SEC ESG Fines Investment Adviser For Alleged ESG Misstatements In ESG Task Force’s First Enforcement Resolution | Shearman & Sterling LLP


On March 4, 2021, the Securities & Exchange Commission (“SEC”) publicly announced the formation of a Climate and Environmental, Social and Governance (“ESG”) Task Force within its Enforcement Division. This task force was reportedly staffed with 22 Enforcement staff members drawn from SEC headquarters, regional offices and specialized units. The task force was assembled in response to, among other things, SEC Chairman Gary Gensler’s focus on investigating misstatements related to ESG disclosures. In remarks by Chairman Gensler on July 7, 2021, he described the SEC as focused on “truth in advertising” and confirming that “funds that market themselves as ‘green,’ ‘sustainable,’ ‘low carbon,’ and so on” were in fact operating consistent with those disclosures. Approximately 14 months later, the ESG Task Force has announced its debut enforcement action by ordering an investment adviser to pay a $1.5 million fine for alleged misrepresentations related to its ESG practices.

Specifically, on May 23, 2022, in a settled enforcement action involving no admission of liability by the respondent, the SEC alleged that the Company made material misstatements and omissions about ESG considerations in making certain investment decisions for specific mutual funds that it managed in violation of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7, 206(4)-8 and Section 34(b) of the Investment Company Act. The Company did not admit or deny the SEC’s allegations as part of the resolution.

According to the SEC’s order, from July 2018 to September 2021, the Company represented to investors via mutual funds prospectuses and other statements and disclosures that its affiliated sub-advisor implemented ESG principles by conducting so-called “ESG quality reviews” as part of the sub-advisor’s investment research process for certain funds, which the SEC order refers to as “the Overlay Funds.” The SEC alleged that, despite these assertions related to ESG quality reviews, individuals at the Company’s sub-advisor at times were permitted to and did select investments that had not undergone the ESG quality review. Further, the order alleges that the Company lacked sufficient written policies and procedures to prevent inaccurate or materially incomplete statements related to the ESG quality reviews. The order notes that compliance personnel were unaware before mid-March 2020 that quality reviews were not prepared for certain funds and as a result, lacked the necessary facts to determine whether the entity complied with federal securities law.

The SEC’s order notes that the Company promptly cooperated with the Commission staff, providing detailed factual summaries and substantive presentations on key issues which, according to the agency, advanced the quality and efficiency of the staff’s investigation. Additionally, although the Company neither admitted nor denied the SEC’s claims, it committed to remedial next steps, including updating investor communication materials, revising certain disclosure language, and modifying company processes, policies and procedures to prevent further violations.

This action is likely the first of many for the ESG Task Force and there has been much evidence of global regulatory interest alleged so-called “greenwashing,” recently, including a dawn raid in Europe related to a European financial institution. This settled SEC action and the statements made in the last year by SEC officials related to ESG enforcement suggest the threshold alleged conduct required for bringing an enforcement action may be quite low, and that investment advisors, fund managers, issuers, and other market participants might be well advised to thoroughly review their ESG disclosures and related compliance processes.

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SEC Order

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