The Securities and Exchange Commission (SEC) has charged WisdomTree Asset Management, Inc., a New York-based investment adviser, with failing to adhere to its own investment criteria for funds marketed as incorporating environmental, social, and governance (ESG) factors. The charges stem from the firm's misstatements and compliance lapses related to the execution of its ESG investment strategies.
Background of the Case
According to the SEC's order, between March 2020 and November 2022, WisdomTree marketed three exchange-traded funds (ETFs) as following ESG principles. The firm's prospectuses claimed that these funds would exclude companies involved in certain activities, including fossil fuels and tobacco. The prospectuses specifically indicated that these funds would avoid investments in companies engaged in coal mining, natural gas extraction, and retail sales of tobacco products.
However, the SEC found that WisdomTree's ESG-marketed funds invested in companies involved in these very sectors, including coal mining, natural gas distribution, and tobacco retail. This discrepancy arose because the firm relied on third-party data vendors who failed to exclude all companies engaged in fossil fuel and tobacco-related activities.
Lack of Oversight
Beyond the investment inconsistency, the SEC's order also highlighted a critical compliance failure. WisdomTree did not have adequate policies and procedures in place to ensure that the ESG criteria were properly implemented. Specifically, the firm lacked oversight mechanisms to ensure that its third-party data vendors effectively screened out companies involved in the restricted activities.
Key Takeaways for Advisory Firms
This case underscores the importance of robust internal controls and due diligence, particularly for firms marketing ESG products. In an environment where regulatory scrutiny of ESG claims is increasing, firms must ensure that their marketing materials align with their actual investment practices. Additionally, it is essential to have comprehensive oversight procedures for third-party vendors, especially when those vendors are responsible for critical functions such as screening investments against ESG criteria.
WisdomTree's failure to meet its own stated ESG criteria is a reminder that compliance programs should be tailored to the specific risks of each investment strategy. A well-documented, effective compliance structure is essential to avoid misstatements that could lead to regulatory actions.
Conclusion
The SEC's action against WisdomTree demonstrates the growing emphasis on truthfulness and transparency in ESG-marketed funds. Advisory firms should take this opportunity to evaluate their own ESG-related policies and practices to ensure they meet regulatory expectations and align with the representations made to investors.
For further details, you can access the SEC's full order here.
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