he Securities and Exchange Commission charged BNY Mellon Investment Adviser, Inc. with misstatements and omissions about ESG considerations for certain mutual funds that it managed. To settle the charges, on May 23, 2022, BNY Mellon Investment Adviser agreed to pay a $1.5 million penalty.
The SEC’s order finds that, from July 2018 to September 2021, BNY Mellon Investment Adviser represented or implied in various statements that all investments in the certain funds had undergone an “ESG quality review,” even though such was not always the case. The order finds that numerous investments held by those funds did not have an ESG quality review score (e.g., an ESG rating) as of the time of investment.
There is an adage that Warren Buffet quotes, “Only when the tide goes out do you discover who’s been swimming naked.” In a time when society is demanding transparency about everything, the tide is always out on ESG disclosures.
This case is an example of current enforcement actions by the SEC related to the new and emergent realm of ESG disclosures that will be required of far more businesses than those historically required before this mission creep by the SEC. We posted some weeks ago about another example of a non U.S. based business not in the financial services sector, SEC Charges Mining Company with Misleading Investors in its ESG Disclosures.
“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,” said Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force.
“Investors are increasingly focused on ESG considerations when making investment decisions,” said Adam S. Aderton, Co-Chief of the SEC Enforcement Division’s Asset Management Unit and a member of the Task Force. “As this action illustrates, the Commission will hold investment advisers accountable when they do not accurately describe their incorporation of ESG factors into their investment selection process.”
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.
With Congressional action not realistic in the current environment in D.C., the SEC is the tip of the spear for the Administration’s much ballyhooed ESG initiatives, including enforcement actions that look to test the veracity as well as efficacy of previously not regulated claims in this fast growing area of new regulation made not only in SEC filings and required statements but also in the broader marketplace.
We advise a wide variety of organizations about ESG matters and universally recommend best practices to our clients in environmental social governance matters, cognizant that this SEC enforcement action can only be seen as a harbinger of things to come.