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Securities and Exchange Commission Proposes Amendments to Investment Advisers Act Regarding ESG Disclosures

Securities and Exchange Commission Proposes Amendments to Investment Advisers Act Regarding ESG Disclosures Background Image

On May 25, 2022, the Securities and Exchange Commission (the “SEC”) introduced a proposal to amend certain rules and forms under the U.S. Investment Advisers Act of 1940 (the “Advisers Act”)1 to require investment advisers and investment companies to disclose additional information regarding their environmental, social, and governance (“ESG”) investment practices.2 These latest proposed rules come hot on the heels of the proposed climate-related disclosures for investors that the SEC released on March 21, 2022 and recently extended the comment deadline on to June 17, 2022.3

In recent years, investor interest in ESG strategies has significantly increased, and the asset management industry has responded by creating marketing funds and strategies that consider ESG factors in their selection process.4 However, according to the SEC, investors interested in ESG-focused investing “face a lack of consistent, comparable, and reliable information” about investment products and advisers that claim to use ESG-focused strategies in their investment decisions.5 This, in turn, can create a risk that asset managers’ ESG strategies do not match investors’ expectations.6

The lack of a current ESG disclosure framework has led to an increase in “greenwashing” — where funds and advisers make exaggerated claims about the ESG qualities of an investment product or strategy or the extent to which an investment product or strategy takes into account ESG factors — to attract business. As recently as May 2022, prosecutors raided Deutsche Bank’s offices over allegations that the company had fraudulently misled investors about certain investment products being ESG-focused, when they actually were not.7 The SEC aims to curb this practice through its proposed ESG disclosure rules and Advisers Act amendments, as well as an already active enforcement regime.

Who does the Advisers Act apply to?

Subject to certain exceptions, the Advisers Act requires firms or solo practitioners that are compensated for advising others about securities investments to register with the SEC and conform to regulations designed to protect investors.8 Generally, only advisers who have at least gross US$100 million of assets under management or advise a registered investment company will have to register with the SEC.9

Banks, lawyers, accountants, engineers, publishers of bona fide newspapers or financial publications, and registered brokers and dealers whose advisory activities are incidental to their broker/dealer business and who receive no special compensation for providing advisory services are expressly excluded from the definition of an investment adviser. These persons or firms need not register under, and are not regulated by, the Advisers Act.10

How does the Advisers Act work?

The underlying premise of the Advisers Act is that an investment adviser has a fiduciary duty to its clients to act in their best interests. To that end, the Advisers Act sets out a number of obligations, such as requiring advisers to:

  • Disclose to their clients all material facts concerning the client relationship;11
  • Ensure that advice is suitable for their clients’ needs;12
  • Seek best execution of their clients’ transactions, by ensuring the clients’ total cost or proceeds in each transaction are the most favorable under the circumstances;13 and
  • Vote proxies on behalf of clients in the clients’ best interests.14

How does the Advisers Act affect corporate and equity clients?

All practitioners and firms falling within the definition of investment advisers under the Advisers Act will need to comply with a number of substantive obligations, such as:

  • Maintaining written policies and procedures designed to prevent the misuse of material, non-public information by the adviser or any of its associated persons (insider trading policy);15
  • Creating and maintaining a code of ethics;16
  • Maintaining records for a minimum of five years of financial statements, agreements between the adviser and its clients, and any other agreements relating to the adviser’s business;17 and
  • Submitting periodic confidential reports electronically to the SEC (i.e., systemic risk reporting).18

SEC’s Proposed Rules and Amendments

The proposed rules and amendments impose additional disclosure requirements regarding ESG strategies to investors in various fund statements, including annual reports and adviser brochures.

One of the amendments proposed by the SEC is a uniform system for disclosure about ESG strategies for registered funds.19 This system would implement ESG-related disclosures in fund prospectuses, annual reports, and investment adviser regulatory filings (where funds use ESG investment techniques) and require disclosure of the use of greenhouse gas (“GHG”) emissions data in certain circumstances.20 The disclosure requirements vary depending on whether a fund uses “ESG Integration,” “ESG-focused,” or “ESG Impact” strategies.

The SEC is also proposing that advisers provide ESG-related disclosures in the adviser brochure (Form ADV Part 2A). The adviser brochure is intended to “provide a narrative, plain English description of the adviser’s business, conflicts of interest, disciplinary history, and other important information to help clients make more informed decisions about whether to hire or retain that adviser.”21 Under the proposed rules, advisers will be required to describe which of the three strategies — “ESG Integration,” “ESG-focused,” or “ESG Impact” — they are using, which ESG factors they have considered as part of their business, and how those factors are incorporated in the advice that they provide to clients.22 For each strategy or method of analysis based on ESG considerations, advisers will need to describe any criteria or methodology used to evaluate, select, or exclude investments and describe how the criteria or methodology were used.23 The SEC believes that requiring advisers to make these disclosures will “help clients understand the investing approach” of their advisers and “compare the variety of emerging approaches[.]”24

Forms N-CEN and ADV Part 1A for registered funds and advisers will also be amended.25 To improve the ability of investors and the SEC to track trends in ESG funds, the SEC is proposing amendments to the Form N-CEN “that are designed to collect census-type information regarding these funds and the ESG-related service providers they use in a structured data language.”26 Investors could then use this information to easily identify funds that incorporate ESG factors into their investment strategies.27 The proposed amendments to Form ADV Part 1A would expand the ESG information collected about the advisory services provided to separately managed account clients (“SMAs”) and reported private funds.28 In each case, an adviser would have to identify whether it uses an “ESG Integration,” “ESG-focused,” or “ESG Impact” strategy in providing services to its SMA or fund clients and which factors it considers (environmental, social, and/or governance).29 The new reporting requirements are designed to capture this information separately for each private fund, but in the aggregate for all SMA clients of an adviser. An adviser also would be required to report the name of any third-party ESG framework that it follows, as well as whether the adviser or any of its related persons is an ESG consultant or other ESG service provider.30 These proposals are “designed to improve the depth and quality of the information” that the SEC collects on investment advisers, which facilitates the SEC’s risk monitoring initiatives and benefits investors.31

Recognizing the “comprehensive nature” of the proposed ESG-related amendments to required disclosures, the SEC reaffirms advisers’ existing obligations to provide accurate information to investors.32 The SEC further cautions investors against exaggerating the role of ESG factors or practices in their portfolio companies, reminding them of the Adviser Acts’ Anti-Fraud Rules, which prohibit advisers from making false or misleading statements to investors.33

If the proposed ESG-related rules and amendments are adopted, they will introduce a shift in the SEC’s current disclosure regime for private fund sponsors by focusing disclosure on a particular aspect of the investment process, namely ESG. Advisers will be required to provide additional disclosures for any significant investment strategy where an ESG factor is considered in an investment decision regardless of the ESG factor’s overall impact on the decision. Further, ESG factors will have independent significance that is distinct from all other elements of an investment strategy.

Most of the ESG-related rules and amendments will take effect one year after the effective date of the amendments. Comments on the SEC’s proposal are due 60 days after the proposal is published in the Federal Register. As of the date of this publication, the proposal has not been published. Advisers should nonetheless prepare for the adoption of these proposed rules and amendments by reviewing their representations regarding ESG investment practices and policies and assessing their accuracy.

1The SEC’s proposal also applies to the U.S. Investment Company Act of 1940; however, this article focuses on the Advisers Act.

2See Sec. & Exch. Comm’n, Proposed Rule: Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, Release Nos. IA-6034, IC-34594 (May 25, 2022) (to be codified at 17 C.F.R. pts. 200, 230, 232, 239, 274, 279), (last visited on June 13, 2022) (“SEC Proposed Rule”).

3See Sec. & Exch. Comm’n, Proposed Rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release Nos. 33-11042, 34-94478, File No. S7-10-22 (March 21, 2022) (to be codified at 17 C.F.R. 210, 229, 232, 239, and 249), (last visited on June 13, 2022).

4SEC Proposed Rule, 7.

5Id. at 7.

6Id. at 7-8.

7See Christiaan Hetzner, Deutsche Bank raided by authorities over ESG ‘greenwashing’ claims: ‘We’ve found evidence that that could support allegations of prospectus fraud, Fortune (May 31, 2022), available at:

8Investment Advisers Act, §§ 202(a)(11)(A)−(E).

9The Advisers Act only applies to “Covered Persons,” which are investment advisers with assets under management of US$100,000,000 or more. Therefore, investment advisers with less than US$100,000,000 will be subject to state laws regarding investment advisers.

10Investment Advisers Act, §§ 202(a)(11)(A)−(E).

11SEC v. Capital Gains Research Bureau, Inc., 84 S. Ct. 275 (1963).

12Sec. & Exch. Comm’n, Suitability of Investment Advice Provided by Investment Advisers, Exchange Act Release No. IA-1406, 1994 WL 84902 (Mar. 22, 1994).

 13Sec. & Exch. Comm’n, Alfred C. Rizzo, Investment Advisers Act Release No. 897 (Jan. 11, 1984) (finding that investment adviser violated the Advisers Act by making investment decision without a “reasonable basis”).

14SEC Rule 206(4)-6, 17 C.F.R. § 275.206(4)-6.

15Investment Advisers Act, § 204A.

 16SEC Rule 204A-1, 17 C.F.R. § 275.204A-1.

17SEC Rule 204-2, 17 C.F.R. § 275.204-2.

18SEC Rule 204(b)-1, 17 C.F.R. § 275.204(b)-1. This requirement applies only to registered advisers with at least US$150,000,000 in private fund assets under management.

19SEC Proposed Rule, 249.

20Id. at 20-21. For example, a fund using an ESG Integration strategy that considers GHG emissions might disclose that it considers the GHG emissions of portfolio companies within only certain “high emitting” market sectors, such as the energy sector. This fund would be required to describe the methodology that it used to determine which sectors would be considered “high emitting,” as well as the sources of GHG emissions data on which the fund relied as part of its investment selection process.

21Id. at 127.


23Id. at 129.

24Id. at 127.

25Id. at 148.

26Id. at 149.


28Id. at 154.

29Id. at 156-57.

30Id. at 158.

31Id. at 155.

32Id. at 166.

33Id. at 167. 

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.