Fund Misstatements Lead to $4 Million SEC Charge
SEC Releases
Introduction
On October 21st, the SEC announced a $4 Million Charge to a NY RIA for compliance failures and making misstatements.
The RIA was marketing an Investment Strategy for three (3) ETFs that incorporated Environmental, Social, and Governance (“ESG”) factors, but that ended up not being the case upon the SEC’s findings.
There were two (2) main discoveries by the SEC listed below that resulted in the charges:
- Data was used from Third-Party Vendors that did not screen out all companies involved in Fossil Fuel and Tobacco-related activities (originally stated they would not invest in those types of companies).
- Policies and Procedures over the screening process were not created.
Vigilant has provided a brief synopsis below relating to the findings by the SEC.
What Was Discovered By The SEC?
- From March 2020 until November 2022, Three (3) ESG ETFs were marketed to incorporate ESG factors.
- These ESG factors were misstated to the Funds’ Board of Trustees and Investors.
- The misstatements said that the ESG ETFs would not invest in companies that had Fossil Fuels, Tobacco and certain controversial products or activities.
- The ESG ETFs ended up investing in the securities of these companies (i.e., Coal Mining, retail sale of Tobacco Products).
- Third-Party Vendors were used for their screening process, but the RIA’s investment process did not remove all securities of companies involved in Fossil Fuels and the Adviser was aware of this since at least September of 2020.
- The Fund Board of Trustees were not informed of this and the ESG ETFs Prospectuses were also not revised as well until November of 2022.
- Failure to adopt and implement any written Policies and Procedures in connection with the Investment Process for the ESG ETFs were apart of the findings too.
- The following Violations below were a result of the findings:
- Section 206(2) of the Advisers Act.
- Section 206(4) of the Advisers Act and Rule 206(4)-7.
- Section 34(b) of the Investment Company Act.
Vigilant’s Conclusion
The Acting Director of the SEC’s Division of Enforcement, Sanjay Wadhwa, made a clear statement that “investment advisers must do what they say and say what they do”.
Having oversight of these investment processes and proper implementation of Policies and Procedures is crucial, especially as the SEC continues their focus on investor protection.
Considering Compliance Support, whether that be on a limited or end-to-end basis, is important, especially in the current regulatory environment we are in.
Contact Vigilant today if you are in need of On-Going Compliance Support or a One Time Assessment of your current Compliance Program.