SEC Charges WisdomTree Asset Management for Misrepresentation of ESG Funds

The Securities and Exchange Commission (SEC) has taken action against New York-based investment adviser WisdomTree Asset Management Inc. for making false statements and failing to comply with its own investment criteria for ESG-marketed funds. The charges, announced on October 21, 2024, highlight the growing scrutiny of environmental, social, and governance (ESG) investment practices in the financial industry.

According to the SEC's order, WisdomTree misrepresented the investment strategies of three exchange-traded funds (ETFs) marketed as ESG-compliant between March 2020 and November 2022. The firm had explicitly stated in fund prospectuses and to the board of trustees that these funds would not invest in companies involved in fossil fuels and tobacco. However, the SEC's investigation revealed that the funds did, in fact, invest in companies engaged in coal mining and transportation, natural gas extraction and distribution, and retail sales of tobacco products.

The SEC's findings indicate that WisdomTree relied on data from third-party vendors that failed to adequately screen out all companies involved in fossil fuel and tobacco-related activities. Moreover, the firm lacked proper policies and procedures to oversee the screening process and ensure compliance with its stated investment criteria.

Sanjay Wadhwa, Acting Director of the SEC's Division of Enforcement, emphasized the importance of transparency and adherence to stated investment strategies: "At a fundamental level, the federal securities laws enforce a straightforward proposition: investment advisers must do what they say and say what they do." Wadhwa further stressed that when investment advisers commit to specific investment criteria, they must adhere to those criteria and disclose any limitations or exceptions.

The SEC's order found that WisdomTree violated antifraud provisions of both the Investment Advisers Act of 1940 and the Investment Company Act of 1940, as well as the compliance rule in the Investment Advisers Act. Without admitting or denying the SEC's findings, WisdomTree has agreed to a cease-and-desist order, a censure, and a civil penalty of $4 million.

This enforcement action underscores the SEC's continued focus on ESG investing and the importance of accurate disclosures in the rapidly growing sustainable investment sector. It serves as a warning to investment firms to ensure their ESG-marketed products align with their stated objectives and that robust compliance measures are in place to prevent misrepresentation to investors.

The case against WisdomTree highlights the challenges faced by the investment industry in navigating the complex landscape of ESG investing, particularly when relying on third-party data providers for screening processes. It also emphasizes the need for financial institutions to implement comprehensive internal controls and due diligence procedures to verify the accuracy of ESG-related claims and ensure compliance with regulatory requirements.

As the demand for ESG-focused investment products continues to grow, this SEC action serves as a reminder to asset managers and investors alike of the importance of transparency, accuracy, and adherence to stated investment principles in the evolving field of sustainable and responsible investing.

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