutual funds, exchange-traded funds and private fund offerings—as a target of continued examination review, typically focusing on whether RIAs and registered funds are accurately disclosing their ESG investing approaches and have implemented policies designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures. More recently, an SEC Risk Alert noted that during examinations of investment advisers, registered investment companies and private funds engaged in ESG investing, SEC staff have observed instances of potentially misleading statements.

“Registered investment advisers and funds are increasingly offering and evaluating investments that employ ESG strategies or incorporate certain ESG criteria, in part to meet investor demand for such strategies and investments,” said Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force. “Here, our order finds that BNY Mellon Investment Adviser did not always perform the ESG quality review that it disclosed using as part of its investment selection process for certain mutual funds it advised.”

Consent ‘Decree’

According to the SEC, BNY Mellon Investment Adviser consented to the entry of the SEC’s order finding that it violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8, and Section 34(b) of the Investment Company Act. Without admitting or denying the SEC’s findings, BNY Mellon Investment Adviser agreed to a cease-and-desist order, a censure, and to pay a $1.5 million penalty. The SEC’s order also noted that BNY Mellon Investment Adviser promptly undertook remedial acts and cooperated with Commission staff in its investigation.

The Division of Enforcement’s Climate and ESG Task Force was formed in March 2021, and among other things, it analyzes disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies. More information about the Task Force can be found here.

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