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SEC Creates New ESG Enforcement Task Force

It is the latest in a string of initiatives from the commission focused on climate risk, and some commissioners argued it would be 'prudent' to wait for the results of other ESG-related reviews.

The Securities and Exchange Commission has assembled a new enforcement task force focusing on environmental, social and governance and climate-related issues, including how investment advisors are disclosing the details of strategies that tout sustainability. 

This comes one day after the SEC’s Division of Examinations released its 2021 examination priorities, which said examiners would be looking out for these issues at firms. But several commissioners questioned whether it would be better for other ESG-related reviews at the agency to conclude before moving forward.

SEC Acting Deputy Director of Enforcement Kelly Gibson will lead the task force, which includes 22 staffers at SEC headquarters, regional offices and specialized units in the Enforcement Division. In addition to analyzing advisors’ and funds’ disclosure and compliance practices, the task force will look into whether issuers’ climate risk disclosures contain “any material gaps or misstatements” under the agency’s current rules.

“Proactively addressing emerging disclosure gaps that threaten investors and the market has always been core to the SEC’s mission,” Gibson said. 

But ESG products or strategies were not being targeted in examinations because they were “problematic or bad,” said Kristin A. Snyder, a deputy director, co-national associate director and associate regional director for the SEC’s Examinations Division, during a panel at the Investment Adviser Association’s (IAA) Compliance Conference. Instead, the SEC was looking to see if a firm’s marketing materials concerning ESG products or strategies matched their policies and procedures. 

“For example, if a firm is saying they exclude certain stocks from the strategy in their portfolio, do they have mechanisms in place to ensure those securities are being excluded from the portfolio and is that checking going on an ongoing basis?” she said. “Or if there are positive inclusions, a positive screening that’s going on and certain securities are included based on those positive screens, are there ways to test and track that and ensure that’s happening?”

Mark Perlow, a partner at the law firm Dechert LLP, said the SEC had been focused on the ESG trend for several years, even if much of what it had been doing was under the radar. He echoed Snyder’s point that the SEC seemed focused on disclosures and marketing materials and that these correspondences with clients matched actual policies and procedures.

“It’s clear to us that the staff views a significant role for the securities laws and for the SEC here,” he said. “Because you’re making representations to investors about how you manage money. Of course, matching what you do to what you say is a key principle of the securities laws.”

But despite the announcement of the task force, the commissioners were not necessarily in uniform agreement on its purpose. In a joint statement released shortly after the announcement, Commissioners Hester Peirce and Elad Roisman said in many cases, the recent spate of climate-related announcements amounted to continuations of previous procedures. 

They cited acting Chair Allison Herren Lee’s recent announcement that the SEC’s Division of Corporation Finance would focus more on climate-related disclosures in public company filings, but the duo stressed that the commissioners had not yet voted on new standards for climate-related disclosure. They also asserted that more exam focus on ESG and climate-related risks was only sensible with the growth of ESG-related products and strategies. But if the point of the new task force was to strengthen previous messaging, Roisman and Peirce found that message to be “an odd one.” They questioned whether it would be “prudent” to wait for the previously announced initiatives to run their course.

“Better yet, shouldn’t we wait for our Corporation Finance staff to complete its assessment of our existing rules relating to ESG disclosures to find out if they are unclear or in need of updating before we announce an initiative aimed at bringing enforcement actions in this area?” the statement read. “But then maybe the Enforcement Division is merely continuing ongoing efforts with a little extra fanfare.”  

SEC Chair nominee Gary Gensler made it clear that climate risk will be an important topic of consideration, during his Senate confirmation hearing earlier this week. Should he be confirmed, there may be a majority on the commission to review (and potentially amend) rules and regulations related to ESG and climate issues.

When asked whether ESG-related examinations would become a routine part of exams or be done in a “sweep” fashion, Peter Driscoll, the director of the SEC’s Division of Examinations who also spoke at the IAA conference, said they would make a determination based on their work and risk analyses prior to inspections.  

“It won’t be on every exam, but to the extent it’s a prevalent piece to a particular firm, or if we see something that’s concerning from an advertising perspective, we may scope it in,” he said.

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