BNY Mellon’s investment advisor subsidiary will pay a $1.5 million penalty to settle charges that it misrepresented the ESG scrutiny of investments for several mutual funds it helped manage, according to the Securities and Exchange Commission (SEC).
The order detailed charges of events that took place from July 2018 to September 2021, in which BNY Mellon Investment Adviser allegedly disclosed to clients that all of the funds overseen by an affiliated sub-adviser “implemented ESG principles by conducting proprietary ESG quality reviews” as part of its investment research process.
"Registered investment advisers and 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,” SEC Enforcement Division Deputy Director Sanjay Wadhwa said (Wadhwa also heads the commission’s Climate and ESG Task Force, which was established in March 2021).
According to the order, BNY Mellon’s sub-advisor would rely on a "responsible investment team" that created ESG quality reviews for equity securities and corporate bonds, according to the SEC.
Some of the mutual funds (known as the ‘Overlay Funds’ in the order) did incorporate ESG into investment decisions, but did not have a mandate to follow ESG principles, and were separate from those funds with required ESG reviews.
But according to the order, BNY Mellon Investment Adviser told investors and intermediaries that ESG considerations were part of the Overlay Funds’ investment process. In responses to requests for proposals for the Overlay Funds and SMAs set to follow one of those funds’ strategies, BNY Mellon asserted that ESG reviews were part of the sub-advisor’s approach.
“(BNY Mellon Investment Adviser’s) representations were incomplete because they did not also state that the sub-adviser could and did select portfolio investments that were not necessarily subject to that aspect of the research process,” the order read.
A BNY Mellon spokesperson said the firm was “pleased” to resolve the issue.
“While none of these funds were part of the (BNY Mellon Investment Adviser) “Sustainable” fund range, we take our regulatory and compliance responsibilities seriously and have updated our materials as part of our commitment to ensuring our communications to investors are precise and complete,” the spokesperson said. “We are proud of our heritage and track record in responsible investment and are committed to continuing to be a trusted partner for our clients’ responsible investing needs.”
Compliance personnel for the firm didn’t know that the quality reviews were not being done for all of the Overlay Funds investments until the middle of March 2020, according to the commission.
BNY Mellon cooperated with commission staff during their investigation, revised some disclosure language and will modify some of its policies and procedures. The firm didn’t admit or deny the findings, but in addition to the civil penalty, BNY Mellon agreed to a cease-and-desist and a censure, the commission stated.
As interest among the industry and investors in ESG options has accrued, so has regulators’ focus on the topic. ESG was included as one of the commission’s 2022 exam priorities (as it had been in previous years), with the enforcement division pledging to focus on whether RIAs and funds are adequately disclosing ESG investing approaches, and whether they’re “overstating or misrepresenting” what ESG factors are considered in portfolio selection and management. In a risk alert released last year, the commission’s Division of Examinations warned advisors using ESG strategies to make sure their invest processes were disclosed and consistent, and that their marketing materials accurately reflected what they offer clients.
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