Goldman Sachs Asset Management, L.P., (GSAM) will pay a total of $4m to settle SEC charges that it launched and marketed environmental, social, governance (ESG) funds without deciding first how to evaluate an investment’s “ESG” potential or setting up any way to be sure it was delivering on the investment strategy it promised to investors.
During 2017, GSAM launched funds and separately managed accounts (SMAs) that would follow ESG-focused investment strategies, according to a Nov. 22 announcement from the SEC.
However, at the time it launched the funds, GSAM had not yet established the criteria investment managers should use to evaluate the ESG characteristics of potential investments or policies outlining how they should be applied, according to the SEC order.
GSAM told fund boards, intermediaries and third parties involved in the products about the criteria it did eventually establish, and about a policy requiring that a questionnaire listing the ESG characteristics of every potential investment be filled out and used in every investment decision.
“Today’s action reinforces that investment advisers must develop and adhere to their policies and procedures over their investment processes, including ESG research, to ensure investors receive the advisory services they would expect to receive from an ESG investment,” said Andrew Dean, co-chief of the Enforcement Division’s Asset Management Unit.
The company did produce both ESG policies and decision-making criteria shortly after the SMA program was launched in 2017, but applied those policies so inconsistently that ESG evaluations were sometimes skipped, or were carried out after investment decisions had been made, according to the SEC order.
The first of the three products included in the order is GSAM’s ESG SMA Strategy, which began as the US Responsible Equity Strategy, but was renamed April 1, 2017.
The mutual funds involved were the International ESG Fund – which was relaunched Feb. 28, 2018, after being converted from the Goldman Sachs Focused International Equity Fund – and the EM ESG Fund, which was launched May 31, 2018.
All three products were managed by the GSAM Fundamental Equity (GSAM FE) group, with the Goldman Sachs Trust board overseeing the two mutual funds.
GSAM FE informed the board of the ESG questionnaire and a materiality matrix that were supposed to be part of the ESG evaluation process, according to the order.
Before February 2020, however, GSAM FE failed to follow the process it had documented to the board and to third parties and, instead, often relied on ESG research that had been conducted earlier, using different methods. Relevant ESG data required for the newly developed ESG questionnaires was often added only after the decision to invest had been made and the securities were ready to be included in the fund portfolio, according to the SEC’s The Division of Enforcement’s Climate and ESG Task Force, which conducted the investigation.
GSAM did not admit fault but agreed to a cease-and-desist order, a censure and a $4 million penalty for violating Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.
Timing incorporates penalty into compliance curriculum
The announcement closely follows a burst of activity from SEC officials who came out in force last week to warn fund advisers that it is putting extra effort into enforcing existing rules against misleading investors to ESG-related funds, despite not having finalized ESG-fund regulations it proposed earlier this year.
The effort follows the “fraud is fraud” enforcement perspective often defined in public appearances by SEC Chair Gary Gensler to explain that the long list of very specific new regulations the SEC has proposed this year does not imply that the agency can’t enforce rules against investment vehicles or offenses not listed by name in an SEC regulation.
Any material statement from an investment adviser with the potential to mislead investors and any failure of procedure or recordkeeping that can fool investors or impede an SEC investigation can be treated as a potential violation, he said.
Gensler has been making the point all year. He added weight to last week’s rendition by discussing it as part of the introduction to a daylong public seminar on enforcement during which SEC staff elaborated on the point, just hours after the release of an SEC report showing the agency brought in $6.44bn in penalties and disgorgements during fiscal 2022 – 67% higher than the year before.
The SEC’s focus on ESG issues is so intense, in fact that that almost any public statement about an ESG fund or other product is likely to be considered to be a material statement eligible for examination or enforcement by regulators, according to experts speaking at the Securities Enforcement Forum held last week in Washington, D.C.
It is critical that a fund’s policies and procedures match what it is telling investors in public statements and marketing, according to expert-panel member Kelly Gibson, co-leader of the enforcement practice at Morgan Lewis.
The timing and details of the GSAM announcement make clear, however, that a fund will get little benefit from the effort to make sure ESG marketing content is consistent if it only files policies rather than putting them consistently into effect.