Introduction
On May 25, 2022, the SEC proposed two rules relating to Environmental, Social, and Governance ("ESG") practices by registered funds and investment advisers: (1) one titled "Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices" (the "Proposed ESG Rule")1 and (2) one titled "Investment Company Names" (the "Proposed Names Rule")2 (collectively, the "Proposed Rules"). Comments on the Proposed Rules will be due on August 16, 2022.
The Proposed Names Rule would expand on the current requirements for funds registered under the Investment Company Act of 1940 as amended (the "'40 Act")and business development companies ("BDCs")3 (but not private funds) to invest at least 80% of their assets in accordance with the suggested investment focus of the fund's name. The Proposed ESG Rule seeks to categorize certain types of ESG strategies broadly and would create additional disclosure requirements in registered fund and BDC prospectuses and annual reports, and in Form ADV for investment advisers registered under the Investment Advisers Act of 1940, as amended (the "Advisers Act") and exempt reporting advisers that offer investors products that consider ESG factors in their investment processes.
These Proposed Rules appear intended to address potential "greenwashing," a practice in which an investment adviser, for example, overstates or misrepresents the "E" (or environmental) factors considered or incorporated into the adviser's portfolio selection, such as in the adviser's performance advertising and marketing. Notably, the Proposed Rules follow the SEC's separate March 2022 proposal on climate-related disclosure for companies with reporting obligations pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "'34 Act") and companies filing a registration statement under the Exchange Act or the Securities Act of 1933, as amended ("Proposed Climate Disclosure Rule");4 the Proposed Climate Disclosure Rule and the Proposed Rules are indicative of the SEC's increasing and heightened focus on climate-related issues. This Debevoise In-Depth discusses the key provisions of each of the Proposed Rules; other regulatory, examination, and enforcement developments; policy considerations with respect to the Proposed Rules; and suggested next steps for registered funds and advisers.
In this Debevoise In-Depth, we focus on the applicability of the Proposed Rules to registered funds and business development companies, and to investment advisers to such entities. For a discussion of how the Proposed ESG Rule applies to private fund advisers, see our previous Debevoise In-Depth titled, "Applicability of the SEC's Proposed ESG Rules to Private Fund Advisers."5
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Footnotes
1. Securities & Exchange Commission, "Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices," 87 Fed. Reg. 36654(2022).
2. See Securities & Exchange Commission, "Investment Company Names," 87 Fed. Reg. 36594 (2022).
3. For purposes of this alert, unless otherwise indicated, we use the term "registered funds" or "funds" to refer to both investment companies registered under the 40 Act and to BDCs.
4. 87 FR 21334 (2022). For the Debevoise In-Depth discussing the Proposed Climate Disclosure Rule, see Debevoise In-Depth, "An In-Depth Review of the SEC Proposed Climate Change Disclosure Rule" (Apr. 25. 2022), available athttps://www.debevoise.com/insights/publications/2022/04/sec-issues-long-awaited-proposed-climate-change.
5. Debevoise In-Depth. "Applicability of the SEC's Proposed ESG Rules to Private Fund Advisers" (Jun. 15, 2022), available athttps://www.debevoise.com/insights/publications/2022/06/applicability-of-the-secs-proposed-esg-rules-to.
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