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Key Impact Points:
- Regulatory Action: SEC charges WisdomTree Asset Management for misstatements and compliance failures in ESG-marketed funds.
- Investor Deception: Funds invested in fossil fuels and tobacco despite claims to the contrary.
- $4 Million Penalty: WisdomTree agrees to cease-and-desist order, censure, and a $4 million civil penalty.
The Securities and Exchange Commission (SEC) has charged New York-based investment adviser WisdomTree Asset Management Inc. with making misstatements and failing to comply with its own investment criteria for funds marketed with environmental, social, and governance (ESG) factors.
Why it matters:
From March 2020 to November 2022, WisdomTree claimed in prospectuses for three ESG exchange-traded funds—and to their overseeing board of trustees—that the funds would not invest in companies involved in certain activities, including fossil fuels and tobacco.
However, the SEC found that these ESG-marketed funds did invest in companies engaged in:
- Coal mining and transportation
- Natural gas extraction and distribution
- Retail sales of tobacco products
“At a fundamental level, the federal securities laws enforce a straightforward proposition: investment advisers must do what they say and say what they do,“ said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement.
The details:
- WisdomTree relied on data from third-party vendors that failed to exclude all companies involved in fossil fuel and tobacco-related activities.
- The firm lacked policies and procedures to properly screen out such companies from their ESG funds.
“When investment advisers represent that they will follow particular investment criteria… they have to adhere to that criteria and appropriately disclose any limitations or exceptions,“ Wadhwa emphasized. “By contrast, the funds at issue… made precisely the types of investments that investors would not have expected… based on WisdomTree’s disclosures.“
The outcome:
- WisdomTree consented to the SEC’s order without admitting or denying the findings.
- The firm agreed to a cease-and-desist order, censure, and to pay a $4 million civil penalty.
The bottom line:
This enforcement action underscores the SEC’s commitment to ensuring that investment advisers accurately represent their investment strategies, especially in the growing ESG sector. Firms must have robust compliance measures to align with their stated investment criteria and maintain investor trust.