Publication
Blockchain law: Will England accept that digital assets are ‘property’?
To American lawyers it has been fairly obvious that digital assets are “property” for legal purposes, but the English have not been so sure.
United States | Publication | June 2022
On May 25, 2022, the US Securities and Exchange Commission (SEC or Commission) proposed new rules to enhance the regulatory framework for disclosures concerning investment funds and investment advisers' environmental, social and governance-related (ESG) investing strategies (the Proposed Rules). If adopted, the Proposed Rules would require SEC-registered advisers to include ESG factors and strategies for investors in fund prospectuses, annual summaries and brochures. More specifically, they would require:
The SEC's Proposed Rules are now in a public comment period, which will remain open for 60 days after publication in the Federal Register. This is the SEC's second ESG-related rule proposal. On March 21, 2022, as discussed in this legal update, the SEC proposed ESG disclosure rules requiring domestic and foreign registrants to provide climate-related disclosures in their registration statements and annual reports. That comment period was extended to June 17, 2022.
These new Proposed Rules seek to standardize ESG disclosure practices to prevent funds and investment advisers from "greenwashing" their investment decisions. Greenwashing has dominated concerns for investors over the past year and SEC Chairman Gary Gensler has warned companies about it since his term began. Recently, the SEC charged BNY Melon Investment Advisor, Inc. for material misstatements and omissions about a sub-adviser's ESG quality reviews. According to Gensler, the Proposed Rules will serve to prevent greenwashing by providing "consistent and comparable disclosures about asset managers' ESG strategies" so that investors can understand what data underlies each fund's claims.
While the key provisions of the lengthy Proposed Rules are synthesized below, at the outset, we wanted to provide key takeaways for funds to determine, first, if the rules would apply to them and, if applicable, how they might be impacted.
Whether and how the SEC's Proposed Rules will impact a fund depends primarily on what newly-defined ESG fund-type applies to the fund's investment decisions. To make this determination, funds would have to perform confidential internal reviews of how ESG metrics have been incorporated in investment strategies and how the fund presents those ESG investment strategies in marketing materials:
If an internal review indicates that a fund is likely to be considered an ESG-Focused Fund or ESG Impact Fund under the Proposed Rules, it may be necessary to devote greater resources to handle the accompanying increased disclosure requirements.
Because disclosure obligations vary by ESG fund type, funds should consider adopting internal policies aligned with their intended ESG fund type classification. Specifically, funds should be thoughtful and deliberate about the publication of sales literature that indicates the significance of ESG factors in investment decision making, as these types of marketing materials could unintentionally lead to enhanced disclosure obligations under the framework found in the Proposed Rules.
Consistency of disclosures in fund prospectuses, annual reports and brochures are a key focus of the Proposed Rules. Therefore, funds and advisers should consider adopting internal frameworks for the use of ESG factors to mitigate the risk of inconsistent use or messaging on this potentially key issue.
Funds will need to take a second look at their existing disclosure processes. While many funds that advertise and expressly incorporate ESG factors in investment decision making have relied on existing reporting frameworks, such as the ones promulgated by the Climate Disclosure Standards Board, in issuing their prior disclosures, the Proposed Rules contain marked differences in qualitative and quantitative metrics. For example, the SEC's Proposed Rules would require ESG-Focused Funds that consider environmental factors to disclose the fund portfolio's carbon footprint and weighted average carbon intensity in their annual reports, which is not required by any existing frameworks.
The SEC's Proposed Rules also state that ESG-related disclosures should be structured correctly and seek to require the use of XBRL Data Tagging in funds' ESG-related registration statements and annual reports.
The Proposed Rules would apply to registered open-end funds, registered closed-end funds, Business Development Companies (BDCs) and Registered Advisers. The Proposed Rules also include a question to commenters, however, about whether the disclosure requirements should also apply to insurance companies' separate accounts registered as management investment companies.
The SEC's Proposed Rules implement a "layered disclosure" regime depending on the type of fund at-issue. For example, open-end funds would have to provide an overview of their ESG strategy in the summary section of their prospectuses and provide more details about their ESG investment strategy in the statutory prospectus.
The specific level of detail required by the enhanced disclosure measures depends on the extent to which a fund considers ESG factors in its investment processes. To that end, the SEC has defined two broad categories and one sub-category of ESG Funds: (1) Integration Funds, (2) ESG-Focused Funds and (3) ESG Impact Funds. Notably, the Proposed Rules stop short of defining "ESG" and instead focus on a holistic approach to disclosures, leaving open the possibility that the final rules may provide a non-exhaustive list of ESG factors.
The Proposed Rules define an "Integration Fund" as a Fund that considers one or more ESG factors alongside other non-ESG factors in its investment decisions, but where those ESG factors are generally no more significant than other factors in the investment selection process. For these funds, the ESG factors are not determinative in including or excluding any particular investment portfolio.
The Proposed Rules define an "ESG-Focused Fund" as one which focuses on one or more ESG factors as a significant consideration in selecting investments or in its engagement strategy with the companies in which it invests. Within the ESG-Focused Funds category, the Proposed Rules also designate certain funds as "ESG Impact Funds." These are funds that seek to achieve a specific ESG impact or impacts.
The Proposed Rules impose additional changes to annual disclosures by funds. For registered management investment companies, the corresponding additional disclosures would be included in the management's discussion of fund performance (MDFP). For Business Development Companies, the enhanced disclosures would be included in the management discussion and analysis (MD&A).
The Proposed Rules would require registered investment advisers to provide Adviser Brochures to prospective clients with details regarding their approach to ESG investing. The Proposed Rules would require such brochures to include:
In addition to enhanced disclosures regarding ESG strategies, impacts and timelines, the Proposed Rules contain amendments that would require disclosures by advisers regarding their voting policies and procedures, including whether such proxy voting procedures consider ESG factors.
For advisers with a wrap fee program, the Proposed Rules would require preparation of a specialized brochure.
The Proposed Rules also include the collection of "census-type" information about funds' and advisers' use of ESG factors, including their use of ESG providers. Specifically, the Proposed Rules would amend forms N-CEN and ADV part 1A to collect information from registered funds and advisers for use by the public and investors.
If adopted, the Proposed Rules would be the first time that the SEC has required disclosure of a specific aspect of the investment process by private fund sponsors. A failure to comply with these rules could easily put a fund in the SEC's crosshairs if there is any significant investment strategy that was not properly disclosed even if it was not material to the investment strategy. Given the SEC's overall focus on ESG disclosures and recent enforcement activity and regardless of whether the Proposed Rules are adopted in their current form, fund advisors should begin to review their compliance programs regarding investor disclosures. They should also review their ESG practices and policies to make sure that they are consistent with their disclosures and representations.
Publication
To American lawyers it has been fairly obvious that digital assets are “property” for legal purposes, but the English have not been so sure.
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