SEC Proposes ESG Investment Rules for Registered Funds – Securities

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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 August 16, 2022.

Proposed name rule would expand current requirements for funds registered under the Investment Companies Act 1940 as amended (the “’40 Act”) and Business Development Companies (“BDC”)3 (but not private funds) to invest at least 80% of their assets in accordance with the investment orientation suggested by the name of the fund. 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, as well as in Form ADV for registered investment advisers under of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) and exempt reporting advisers who offer investors products that take ESG factors into account in their investment processes.

These proposed rules appear intended to combat potential “greenwashing”, a practice in which an investment adviser, for example, overestimates or misrepresents the “E” (or environmental) factors considered or incorporated into the portfolio selection of the advise, as in the performance of the Advertising and marketing adviser. Notably, the proposed rules follow the SEC’s separate March 2022 climate-related disclosure proposal for companies with reporting obligations under 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 Proposed Rules reflect the SEC’s growing and heightened focus on climate-related issues. This Debevoise In-Depth discusses the main provisions of each of the proposed rules; other regulatory, review and enforcement developments; political considerations regarding 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, as well as to the investment advisers of these entities. For a discussion of how the proposed ESG rule applies to private fund advisors, see our previous Debevoise In-Depth titled “Applicability of SEC’s Proposed ESG Rules to Private Fund Advisors”.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 the purposes of this alert, unless otherwise specified, we use the term “registered funds” or “funds” to refer to both investment companies registered under Bill 40 and BDCs.

4. 87 FR 21334 (2022). For the Debevoise In-Depth discussing the proposed climate disclosure rule, seeDebevoise In-Depth, “An In-Depth Review of the SEC’s Proposed Climate Change Disclosure Rule” (April 25, 2022), available athttps://www.debevoise.com/insights/publications/2022/04/sec-issues-long-awaited-proposed-climate-change.

5. Debevoise in depth. “Applicability of SEC Proposed ESG Rules to Private Fund Advisors” (June 15, 2022), available athttps://www.debevoise.com/insights/publications/2022/06/applicability-of-the-secs-proposed-esg-rules-to.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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