WisdomTree, a New York-based asset manager and exchange-traded-fund (ETF) provider, has agreed to pay $4m over ETF prospectuses stating it would exclude companies involved in the tobacco or fossil fuels industries.

These promises were backed up by the RIA’s affirmations that it was developing a “model-based approach” that would be able to screen out securities that had even minimal connections to the excluded industries “regardless of revenue measures.”

However, three WisdomTree-managed ETFs ultimately invested in those industries and other environmentally detrimental enterprises such as coal mining and natural gas extraction, the SEC stated in its order.

Vendors paint an incomplete picture

Those missteps apparently resulted from WisdomTree’s reliance on several third-party data vendors that provided intelligence on the companies it would invest in, so it could screen out those that participated in prohibited industries.

However, one of WisdomTree’s vendors did not capture companies that derived less than 10% of their revenues from tobacco sales, a limitation WisdomTree was aware of.

And when WisdomTree discovered that its first vendor did not identify a full list of companies that were involved in the fossil fuels industry, it purchased more from a second vendor.

But that still did not provide WisdomTree with a full picture of its fossil fuel investments – a fact that the company knew since at least September 2020. However, “WisdomTree did not inform the [ETFs’] Board or revise the ESG Funds’ prospectuses until November 2022 concerning these issues…” the order stated.

Written policies

Accordingly, the SEC noted that the company did not have written policies or procedures in place that could have screened out investments that ran contrary to its ETF’s ESG-related investment programs.

It is likely the absence of effective internal protocols substantially contributed to the fine’s heftiness.

WisdomTree has agreed to the monetary penalty as well as a cease-and-desist order without admitting or denying the accusations.

“We take our regulatory and compliance responsibilities very seriously, and as the SEC’s order found, we updated the prospectuses of the relevant ETFs in November 2022,” WisdomTree said. “We are proud of our investment track record and our transparency with investors, and we remain committed to continuing to bring innovative investment strategies to the ETF market.”

Maximizing investors’ best interests

ESG-conscious fund managers and advisors have recently come under fire by conservative legislators and state securities boards, which have accused them of prioritizing airy social goals over customer returns.

With this enforcement action the SEC moves in the opposite direction by reminding ESG investors that their fidelity to promises made to investors is paramount.

“When investment advisers represent that they will follow particular investment criteria, whether that is investing in, or refraining from investing in, companies involved in certain activities, they have to adhere to that criteria and appropriately disclose any limitations or exceptions to such criteria,” said SEC acting director of enforcement Sanjay Wadhwa.

“By contrast, the funds at issue in today’s enforcement action made precisely the types of investments that investors would not have expected….”

Rule violations

For the misleading prospectuses, the SEC charged WisdomTree with violating:

• Section 206(2) of the Advisers Act covering fraud or deceit on a client generally;
• Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder covering misstatements or omissions made to investors in a pooled investment vehicle;
• Section 206(4) of the Advisers Act and Rule 206(4)-7, requiring implementing written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act;
• 34(b) of the Investment Company Act covering untrue or misleading statements in documents filed with the SEC.