Investment Adviser Settles SEC Enforcement Action Concerning Alleged Misstatements Regarding ESG Investment Process

Kramer Levin Naftalis & Frankel LLP

On Sept. 25, 2023, the Securities and Exchange Commission announced settled charges against registered investment adviser DWS Investment Management Americas Inc. (DIMA), a Deutsche Bank investment arm, in an enforcement action concerning DIMA’s misstatements regarding its Environmental, Social, and Governance (ESG) investment process. Without admitting or denying the SEC’s allegations, DIMA agreed to a cease and desist order and to pay a $19 million penalty for the purported ESG misstatements.

This enforcement action, which follows similar actions by the SEC against other investment managers, highlights the SEC’s continued interest in ESG-related disclosures and alleged “greenwashing.” The SEC’s focus on ESG disclosures underscores the need for asset managers that market ESG products to represent accurately and implement uniformly their written policies and procedures pertaining to their investment decisions. Asset managers should also be aware of the SEC’s recent adoption of amendments to Rule 35d-1, more commonly known as the “Names Rule,” under the Investment Company Act of 1940, described here.

The SEC’s Enforcement Action

The SEC alleged that from August 2018 until late 2021, DIMA marketed itself as a leader in ESG that adhered to specific provisions of its global policy for integrating ESG considerations into its investments (the Policy). For example, the SEC’s order described that in 2019, a DIMA senior leader stated in a public marketing piece that ESG is “top of mind throughout our organization” through use of a proprietary “DWS ESG Engine” that is “the centerpiece of our commitment to integrating ESG considerations into our investment process [and] [e]very DWS investment team uses it to make investment decisions for their portfolio.” The SEC’s order found, however, that DIMA failed to have controls in place to ensure its personnel were implementing the Policy in a manner consistent with those representations. The order explained that while DIMA investment professionals were generally trained on the Policy, some individuals in senior portfolio management positions were not aware of the Policy at all or were unsure if it applied to DIMA. It also explained that DIMA lacked processes to monitor the consistent implementation of certain portions of the Policy and other relevant ESG procedures and thus, DIMA senior management could not actually know if investment professionals were consistently following, or attempting to consistently follow, the requirements that they considered material ESG risk factors in each investment decision.

Acknowledging that DIMA undertook remedial steps once these purported deficiencies came to light — including modifying the relevant processes, policies, procedures and controls — the SEC found that DIMA’s alleged conduct constituted violations of (i) Section 206(2) of the Advisers Act, which prohibits an investment adviser, directly or indirectly, from engaging “in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client”; (ii) Section 206(4) of the Advisers Act and Rule 206(4)-8 promulgated thereunder, which provide that it is unlawful for an investment adviser to a pooled investment vehicle to make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; and (iii) Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require investment advisers registered or required to be registered with the Commission to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder. The Financial Times reported that the SEC “launched its greenwashing investigation two years ago, prompted by a whistleblower complaint from D[IMA]’s former head of ESG.”

In a separate enforcement action against DIMA, as to which the SEC also announced settled charges on Sept. 25, 2023, the SEC alleged that DIMA failed to ensure that the mutual funds it advised had tailored anti-money laundering programs compliant with the Bank Secrecy Act and relevant regulations from the Financial Crimes Enforcement Network, and that DIMA caused the failure of those mutual funds to adopt and implement policies and procedures reasonably designed to detect activities indicative of money laundering with respect to transaction monitoring, and did not conduct AML training specific to their businesses. Without admitting or denying the SEC’s allegations, DIMA agreed to a cease and desist order and to pay a $6 million penalty to resolve the AML case.

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The SEC’s ESG charges against DIMA are yet another example of the SEC’s scrutiny of ESG-related disclosures and purported greenwashing in the marketplace for investment products. Asset managers that market ESG financial products should appropriately disclose criteria, policies and procedures they employ in determining an investment as ESG-favorable. Once they adopt such procedures, they should take steps to ensure they consistently follow their policies, monitor such compliance and accurately represent those policies and procedures both internally and externally.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Kramer Levin Naftalis & Frankel LLP

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