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Arnold & Porter Discusses ESG, Whistleblowing, and Compliance Programs

On September 25, the U.S. Securities and Exchange Commission (SEC) announced a US$19 million settlement with the investment adviser DWS Investment Management Americas Inc. (DIMA) for material misstatements and shortcomings in its policies and procedures related to Environmental, Social and Governance (ESG) investing.[1] TheOrder resolves a longstanding investigation by the SEC into “greenwashing” allegations against Deutsche Bank AG’s asset-management arm, DWS Group (DWS), which we discussed in our September 20, 2021 Advisory.

The order provides a roadmap of areas for compliance that the SEC may scrutinize in future ESG investigations. The SEC focused on lack of: (1) training, (2) testing, (3) controls, (4) standards for management, (5) consistency in approach, and (6) remediation once it recognized the inconsistencies. To settle charges brought under the Investment Advisers Act and the SEC’s rules promulgated thereunder, DIMA agreed, without admitting or denying the SEC’s findings, to pay a US$19 million penalty, and accept a censure and cease and desist order.

This Advisory spotlights both the SEC’s continuing focus on “greenwashing” statements and related policy and procedure deficiencies, as well as the importance of robust whistleblower and internal investigation procedures.

Findings Against DIMA

In the order, the SEC found that DIMA marketed itself to current and prospective fund clients and investors as a leader in ESG. DIMA marketed certain mutual funds as “ESG integrated” because they were subject to the Global ESG Integration Policy of its parent company (DWS). Under that policy, which was published on DIMA’s public website, DIMA investment professionals advising these mutual funds were expected to consider material ESG aspects as part of their investment decision. In particular, the published policy stated that DWS applied an ESG screening and integration strategy to all of its actively managed holdings.

Additionally, from at least 2019 through 2021, DIMA regularly marketed the use of a proprietary ESG quality review, which aggregated data from multiple ESG third-party vendors to provide a letter rating from A to F for thousands of issuers according to six rating categories, such as overall ESG quality, carbon and water risk, and controversial business conduct. In an article in an investment industry magazine titled “When ESG is in your DNA,” DIMA stated that every DWS investment team used the ESG quality review system to make investment decisions for their portfolio.

The SEC found, however, that from August 2018 to late 2021, DIMA failed to adequately implement the ESG Integration Policy’s requirements as it had led clients and investors to believe it would. The SEC further found that DIMA did not adopt and implement reasonable policies and procedures to ensure that its public representations about the ESG Integration Policy were not misleading. The SEC found that the ESG Integration Policy remained published on DIMA’s website even though DIMA knew or should have known that it lacked adequate procedures to ensure that employees were following the policy. In fact, quality checks conducted by the ESG Integration Team on a sample of research notes written between January and November 2020 showed that of the research notes sampled, only about 54% of active equity research notes and 21% of fixed income research notes mentioned ESG criteria. Moreover, the SEC found that the ESG Integration Team received pushback from research analysts and their supervisors regarding monitoring and documenting compliance with the ESG Integration Policy, such that monitoring for ESG integration in models and recommendations was not achieved consistently across the organization.

In determining the penalty in this matter, the SEC credited DIMA’s remedial acts and cooperation, including that DIMA modified relevant processes, policies, procedures, and controls.

Key Takeaways

In light of the DIMA case and the focus by the SEC on climate and ESG-related issues, fund sponsors, companies, and financial institutions should consider the following key takeaways:


[1] The SEC also issued a separate order charging DIMA for failing to implement a reasonably designed anti-money laundering (AML) compliance program; according to the SEC, DIMA adopted its ultimate parent company’s AML program used for all U.S. operations without tailoring the program to meet AML compliance requirements specific to mutual funds. As part of the settlement, DIMA agreed to pay a US$6 million penalty and accept a cease and desist order.

[2] The order comes on the heels of the SEC’s Final Rule on Investment Company Names (September 20, 2023), which (1) applies its 80% investment policy requirement to any fund name with terms suggesting that the fund focuses in investments that have, or investments whose issuers have, particular characteristics, such as ESG, and (2) requires such fund to define the terms used in its name, including the criteria the fund uses to select the investments such terms describe. Taken together with this rule, the order compounds the notion that the SEC is deeply concerned with the substance behind any kind of marketing statement made by funds and/or investment advisers.

This post comes to us from Arnold & Porter Kaye Scholer LLP. It is based on the firm’s memorandum, “ESG, Whistleblowing, and Compliance Programs: Key Takeaways from a Recent ESG Misstatement Case,” dated October 12, 2023, and available here.  Arthur Luk and Paul Nabhan contributed to the memorandum.

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