Compliance and Regulatory Alerts  |  05-31-22

SEC Proposes Amendments to ESG Disclosure Rules and Forms

SEC Proposes Amendments to ESG Disclosure Rules and Forms

The SEC last week issued a proposal to require “registered investment advisers, certain advisers exempt from registration, registered investment companies, and business development companies” to disclose information on environmental, social and governance (“ESG”) investment practices and strategies in fund registration statements, prospectuses, annual reports, and adviser brochures. In April of 2021, the SEC Division of Examinations issued a risk alert to review compliance deficiencies concerning ESG product and service offerings by investment advisers, registered investment companies, and funds. (See previous Bates post). Based in part on those findings, the newly proposed amendments are intended to make ESG disclosures more “consistent, comparable and reliable,” and “decision-useful” for investors. The 362-page proposal contains new disclosure requirements and would amend numerous Forms for funds (Forms S-6, N-1A, N-2, N-8B-2, N-CEN, and N-CSR) and advisers (Form ADV Part 1A, 2A - Items 8, 10 and 17, and 2A Appendix 1 - Items 4 and 6). The SEC also issued an accompanying Fact Sheet on the proposal.

The proposal acknowledges that (i) funds must currently “provide disclosures concerning material information on investment objectives, strategies, risks, and governance;” (ii) “management must provide a discussion of fund performance in the fund’s shareholder report;” and (iii) advisers must provide information about their advisory services describing methods of analysis and investment strategies, fees, conflicts, and personnel on Form ADV. The SEC asserts that ESG strategies differ in ways that “necessitate specific requirements and mandatory content to assist investors in understanding the fundamental characteristics of an ESG fund or an adviser’s ESG strategy.” The agency contends that “variation” concerning ESG investing (i.e., “the variety of perspectives concerning what ESG investing means, the issues or objectives it encompasses, and the ways to implement an ESG strategy”) and the “lack of a specific disclosure framework” increase the “risk of funds and advisers marketing or labelling themselves as ‘ESG,’ ‘green,’ or ‘sustainable’ in an effort to attract investors or clients, when the ESG-related features of their investment strategies may be limited.”

In a statement on the proposal, SEC Chair Gary Gensler said that “it can be very difficult to understand what some funds mean when they say they’re an ESG fund. There also is a risk that funds and investment advisers mislead investors by overstating their ESG focus.” He clarified that the proposal requires funds that say they consider ESG factors to put in their prospectus the factors they consider and the strategies they use. For certain funds, it would require disclosing relevant metrics of the portfolio including greenhouse gas emissions. Further, he highlighted that funds that use proxy voting as a means of implementing their ESG strategy “would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.” Investment advisers would be required to disclose similar information regarding their ESG factors and strategies in their client brochures.

Additional Rules Proposed Affecting ESG

In a second proposal issued on May 25, 2022, the SEC offered amendments to its rule addressing “certain broad categories of investment company names that are likely to mislead investors about an investment company’s investments and risks.” The proposal on the so-called “Name Rule” would expand the requirement to hold at least 80 percent of a fund’s assets consistent with the focus of the fund’s name. The SEC stated that this requirement would apply “to any fund name with terms suggesting that the fund focuses on investments that have, or investments whose issuers have, particular characteristics,” such as “those indicating that the fund’s investment decisions incorporate one or more environmental, social, or governance (‘ESG’) factors.” Among other new obligations, the proposal would also require enhanced disclosure (on how it tracks investments), notice (to add electronic delivery), and additional recordkeeping requirements. 

The comment period for both proposals will run for 60 days after publication in the Federal Register.

Contact

For regulatory and compliance questions, please contact Managing Director Hank Sanchez (hsanchez@batesgroup.com). For litigation questions, please contact Managing Director Julie Johnstone (jjohnstone@batesgroup.com). 

If you would like more information concerning Bates Group's Practices and Services, please visit:

Regulatory and Internal Investigations

Bates Compliance

Retail Litigation and Consulting

Institutional and Complex Litigation

Consulting and Expert Testimony

Bates AML and Financial Crimes

Alert

Get Bates Group News and Alerts in your Inbox

Sign Up Now

Contact Bates Group

Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.

Contact Bates Group