The Securities and Exchange Commission charged BNY Mellon Investment Adviser with misleading investors and omitting significant information about its environmental, social and governance screenings for its Overlay funds, the SEC announced today.

Without admitting or denying guilt, the registered investment advisor agreed to a cease-and-desist-order, a censure and will pay $1.5 million in a civil money penalty to settle the first-of-its-kind ESG charges, an area that is a priority for the Biden administration.

“Registered investment advisors and funds are increasingly offering and evaluating investments that employ ESG strategies or incorporate certain ESG criteria, in part to meet investor demand for such strategies and investments,” Sanjay Wadhwa, deputy director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force, said in a statement. “Here, we allege that BNY Mellon Investment Adviser did not always perform the ESG quality review that it disclosed using as part of its investment selection process for certain mutual funds it advised.”

BNY Mellon Investment Adviser implied in numerous statements between July 2018 and September 2021 that all investments in its Overlay Funds, which had $5.3 billion in assets on March 31 had undergone ESG quality review “even though that was not always the case,” the SEC said in its order.

“As this action illustrates, the commission will hold investment advisors accountable when they do not accurately describe their incorporation of ESG factors into their investment selection process,” said Adam S. Aderton, co-chief of the SEC Enforcement Division’s Asset Management Unit and a member of the agency's Climate and ESG Task Force.

BNY Mellon Spokesperson Stan Neve said, “BNY Mellon Investment Adviser (BNYMIA) is pleased to resolve this matter concerning certain statements it made about the ESG review process for six U.S. mutual funds. While none of these funds were part of the BNYMIA 'Sustainable' fund range, we take our regulatory and compliance responsibilities seriously and have updated our materials as part of our commitment to ensuring our communications to investors are precise and complete."  

According to the SEC, BNYMIA misrepresented to investors that its affiliated sub-advisor to the Overlay Funds implemented ESG principles by conducting proprietary ESG quality reviews as part of the Sub-Adviser’s investment research process for all investments.

During the same time, BNYMIA made other similar representations in written responses to requests for proposals from other investment firms that were considering investments on behalf of their own clients, which implied that all investments in the Overlay Funds had undergone an ESG quality review, the SEC said. The RFP Responses concerned the Overlay Funds as well as separately managed accounts that follow an Overlay Fund investment strategy, the SEC said.

BNY Mellon Investment Adviser’s alleged failures are violations of the Investment Advisers Act of 1940 and the Investment Company Act, the SEC said.  The SEC’s order also noted that BNY Mellon Investment Adviser promptly undertook remedial acts and cooperated with Commission staff in its investigation.

An SEC examination led to the findings and the referral to the SEC Enforcement Division, the agency said.

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