Legal Law

What the SEC’s finding on potentially misleading claims related to investing in ESG topics means to you

Compared to his predecessor, President Biden’s administration has taken a markedly different course on a number of issues, including oversight of the financial industry. Of course, at the beginning of a presidency, it is difficult to foresee the full impact of the executive’s four-year influence. But last Friday she did The US Securities and Exchange Commission showed its teeth in a preview of at least one area with a new focus.

In recent years, socially responsible funds have become increasingly popular with investors, despite efforts by the Trump administration to contain their growth. In 2020 alone, a record $ 51 billion flowed into sustainable U.S. funds despite the ongoing effects of a pandemic, according to Morningstar. With so much money at stake, it’s not surprising that some funds have been accused of over-inflating their progressive qualifications to attract a bigger slice of the pie.

On Friday, the SEC announced the preliminary results of a review of investment advisors and funds focused on investing ESG issues. Regulators said they had found advisors and funds making “potentially misleading” claims. The SEC also said it uncovered inadequate controls over ESG issues.

The SEC warned against investigating discrepancies between the funds’ stated approaches and the actual actions of advisors and fund managers in the real world. This included information errors, with some advisors being accused of promoting investment strategies as socially responsible despite the lack of tools to screen or adequately track investments in relevant industries. However, the SEC also complained of procedural deficiencies and cited cases where investors were not allowed to vote separately on ESG-related proposals, despite promises to be made. The SEC’s auditors intend to continue this review of ESG investments.

This latest endeavor are in line with previous climate risk and social governance initiatives the SEC has taken since Joe Biden’s inauguration. Acting SEC Chairwoman Allison Herren Lee has been particularly active on ESG issues.

No pending enforcement actions were announced on Friday in connection with the SEC’s latest ESG review. Still, this is just the latest shot over the bow: The SEC has gradually announced that disclosure of ESG will be a priority for 2021. Funds that don’t pay attention could face the consequences in the coming months.

Some ways to stay out of the SEC’s crosshairs during an ESG review are obvious. While it is recognized that advisors and funds seek to attract rather than deter investors, it is still best not to overestimate the sustainability or social fairness of any particular option. However, not all areas that SEC regulators are likely to focus on are that simple. For example, information on Lee’s political spending was linked directly to information on ESG. A company that commits to climate or racial justice and then offers campaign contributions to lawmakers whose voting results contradict the promise could face an uncomfortable level of regulatory scrutiny, according to recent public comments from Lee.

Industry insiders will not only take steps to get your house in order, but will also play a role in forming the SEC’s final ESG regulatory framework. end of March The SEC hosted a virtual panel that looked at the new standards recommended by the SEC’s ESG subcommittee to disclose material ESG risks. Panelists included both agency staff and industry leaders, and each panelist was given an individual opportunity to comment on the recommended ESG standards. While the panellists seemed to fall into two different camps (with little room for compromise), those in the industry being regulated have nothing to lose and at least the potential to win by taking a seat at the table.

ESG issues will be at the forefront of the SEC’s agenda under President Biden and Chairman Gary Gensler, who has made it clear that ESG disclosure will be a priority for the agency. For funds and advisors who are proactive, this change in focus doesn’t have to be particularly painful, and there may even be an opportunity to actively discuss the shape of new ESG regulations directly with the SEC.

Jonathan Wolf is a civil litigation attorney and author of Your debt free JD (Affiliate link). He has taught legal writing, written for a variety of publications, and made it both his business and pleasure to be financially and scientifically literate. Any views he expresses are likely pure gold, yet only his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the loan anyway. He can be reached at [email protected].

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