Top 5 SEC Enforcement Developments For May 2022

• Published date: 07 June 2022
• Subject Matter: Corporate/Commercial Law, Technology, Corporate and Company Law, Securities, Fin Tech
• Law Firm: Morrison & Foerster LLP
• Author: Mr Michael D. Birnbaum, Jina Choi and Haimavathi V. Marlier

In order to provide an overview for busy in-house counsel and compliance professionals, we summarize below some of the most important SEC enforcement developments from the past month, with links to primary resources. This month we examine:

• The SEC's continued focus on environmental, social, and governance ("ESG") disclosures and cryptocurrency markets;
• The SEC's in-house courts under attack;
• The Second Circuit's decision in Noto v. 22nd Century Group, Inc.; and
• The SEC's billion-dollar case against a prominent investment adviser.

1. SEC Brings ESG Enforcement Action and Proposes New ESG Rules

On May 23, 2022, the SEC charged a registered investment adviser with misrepresenting its approach to ESG-related investments. In a settled order resolving a matter pursued by the SEC's Climate and ESG Task Force, the SEC found that between July 2018 and September 2021, the adviser represented that all of its stock and bond picks had undergone quality reviews of ESG risks and opportunities associated with those investments, but numerous investments had no such quality review scores at the time of investment. The SEC found that the adviser included false or otherwise misleading statements in mutual fund prospectuses, statements to the funds' boards, and in requests for proposals from investment firms considering investing in the funds at issue.

The adviser agreed to a $1.5 million fine, a cease-and-desist order, and censure for violations of various Investment Advisers Act antifraud provisions'none of which require a finding of scienter'and for lacking policies and procedures "reasonably designed to prevent the inclusion of untrue statements of fact" in their various disclosures. The adviser appears to have been spared more severe sanctions based on cooperation and remedial efforts that the SEC acknowledged in its order, including providing detailed factual summaries and substantive presentations on key topics and revising its disclosures and internal policies.

The SEC is clearly not done focusing on ESG disclosures. Indeed, while this case shows the SEC using its traditional enforcement tools'here, the Investment Advisers Act and Investment Company Act'the Commission is also considering additional tools to use in addressing ESG-related disclosures. For example, on May 25, 2022, just two days after announcing the settlement, the SEC announced proposed rules specifically focused on "greenwashing," or the exaggeration of a fund's adherence to ESG principles and practices.

SEC Chair Gary Gensler described the proposed rules as intended to "establish disclosure requirements for funds and advisers that market themselves as having an ESG focus." They would require certain investment advisers and investment companies, among others, "to provide additional information regarding their [ESG] investment practices" in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue using Forms N-CEN and ADV Part 1A.

Considered in tandem with the SEC's settlement in this matter, the proposed rules reaffirm that the SEC's focus on ESG is here to stay. #ESGdisclosureenforcement #ENFandESG #besttocooperate #goodbyegreenwashing

2. SEC Brings Charges Against Gaming Chip Giant, NVIDIA, and Mulls Tighter Crypto-Related...