The SEC does not currently mandate specific disclosures by funds or advisers with respect to ESG, instead applying existing anti-fraud and marketing rules and regulations that apply to all disclosures, including ESG matters. In emphasizing special risks to investors in ESG-focused investment products, the SEC intends the proposed rules to provide investors with consistent, comparable and reliable information about funds and ESG strategies. In particular, the SEC expressed concern about “greenwashing,” the notion that funds or advisers may overemphasize the role that ESG factors play in their investment decisions.
The SEC’s proposal imposes the heaviest new burdens on registered investment companies (such as mutual funds, exchange-traded funds and other registered investment products), unit trust investments, and business development companies and not on private funds.
Nonetheless, the new rules would affect private funds through proposed amendments to Form ADV, with implications not only for registered investment advisers (RIAs) but also, in some cases, exempt reporting advisers (ERAs) relying on the venture capital fund adviser or private fund adviser exemptions from registration.
The ESG rules are the latest in a flurry of SEC rulemaking proposals, which follow (i) proposed Advisers Act rule amendments in January relating to Form PF reporting; (ii) proposed rules under the Company Act and Advisers Act in February bolstering cybersecurity practices and imposing sweeping new restrictions and regulations on private funds in February; and (iii) proposed Company Act rules in March enhancing disclosures and protections relating to special purpose acquisition companies (SPACs).
Authored by Adam Brown, Parik Dasgupta, Henry Kahn, Bryan Ricapito, David Winter, Kevin Lees, and Ali D'Amelio.