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SEC secures $1.5M penalty from BNY Mellon investment adviser over environmental, social, and governance allegations

In May, the Securities and Exchange Commission charged BNY Mellon Investment Adviser (“BNY Mellon”) with misrepresenting that certain mutual fund investments had undergone Environmental, Social, and Governance (“ESG”) review when they had not. BNY Mellon settled the charges by agreeing to pay a $1.5 million penalty, cease and desist from the conduct, and receive a censure.

ESG reviews evaluate a company’s risks associated with factors that are often not included in standard financial reviews. ESG rating agencies or data providers typically conduct these reviews, using their own formulas and methodologies to measure how well companies meet ESG criteria, as defined by the rating agency or data provider. For example, ESG reviews may look at how efficiently a company uses energy, how at risk workers are for job-related injuries, or whether a company’s board is independent. While companies are not currently required to perform ESG reviews, many companies publish their ESG ratings to allow consumers to more easily evaluate these risks, and many financial advisers provide ESG ratings and reviews of the investments and financial products offered to investors.

As the SEC’s press release on the action notes, investors increasingly want to see companies’ ESG ratings and that companies are implementing ESG strategies. Concerns about climate change, natural resources, and workers’ rights are likely driving investors’ growing demand for investments that take ESG considerations into account. When companies misrepresent that they have conducted ESG review on their investment offerings, investors may make investment decisions based on those misrepresentations.

In the case of BNY Mellon, the SEC alleged that it had represented to investors, mutual funds’ boards, and other investment advisers that investments made in certain mutual funds had undergone ESG review as part of the research into the investments. BNY Mellon employed a Sub-Adviser that was responsible for conducting ESG reviews, but the SEC’s Order found that the Sub-Adviser was allowed to select some funds that had not undergone ESG review.

The SEC’s action against BNY Mellon is not its first ESG-related enforcement action. In April 2022, the SEC charged Vale S.A., a mining company, with making false statements about the safety of its dam that ultimately collapsed. According to the SEC’s complaint, some of these false statements were contained in Vale S.A.’s ESG disclosures to investors. The collapse of the dam resulted in major environmental damage and the deaths of 270 people.

More actions based on misrepresentations of ESG commitment are likely to follow, as the SEC launched a Climate and ESG Task Force in its Division of Enforcement in 2021. The Task Force focuses on identifying ESG-related wrongdoing, as well as efficiently marshaling SEC resources and utilizing data science to combat such violations. The SEC has also proposed a rule to bring greater transparency to ESG disclosures in order to protect investors.

Whistleblowers who have knowledge of misrepresentations made by public companies about their ESG commitments can submit a confidential whistleblower tip to the SEC through its whistleblower program, and may be eligible for a reward.

SEC whistleblower rewards range between 10% and 30% of the monetary sanctions collected by a SEC action if they total over $1 million. Whistleblowers also are eligible for rewards based on sanctions collected in related enforcement actions, if there is a successful SEC enforcement action.

Whistleblowers’ identities are kept anonymous and confidential, with certain rare exceptions. The Dodd-Frank Act prohibits employers from firing, harassing, demoting, suspending, threatening, or otherwise retaliating against whistleblowers who report potential securities law violations to the SEC.

For a free, confidential review of your matter by experienced SEC whistleblower lawyers, contact Phillips & Cohen.

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