Tuesday, May 24, 2022

SEC fines BNY Mellon adviser $1.5 million for misleading on ESG analysis

By Lene Powell, J.D.

The SEC announced settled charges against BNY Mellon Investment Adviser, Inc., for misstatements and omissions related to review of environmental, social, and governance (ESG) factors in selecting investments. The SEC’s order found that BNY Mellon represented or implied that all investments in certain mutual funds had undergone an ESG quality review, when this was not always the case. The adviser agreed to a cease-and-desist order and censure and to pay a $1.5 million penalty (In the Matter of BNY Mellon Investment Adviser, Inc., Release No. 40-6032, May 23, 2022).

The action reflects a focus by the SEC’s Climate and ESG Task Force on misrepresentation of “green” credentials.

“Registered investment advisers and funds are increasingly offering and evaluating investments that employ ESG strategies or incorporate certain ESG criteria, in part to meet investor demand for such strategies and investments,” said Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force. “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.”

Misrepresentations abut ESG review. BNY Mellon Investment Adviser, Inc. (BNYMIA), a wholly-owned subsidiary of The Bank of New York Mellon Corporation, is a registered investment adviser with over $380 billion in regulatory assets under management, including over $350 billion in mutual funds or other investment companies.

The SEC found that BNYMIA made misstatements and omissions about ESG quality reviews for investments by certain funds called “Overlay Funds.” In board minutes and certain requests for proposals from other investment firms for both Overlay Funds and separately managed accounts that followed an Overlay Fund’s investment strategy, BNYMIA represented that ESG quality reviews were part of the sub-adviser’s investment research process.

This was not always accurate.

The sub-adviser maintained a Responsible Investment Team that researched ESG issues. The sub-adviser prepared written ESG quality reviews that identified ESG risks and opportunities for securities in which a fund might invest, and ensured that ESG challenges were well-managed within the business strategy of any issuer in which a fund was considering an investment.

The misrepresentations concerned which funds were covered by this quality review. For certain mutual funds that the sub-adviser sub-advised, called the “Sustainable Funds,” the sub-adviser required the Responsible Investment Team’s proprietary ESG quality review for all investments. However, for other mutual funds, including the Overlay Funds, the sub-adviser was permitted to select investments that were not researched by the Responsible Investment Team and thus did not undergo a proprietary ESG quality review. As a result, BNYMIA’s representations that ESG quality reviews were part of the sub-adviser’s investment research process for Overlay Funds were misleading.

Violations and sanctions. The SEC found that BNYMIA 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 findings, BNYMIA agreed to pay a $1.5 million penalty and to the entry of a cease-and-desist order and censure. The SEC noted that BNYMIA promptly undertook remedial acts and cooperated with Commission staff in its investigation.

Other ESG enforcement. The BNYMIA action is the third SEC action this year identified by the Climate and ESG Task Force as an enforcement action related to ESG issues or statements.
  • In the Matter of Wahed Invest LLC. The SEC charged an investment adviser that marketed its automated investment services as Shari’ah compliant without ensuring that client assets were invested in Shari’ah-compliant investments. The adviser agreed to pay a $300,000 civil penalty and comply with undertakings, including retaining an independent consultant.
  • SEC v. Vale S.A. The SEC charged a Brazilian mining company with making false and misleading claims about safety prior to a dam collapse that killed 270 people, caused massive environmental and social harm, and led to a loss of more than $4 billion in the company’s market capitalization. The SEC is seeking injunctive relief, disgorgement and prejudgment interest, and civil penalties.
Increased scrutiny of ESG claims. The SEC is scheduled to hold an open meeting on May 25 on ESG disclosures for investment advisers and investment companies. According to the agenda, the Commission will consider whether to propose amendments to rules and reporting forms for registered investment advisers, certain advisers exempt from registration, registered investment companies, and business development companies to provide standardized environmental, social, and governance (“ESG”) disclosure to investors and the Commission.

The Commission will also consider whether to propose amendments to the rule under the Investment Company Act that addresses investment company names, with possible implications for ESG.

With rulemaking proposals and targeted enforcement, it is clear the SEC is looking closely at claims by investment advisers and investment companies regarding ESG credentials.

“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.”

The release is No. 40-6032.