On May 25, 2022, the U.S. Securities and Exchange Commission (“SEC”) provided notice of proposed rulemaking aimed at Investment Advisers (“Advisers”), Investment Companies and Business Development Companies (collectively “Funds”) that market themselves as incorporating environmental, social and governance (“ESG”) factors into their investment selection process or overall investment strategies. The public comment period will be open for 60 days following the SEC’s announcement. The proposed rules seek to standardize the categorization of ESG strategies and require Advisers and Funds to provide more specific disclosures in their fund prospectuses, annual reports, and brochures, as well as enhanced ESG reporting requirements on Forms N-CEN and ADV Part 1A, with the quantity of disclosures commensurate with the standardized categorizations. The SEC's proposed rules follow a related announcement of a regulatory enforcement action wherein it charged an investment adviser for misrepresenting the extent it reviewed ESG factors in the investment selection process. Ultimately, that case settled with a public censure, a cease and desist order and a penalty of $1.5 million. Given the SEC’s recent efforts to dive feet first into climate control and ESG initiatives, we fully anticipate that the SEC’s efforts will have a ripple effect throughout the retail distribution of ESG products by broker/dealers. In our opinion, the SEC and other regulators will later look to broker/dealers to exercise a reasonable amount of due diligence to ensure that certain products are in fact “green” before onboarding and advertising products as such. We discuss our thoughts in more detail below.

On March 8, 2022, FINRA released Regulatory Notice 22-08 expressing continued concerns related to the sale of complex products and options (“complex products”) to retail investors.The expressed concerns include the following: Registered representatives often fail to understand the unique characteristics and risks presented by complex products; Member firms are not adequately training their registered representatives as to the characteristics and risks of complex products; Registered representatives and member firms often fail to fairly and adequately present complex products to retail customers; Customers often fail to possess the financial experience and acumen to understand the related characteristics and risks, particularly when investing in self-directed accounts; Member firms and their registered representatives are not conducting satisfactory suitability analyses and/or ensuring Regulation Best Interest (“Reg BI”) compliance. Member firms do not have adequate supervisory and compliance programs designed to provide customer protections against the sale of complex products.