Mind your P’s and P’s – SEC Settles Enforcement Action Related to ESG Policies and Procedures

The Securities and Exchange Commission (the “SEC”) has again set its sights on registrants’ environmental, social, and governance (“ESG”)-related investing. In another major action against registrants involving ESG-related policies and procedures, the SEC recently charged a registered investment advisor (the “Advisor”) for policies and procedures failures involving one separately managed account strategy (“SMA”) and two mutual funds marketed as ESG investments.[i] 

 A summary of the recent administrative order (the “Order”) and some key takeaways are set forth below.

 Case Summary

 On November 22, 2022, the SEC released the Order, finding that from April 2017 until February 2020, the Advisor had multiple policies and procedures failures involving the ESG research it used to select and monitor securities for one ESG SMA strategy (the “ESG SMA Strategy”) and two ESG mutual funds (the “Funds,” and together with the SMA strategy, the “Products”).[ii]  The Order charges the Advisor with violating the Investment Advisers Act of 1940, as amended (the “Advisers Act”) and details two overarching policies and procedures failures. First, the Order provides that the Advisor failed to implement written policies governing the selection the of investments for the ESG SMA Strategy.[iii] Second, the Order provides that the Advisor failed to follow its written policies and procedures for the Products.[iv]

 On April 1, 2017, the Advisor created the ESG SMA Strategy when it renamed an existing SMA strategy to include ESG in the strategy name. According to the Order, while the Advisor developed a “common framework” to evaluate ESG investments in September 2017, the Advisor did not adopt written policies and procedures governing the investment process for the ESG SMA Strategy until June 2018.[v] Accordingly, the Order charged the Advisor with failure to implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder.[vi]

 On February 28, 2018, a mutual fund managed by the Advisor was renamed and relaunched as an ESG-focused fund and a new mutual fund managed by the Advisor with an ESG strategy was launched on May 31, 2018.[vii] The Advisor’s written policies and procedures governing the ESG investment process required investment teams to complete a proprietary ESG questionnaire (the “Questionnaire”) for each issuer before that issuer’s securities were purchased for the Products.[viii] The Order alleges that while the Advisor did perform some level of ESG analysis in its due diligence of many investment, there were incidences where the Advisor failed to complete the Questionnaire for issuers whose securities were held in the Products’ portfolios.[ix] These failures, along with certain other matters noted in the Order, including allegations that the Advisor failed to adequately train its staff on its ESG policies and procedures, led the SEC to charge the Advisor with failure to follow written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder.[x]


 The Advisor was ordered to cease and desist, was censured, and was ordered to pay a civil monetary penalty of $4 million.[xi]


  • The SEC is  continuing to focus on ESG-related disclosure issues, with particular emphasis on ensuring that Registrants are “doing what they say.”  This focus is further demonstrated by previous orders, the numerous SEC statements and proposed rules related to ESG (including the two proposed rules released in May 2022), and the inclusion of ESG as an examination priority for the third consecutive year in the SEC Division of Examination’s Annual Priorities.
  • Registrants should ensure that they have written policies and procedures reasonably designed to ensure compliance with the ESG elements of any strategy that incorporates ESG considerations and ensure that staff are appropriately trained regarding these policies and procedures.
  • Registrants should review their policies and procedures surrounding ESG criteria and the review how these policies are being implemented to ensure that the registrant is consistently applying its ESG policies and procedures.
  • Registrants should be aware of the need to be precise with language regarding the use of ESG criteria and processes not just in their disclosure documents, but in all communications (e.g., materials presented at board meetings, board minutes reflecting oral discussions at meetings, RFP responses, and other communications with clients).
  • Registrants should ensure that funds or strategies that do not consider ESG factors in their investment processes avoid representing that they are “ESG conscious” or otherwise indicating that they consider such factors.
  • Registrants should continue to monitor new ESG-related guidance and news as it becomes available, including SEC actions like the Order.


 If you have any questions about the Order, ESG related items, or about the regulation of investment advisors, broker-dealers, and registered investment companies generally, please feel free to contact us.

By the Investment Management and Broker-Dealer Team at Kilpatrick Townsend & Stockton

[i] See, SEC, Press Release, SEC Charges Goldman Sachs Asset Management for Failing to Follow its Policies and Procedures Involving ESG Investments (Nov. 22, 2022), https://www.sec.gov/news/press-release/2022-209 (hereinafter, “Press Release”); In the Matter of Goldman Sachs Asset Management, L.P., SEC Release No. IA-6189 (November 22, 2022), https://www.sec.gov/litigation/admin/2022/ia-6189.pdf (hereinafter, “Order”).

[ii] Order at 2.
[iii] Order at 2.
[iv] Order at 2.
[v] Press Release.
[vi] Order at 6.
[vii] Order at 6.
[viii] Order at 4.
[ix] For example, as of August 24, 2018, the SEC found that the Advisor had only completed Questionnaires for thirty-four of the seventy-nine positions held by a Fund. Order at 5.
[x] Order at 6.
[xi] Order at 7.
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