Who may be interested: Registered Investment Companies; Directors of Registered Investment Companies; Investment Advisers
Quick Take: The SEC recently charged a registered investment adviser for alleged misstatements and compliance failures relating to its marketed investment strategies for three environmental, social and governance (ESG)-focused funds managed by the adviser. The SEC’s Order stated that the adviser’s selection of fund investments relied on data from third-party vendors that did not screen out companies in sectors excluded from the strategies, including tobacco and fossil fuels, and that the adviser did not have policies and procedures in place to ensure that the screening process excluded such companies.
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According to the SEC’s Order, between March 2020 and November 2022, the adviser represented that three registered ESG-focused funds would not invest in companies involved in some “controversial” products or activities, including tobacco and fossil fuels. The adviser made these representations to the funds’ Board and the funds made the same representations in their prospectuses. The adviser used third-party vendors to supplement its existing investment processes to exclude companies involved with fossil fuels and tobacco from the funds’ investment portfolios. The Order noted, however, that the data provided by the external vendors did not exclude all such companies. The SEC alleged that the adviser knew of these deficiencies before launching the funds and failed to correct them or modify the funds’ disclosures, to investors or the Board. As a result, the funds invested in companies involved in natural gas extraction and distribution, coal mining and transportation, and the sale of tobacco products.
The SEC’s Order further alleged that the adviser failed to adopt and implement policies and procedures to oversee the third-party vendor’s process to exclude these companies.
The SEC’s Order found that the adviser violated the antifraud provisions of the Advisers Act and the 1940 Act, and the compliance rule of the Advisers Act. Without admitting or denying the findings, the adviser agreed to a censure, a cease-and-desist order, and a $4 million fine.
Although ESG and sustainability themes were omitted from the SEC’s 2025 examination priorities, and the SEC shuttered its Climate and ESG taskforce earlier in 2024, this enforcement action demonstrates that the SEC will pursue ESG-related violations when it believes an adviser is not adhering to its ESG disclosures. It also highlights the importance of external vendor selection and oversight, which is included among the focus areas in the 2025 examination priorities.
The SEC’s Order announcing the settled charges can be found here.
