SEC: BNY Mellon to pay $1.5 million for ESG error
BNY Mellon’s investment advisory subsidiary will pay a $1.5 million fine to settle charges that it misrepresented the ESG review of investments for several mutual funds, according to the Securities and Exchange Commission (SEC) that she helped manage.
The order detailed accusations of events that took place from July 2018 to September 2021, during which BNY Mellon’s investment adviser allegedly disclosed to clients that all funds supervised by an affiliated sub-advisor “implemented ESG principles by conducting proprietary ESG quality reviews” as part of its investment research process.
“Investment advisers and registered funds are increasingly offering and evaluating investments that employ ESG strategies or incorporate certain ESG criteria, in part to meet investor demand for such strategies and investments,” Sanjay said. Wadhwa, deputy director of the SEC’s Enforcement Division (Wadhwa also heads the committee’s climate). and ESG working group, created in March 2021).
According to the order, BNY Mellon’s sub-advisor would rely on a “responsible investment team” that would create ESG-grade ratings for corporate stocks and bonds, according to the SEC.
Some of the mutual funds (known as “layered funds” in the order) did incorporate ESG into investment decisions, but were not mandated to follow ESG principles and were separate from funds subject to required ESG reviews.
But according to the order, BNY Mellon’s investment adviser told investors and intermediaries that ESG considerations were part of the Overlay Funds’ investment process. In response to RFPs for overlay funds and ADMs that will follow one of these funds’ strategies, BNY Mellon asserted that ESG reviews are part of the sub-advisor’s approach.
“The representations (from BNY Mellon Investment Adviser) were incomplete as they also failed to indicate that the sub-advisor could and did select portfolio investments that were not necessarily subject to this aspect of the research process,” indicates the order.
A BNY Mellon spokesperson said the company was “pleased” to resolve the issue.
“Although none of these funds are part of the ‘Sustainable’ fund range (BNY Mellon Investment Adviser), we take our regulatory and compliance responsibilities seriously and have updated our documentation as part of our commitment to ensuring that our investor communications are accurate and complete,” the spokesperson said. “We are proud of our heritage and track record in responsible investing and are committed to continuing to be a trusted partner for our clients’ responsible investing needs.”
The firm’s compliance staff were unaware that quality reviews were not conducted for all investments in the overlay fund until mid-March 2020, the commission said.
BNY Mellon has cooperated with commission staff during their investigation, has revised certain disclosure terms and will change some of its policies and procedures. The company neither admitted nor denied the findings, but in addition to the civil penalty, BNY Mellon agreed to cease-and-desist and censorship, the commission said.
As industry and investor interest in ESG options has grown, so has regulators’ attention to the topic. ESG was included as one of the priorities for the commission’s review in 2022 (as it had been in previous years), with the enforcement division pledging to focus on whether whether RIAs and funds adequately disclose ESG investment approaches, and whether they are “exaggerated or false”. which ESG factors are taken into account in the selection and management of the portfolio. In a risk alert issued last year, the Commission’s Review Division cautioned advisers using ESG strategies to ensure their investment processes were disclosed and consistent, and that their marketing materials reflected detail what they were offering to customers.