Published on May 27th, 2022 |

Brief Introduction

On Wednesday, May 25th, the SEC released Proposed ESG Related Amendments for Funds and Advisers.

Who Does This Apply To?

This Proposed Rule is applicable to the following:

  • RIAs;
  • RICs;
  • BDCs; and
  • Certain Advisers Exempt from Registration.

Recent Negative News in the Industry Relating to ESG

A well known Investment Adviser was penalized to pay $1.5 Million for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds that they managed.

The Proposed Rule appears to come in at a good time to provide more clarity for Funds and Advisers.

Brief Synopsis of the Proposed Rule

  • The main goal of the Proposed Rule is to provide investors with consistent and comparable information concerning funds’ and advisers’ use of ESG factors in their investment strategies and processes.
  • The SEC Chairman believes this would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus which will protect investors by allowing them to allocate their capital efficiently and meet their needs.
  • Integration Funds would have to briefly summarize how the fund incorporates ESG factors into its investment selection process, including what ESG factors the fund considers.
  • ESG-Focused Funds (one or more ESG factors used as a significant or main consideration), which would include an ESG Impact Fund, would have to provide specific disclosure about how the fund focuses on ESG factors in its investment process. 
  • An Impact Fund overview must include:
    • How the fund measures progress toward the specific impact and key performance indicators the fund analyzes;
    • The time horizon the fund uses to analyze progress; and
    • The relationship between the impact the fund is seeking to achieve and financial return(s).
  • A fund that checks either the proxy voting or engagement box in the first row of the ESG Strategy Overview Table, indicating that proxy voting or engagement with issuers is a significant means of implementing its ESG strategy, would be required to provide a brief narrative overview in the last row of the ESG Strategy Overview table of how the fund engages with portfolio companies on ESG issues.
  • The SEC is proposing several amendments to fund annual reports to provide additional ESG-related information. Registered Management Investment Companies would be included in the MDFP section of the fund’s annual shareholder report.

Vigilant’s Final Conclusion

As we have stated throughout the year, the SEC is fully focused on protecting investors in 2022, and this was clearly communicated throughout the entire Proposed Rule for ESG.

With the SEC Chairman’s support, they believe that this would really help establish disclosure requirements for Funds and Advisers that have an ESG Focus.

Limiting misstatements and omissions about ESG like we saw earlier this week is a large focus throughout the Proposed Rule.

If you need assistance in updating policies, procedures, or are looking to help alleviate the Compliance burden with all the new Proposed Rules and New Rules taking effect…click the Contact Us button below for Vigilant’s Assistance.

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