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US Securities and Exchange Commission

Former SEC Commissioner Atkins Questions Staff on ‘Regulation Through Enforcement’ on ESG Fund Rules

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Former SEC Commissioner Paul Atkins pressed staffers in the Division of Investment Management (IM) on whether there will be more “regulation through enforcement” once the commission finalizes its environmental, social and governance (ESG) disclosure rules for funds and advisers.

The SEC in May proposed Release No. 33-11068Environmental, Social, and Governance Disclosures for Investment Advisers and Investment Companies, which would address so-called “greenwashing” practices by funds and advisers by mandating new disclosures on ESG strategies and requiring certain funds to disclose their portfolio investments’ GHG emissions, among other provisions.

In a Sept. 8, 2022, exchange during an panel discussion at the Practising Law Institute’s SEC Speaks conference, Atkins said “the commission seems to studiously avoid trying to define what ESG is, and as you were discussing, leaving it to the funds themselves to lay the groundwork to justify what they’re doing.”

Atkins praised the SEC for the proposal, which shines a light on the “fair amount of chicanery out there.” But should it be adopted, he asked “is this going to be more regulation through enforcement and examination by people trying to divine where the commission’s going, or do you think there’s going to be further, from commentary you’ve received and whatnot, further refining of this proposal?”

Melissa Harke, assistant director, Investment Adviser Regulation Office, responded that “I think actually the opposite is the intent.”

“I think providing clarity and providing a framework and providing specific rules when it comes to ESG is designed to prevent having to deal with things through enforcement, through exams, through a much more inefficient and less effective method,” she said.

And Michael Spratt, assistant director, Disclosure Review and Accounting Office, added that ESG is no different than other areas “in that: say what you do and do what you say.”

“When the commission has brought some cases in the ESG space, it’s been because there have been statements that haven’t been followed,” he said. “It’s not necessarily specific to ESG, obviously when you make disclosure you need to follow that disclosure and if not then you lend yourself to potential enforcement actions.”

In May, the SEC announced settled charges announced against BNY Mellon Investment Adviser, Inc., related to ESG quality reviews for investments by certain mutual funds advised by the firm. BNY Mellon neither admitted nor denied the commission’s findings as part of the settlement, in which it agreed to a $1.5 million penalty, a censure, and cease-and-desist order. (See BNY Mellon to Pay $1.5 Million to Settle SEC Charges on ESG Misstatements in the May 25, 2022, edition of Accounting & Compliance.)

Atkins’ remarks on the lack of a specific ESG definition in the proposal echoes the criticisms of Republican lawmakers and current SEC Commissioner Hester Peirce of Release No. 33-11068. Peirce, in a dissenting statement on the proposal, concluded that “E, S, and G cannot be adequately defined, nor will they be, should the proposal eventually find its way into the Code of Federal Regulations.” (See Commissioner Peirce Says SEC Proposal Aimed at Tackling Greenwashing in Investment Industry Will Not Work in the May 27, 2022, edition of ACA.)


This article originally appeared in the September 9, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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