On October 21, 2024, the SEC imposed a fine of $4 million on investment adviser WisdomTree Asset Management Inc. for improperly labeling certain funds as compliant with ESG principles. According to the settled administrative proceeding, there were “three exchange-traded funds that [WisdomTree] marketed as incorporating environmental, social, and governance factors . . . [including] that the ESG Funds would not invest in companies that were ‘involved in certain controversial products or activities,’ including ‘fossil fuels’ and tobacco' . . . [but] [i]n reality the ESG Funds invested in the securities of companies . . . that were involved in such activities, including coal mining and the transportation of coal, natural gas extraction and distribution, and the retail sale of tobacco products.” Additionally, the SEC noted that “WisdomTree did not adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act in connection with the investment process for the ESG Funds.” In short, despite marketing three funds as ESG-compliant, the funds were demonstrably not, and the defendant failed to take measures to ensure the accuracy of its marketing materials.
While this may appear to be nothing more than a garden-variety case of a prosecution based upon false statements in marketing materials, this action is nonetheless significant. This case constitutes an example of an ESG-based prosecution--despite the recent disbandment of the SEC's Climate and ESG Task Force--and so indicates a continued focus on ESG-related issues at the SEC. Further, according to the settled administrative proceeding, WisdomTree had relied on two third-party vendors to screen its investments--and it was WisdomTree's knowledge of flaws in the processes utilized by these vendors that the SEC deemed particularly problematic. These circumstances demonstrate that mere reliance on third-parties to perform key functions is insufficient, and that parties need to inquire more deeply into the underlying metrics employed by third parties. In other words, a greater degree of diligence is required--which is particularly noteworthy in the ESG context due to the lack of generally-accepted norms.
The Securities and Exchange Commission today charged New York-based investment adviser WisdomTree Asset Management Inc. with making misstatements and for compliance failures relating to the execution of an investment strategy that was marketed as incorporating environmental, social, and governance (ESG) factors.
According to the SEC’s order, from March 2020 until November 2022, WisdomTree represented in prospectuses for three ESG-marketed exchange-traded funds, and to the board of trustees overseeing the funds, that the funds would not invest in companies involved in certain products or activities, including fossil fuels and tobacco. However, the SEC’s order finds that the ESG-marketed funds invested in companies that were involved in fossil fuels and tobacco, including in coal mining and transportation, natural gas extraction and distribution, and retail sales of tobacco products.
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