Key Lessons for Investment Advisers from WisdomTree ESG Compliance Lapses 

Key Lessons for Investment Advisers from WisdomTree ESG Compliance Lapses 

The SEC has charged WisdomTree Asset Management Inc., a New York-based investment adviser, with misleading statements and ESG compliance lapses in its investment strategies. ESG stands for environmental, social, and governance and is a framework that helps companies measure their non-financial performance in these areas.

Between March 2020 and November 2022, WisdomTree promoted three ESG-marketed exchange-traded funds (ETFs), assuring investors and trustees that these funds would avoid companies engaged in specific sectors, such as fossil fuels and tobacco. 

However, the SEC’s investigation found that the funds had, in fact, invested in companies linked to coal mining, natural gas, and tobacco sales. This discrepancy was attributed to third-party data providers that failed to screen out all such companies. The SEC also noted that WisdomTree lacked adequate policies and procedures to oversee the ESG screening process, resulting in unverified claims about investment exclusions.

The SEC’s Acting Director of Enforcement, Sanjay Wadhwa, emphasized that federal securities laws require investment advisers to fulfill their stated commitments and disclose any criteria limitations to investors. 

In this case, WisdomTree’s ESG funds included investments contrary to investors’ expectations based on the company’s disclosures. Without admitting or denying the allegations, WisdomTree consented to the SEC’s findings and agreed to a cease-and-desist order, censure, and a $4 million civil penalty for violations of the antifraud provisions of the Investment Advisers Act of 1940, the Investment Company Act of 1940, and compliance rules under the Advisers Act.

For compliance officers, the WisdomTree case underscores the critical need for rigorous oversight and verification in ESG investing and disclosures. Key takeaways include the importance of:

• Robust Due Diligence on Data Providers: Relying on third-party data without proper validation can lead to inadvertent violations. Compliance teams should regularly review and audit the screening methods and reliability of external ESG data providers to ensure alignment with stated investment criteria.
• Clear and Accurate Disclosures: Investment strategies, particularly those with specific exclusions like ESG criteria, must have clear, accurate, and consistent disclosures to investors. Compliance officers should confirm that all marketing materials and prospectuses accurately represent the fund’s criteria and limitations.
• Policy and Procedure Development: This case illustrates the risks of inadequate policies and procedures, especially for managing ESG compliance. Implementing clear, documented procedures to oversee screening processes and ensure alignment with fund objectives can reduce compliance risk.
• Continuous Monitoring and Reporting: Regular monitoring and internal audits are crucial to detect potential misalignments early and ensure adherence to investment policies. Compliance teams should also be prepared to update stakeholders promptly if issues are identified.

This case reaffirms that strong, proactive compliance practices are essential in maintaining investor trust, meeting regulatory standards, and mitigating potential enforcement actions in the evolving ESG landscape.