ESG Enforcement Tracker

Key facts:

In May 2022, the SEC instituted administrative and cease-and-desist proceedings against BNY Mellon’s investment advice arm (BNYMIA) in relation to ESG-related statements it made with respect to certain mutual funds (the “overlay funds”). The matter was ultimately settled between the parties, resulting in a cease-and-desist order, a censure and payment of a US$1.5 million fine, without any admission or denial of guilt by BNYMIA.

According to the settlement, in the period July 2018 to September 2021, BNY Mellon made misleading statements in three different forms with respect to six of the overlay funds. In the fund prospectuses, in meetings with the funds’ boards, and in response to questions asked by potential fund investors, representations were made that the SEC believed could lead a reasonable investor to mistakenly conclude that ESG quality reviews had been undertaken for all of the funds’ investments. However, and unlike the different “Sustainable Funds” for which such quality reviews were necessary, such reviews were neither required nor undertaken in all instances for investments made by the Overlay Funds.

The SEC alleged that this conduct amounted to three violations of the Investment Advisers Act of 1940 and related rules, namely:

•  section 206(2) (the prohibition on investment advisers engaging in “any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client”);
• section 206(4), rule 7 (relating to the adoption and implementation of written policies and procedures to prevent violations of the Act and rules); and
• section 206(4), rule 8 (relating to untrue statements made by investment advisers to investors/prospective investors in pooled investment vehicles).

It also alleged a violation of the Investment Company Act of 1940 (the making of an untrue statement of a material fact in any registration statement, or other document filed or transmitted pursuant to the Investment Company Act).