The Securities and Exchange Commission is stepping up scrutiny of registered investment advisor firms and investment funds in relation to environmental, social and governance strategies, with two proposed rule amendments released on Wednesday.
In the first proposal, the regulator wants to require advisors and funds to be more specific about their disclosures of the ESG strategies they employ, in documents including fund prospectuses, annual reports and advisor brochures, according to the proposed changes.
That includes a requirement that funds focused on environmental factors disclose their portfolio investments’ greenhouse gas emissions, and funds touting a specific ESG impact would need to describe that impact and summarize their progress, the SEC says.
Moreover, funds using proxy voting “as a significant means of implementing their ESG strategy” would need to disclose information about their voting on ESG-related matters as well as information about “ESG engagement meetings,” according to the proposal.
The proposed amendments also include requiring ESG reporting on ADV Part 1A, used by advisors to report census-type data, as well as Forms N-CEN, which is used by funds, the SEC says.
That data shapes the commission’s regulatory, enforcement, examination, disclosure review and policymaking roles, according to the regulator.
The proposed rule changes would apply to certain RIA firms and advisors exempt from registration, as well as registered investment companies and business development companies, the SEC says.
Separately, the regulator proposed changes to rules governing the naming of funds in a bid to “prevent misleading and deceptive funds” in references to names mentioning terms related to ESG as well as “growth” or “value.”
The SEC wants to require more funds to adopt the so-called “80% investment policy,” essentially forcing the funds to have at least 80% of the value of their assets in such investments, according to the proposal.
The comment period on both proposals will be open for 60 days after the publication of the proposals in the Federal Register, the SEC says.
The proposed amendments come on the heels of a $1.5 million settlement that the regulator reached with BNY Mellon Investment Adviser on Monday over the firm’s alleged failures to properly conduct ESG quality reviews on funds that it claimed had undergone such a review, as reported.
The regulator signaled previously that financial services firms can expect a more stringent approach to their disclosures related to ESG investing.
In March, the SEC said it plans to focus on disclosure of ESG factor investing approaches by RIA firms and registered funds, putting it on its list of 2022 exam priorities, as reported.
The SEC’s focus on ESG investing disclosures has drawn criticism from the financial services industry.
When the regulator voted in March to seek public comment on a proposal to force public companies to disclose their own greenhouse gas emissions as well as their plans to reduce them, for example, Chris Iacovella, CEO of the American Securities Association said that “every American” should be concerned with “[h]aving an administrative agency prioritize the interests of an ESG-Industrial Complex that invests in China and Russia over those of America’s working families, retail investors, and retirement savers to dispense with the concept of materiality and to force the reallocation of capital towards politically-favored industries,” as reported.
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