On October 21, 2024, the SEC announced the settlement of administrative proceedings brought against a registered investment adviser for allegedly making misleading statements regarding how it managed certain ETFs that were marketed as incorporating environment, social and governance (ESG) factors in their investment strategies and for failing to maintain adequate written policies and procedures governing the implementation of its investment process.

According to the order, from March 2020 to November 2022, the adviser represented to the ETFs’ board of trustees and in prospectus disclosures that its investment process for the ETFs incorporated certain ESG factors using a model developed by the adviser and that, as part of that investment process, securities of companies with any involvement in fossil fuels, tobacco or certain other activities were screened out.  As described in the order, to identify such companies, the adviser’s model relied on data sets purchased by the adviser from third-party vendors.  The order alleges that, during the relevant period, the adviser was aware that its investment process failed to exclude securities of certain companies involved in fossil fuels or tobacco-related activity due to limitations in the third-party data sets, and that the adviser failed to describe such limitations to the ETFs’ board or in the ETFs’ prospectuses.  According to the order, in response to an examination by the SEC’s Division of Examinations, the adviser updated the ETFs’ prospectuses in November 2022 to address these limitations and provide additional risk disclosure. The order also alleges that the adviser failed to adopt and implement written policies and procedures in connection with its investment process for the ETFs, including the model’s exclusionary screening process. 

The SEC found that the adviser willfully violated (1) Section 206(2) of the Investment Advisers Act of 1940, which makes it unlawful for any adviser to engage in a transaction, practice or course of business that operates as a fraud or deceit upon a current or prospective client; (2) Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, which make it unlawful for any investment adviser to make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading to any investor or prospective investor; (3) Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require registered investment advisers to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder; and (4) Section 34(b) of the Investment Company Act of 1940, which makes it unlawful for any person to make any untrue statement of a material fact in any registration statement and other documents filed or transmitted pursuant to the Investment Company Act, or to omit to state therein any fact necessary in order to prevent the statements made therein, in the light of the circumstances under which they were made, from being materially misleading.

Without admitting or denying the allegations, the adviser agreed to cease and desist from future violations, to be censured and to pay a civil monetary penalty of $4,000,000.

The SEC’s order is available here, and a related press release is available here.