Dive Brief:
- The Securities and Exchange Commission’s Division of Examinations said Monday that its staff has observed registered investment companies and advisors mischaracterize their use of environmental, social and governance factors when advertising funds to investors.
- The Exams Division highlighted the issue as part of a broader risk alert to help highlight risks and weaknesses it has identified for funds in deficiency letters, as well as let companies know what sort of information the agency seeks in compliance operations.
- SEC examiners said they reviewed funds over a four-year period to determine recurring mischaracterizations when it came to compliance, disclosures and filings, but did not disclose the names of the funds the agency reviewed.
Dive Insight:
The Nov. 4 alert said a common weakness SEC examiners found in fund disclosures and filings were that funds mischaracterized how they utilized ESG factors for their investments decisions “compared to their actual practices,” the alert said.
The Examinations Division said it is providing this alert to give funds and their advisers a holistic view of the examinations process, allowing them to prepare. The risk alert said the office also commonly found issues with funds’ compliance programs, disclosures and filings and governance practices.
The agency’s examiners said that the ESG mischaracterizations appeared in sales literature that “appeared to contain untrue statements or omissions of material fact.” In addition to finding the ESG mischaracterizations, the agency said it also found issues with incomplete, outdated or potentially misleading information in fund registration statements, fact sheets and other securities filings.
The agency said it hopes the information shared in the risk alert will help investment companies shore up their compliance efforts.
“This Risk Alert is intended to highlight for firms risks and issues that the Division’s staff has identified,” the alert said. “Other risks besides those described in this Risk Alert may be appropriate to consider, and some issues discussed in this Risk Alert may not be relevant to a particular firm’s business. The adequacy of supervisory, compliance and other risk management systems can be determined only with reference to the profile of each specific firm and other facts and circumstances.”
The alert said that when the Examinations Division looks to request documents for examinations, the staff typically sends investment funds and their advisers a letter notifying them of the upcoming exam, as well as a request for information. This request generally asks for information on the fund’s business and operations; identified compliance risks and the written policies to address them; information on its governance process and board oversight of compliance; and any other information to aid the office as it tests for compliance in line with its own priorities.
The office said its deficiency letters also found that on the issue of compliance: funds were not performing the required oversight or assessing their compliance programs; “did not adopt, implement, update and/or enforce” policies and procedures to comply with securities laws; had codes of ethics were not followed, adopted or were inadequate; or had policies and procedures that were not tailored to the funds’ business models or were inconsistent with their practices.
The Exams Division declined to list ESG as an office priority for fiscal year 2024, despite the topic being listed as a priority from 2021-23. An SEC spokesperson previously told ESG Dive that the list was not exhaustive of the issues the agency would look to address, when the agency announced its priorities in October 2023.
