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 January 27, 2022, the SEC released a Risk Alert from the Division of Examinations (“EXAMS”), wherein it reported concerns noted during its recent examinations of investment advisers who manage private funds (“private fund advisers”). A copy of the SEC’s Risk Alert is linked HERE.  This is the SEC’s third Risk Alert in the last five (5) years regarding compliance issues in this space. Private fund advisers are likely to be a continued focus for the SEC. In the Risk Alert, EXAMS noted four problematic areas related to private fund advisers who 1) acted inconsistently with their obligations under fund disclosures, 2) made misleading marketing disclosures, 3) failed to perform appropriate due diligence before recommending investments, or 4) used hedge clauses to limit their liability for breaches of fiduciary duty.  Below is a summary of the SEC’s observations.