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The SEC’s compliance outreach held this month had a clear theme: document your practices, disclose them and do what they say.
The program was conducted to highlight areas of concern and help prepare firms for upcoming compliance obligations. There were panels on the new marketing rule, ESG, proxy voting, and topics specific to registered funds and private fund advisers. The discussions all highlighted a similar theme: ensuring disclosures matched practice. Regardless of the topic, the SEC made it clear that firms can only be compliant if their policies and procedures match their actual practice. This is especially significant in areas involving ESG, with the SEC making it clear that proper disclosures are a marketing issue they are concerned about going forward.
Although there is ambiguity around the definition of ESG, which the SEC stated they do not plan to define, investment advisers, registered funds and private funds need to be clear around how ESG is being used and what effects that may cause. For example, if a firm is not investing in oil and gas due to ESG concerns, the SEC wants to see how that exclusion is applied.
Registrants are also encouraged to reduce ambiguity in their disclosures, for example avoiding “may do” when the registrant, in actual practice, “always does.” On the same note, proxy voting policies need to be clearly stated and, if you as a firm making decisions on proxy voting for clients, the rationale and decision needs to be documented. The SEC had many instances where a firm disclosed that they would be voting for all proxies in the best interest of the clients yet failed to document the rationale behind the vote. If you disclose you will vote in the best interest of the, it implies you are reviewing all proxy votes made by the firm, and therefore you need to review and document rationale for each vote.
Again, the focus here all goes back to document, disclose, and do; the SEC wants to see that firms are properly documenting their practices, disclosing them adequately and, most importantly, doing what they say.
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