SEC Cautions Advisers About Faults in ESG Compliance

Recent Securities and Exchange Commission (SEC) examinations of investment advisers, investment companies, and funds show shortcomings in processes related to pitching, constructing, and monitoring investment products and procedures that use environmental, social, and governance factors (ESG.)

Authorities With The SEC Claim That ESG Over Promised And Under Delivered To Investors

As a result, the SEC’s Division of Examinations recently issued a risk alert explaining they found instances of misleading claims and inadequate policies, methods, and documentation regarding ESG investing.

The agency explained some advisers’ compliance programs and internal controls were not fit to prevent false ESG disclosures and marketing efforts that could lead to securities laws violations.

Authorities also stated that some investment advisers were overpromising and under-delivering on ESG properties. 

Advisors Were Not Appropriately Monitoring ESG  To Satisfy Customer Preferences

The alert states a lack of adherence to global ESG frameworks, unsubstantiated claims involving investment practices, and a lack of documentation of investing decisions/issuer engagement efforts. Furthermore, the staff also observed failures in effectively updating marketing materials.

The SEC found that advisers were not appropriately monitoring and updating ESG investments to guarantee that they satisfied customer preferences. Nor did advisers have adequate systems to consistently and reasonably track and update clients’ negative screens leading to the risk that certain restricted securities could be included in their portfolios.

The alert also highlighted the best practices the SEC has observed regarding ESG investing — praising firms that made disclosures that were clear and precise and employed compliance personnel knowledgeable about the firms’ specific ESG-related practices.

State regulators also weighed in on ESG investing when the North American Securities Administrators Association issued an investor advisory.

Over the last several weeks, SEC has ramped up reviews of corporate climate disclosures, created an enforcement task force on ESG and climate issues, and issued a request for public comment on ESG and climate-risk disclosures, among other moves.

Although it is an independent agency, the SEC is poised to play its part in an administration-wide emphasis on climate policy. Promoting ESG in examinations is part of that effort.

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Our AV-rated* securities fraud lawyers have extensive experience litigating a broad range of cases including stockbroker and brokerage misconduct. If you are looking for a securities fraud attorney to review your case, the securities fraud lawyers at Dimond Kaplan & Rothstein, P.A. have a proven track record of getting results for clients. 

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