(Article from Registered Funds Regulatory Update, January 2025)
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On October 21, 2024, the SEC announced that it had settled charges with WisdomTree Asset Management, Inc., a registered investment adviser, to three ETFs for making misleading statements and for compliance failures relating to the execution of the ETFs’ investment strategies, which were marketed as incorporating ESG factors.
According to the Order, from March 2020 until November 2022, WisdomTree represented to each ETF board that the ETFs would not invest in issuers that were “involved in certain controversial products or activities,” including fossil fuels and tobacco. Additionally, WisdomTree represented to the boards, and the prospectuses of each ETF disclosed to investors, that its model portfolio upon which the ETFs investments would be based would exclude the securities of fossil fuel and tobacco companies “regardless of revenue measures.” Despite these representations, the ETFs invested in issuers that were involved in fossil fuels and tobacco, including coal mining and transportation, natural gas extraction and distribution, and retail sales of tobacco products, in reliance on data purchased from third-party vendors that only identified a subset of issuers involved in fossil fuels or tobacco. However, WisdomTree was aware that there were limitations in the data provided by the vendors but failed to purchase supplemental data or otherwise conduct further diligence that would have excluded such issuers. The Order found that WisdomTree did not have policies and procedures overseeing the screening process to appropriately select issuers that complied with the ETFs’ ESG-investment mandates and, more broadly, its ESG investment process.
By November 2022, WisdomTree updated the ETFs’ prospectus disclosure to address the data its model used to exclude the securities of issuers involved in fossil fuels and tobacco, among others. On February 5, 2024, after obtaining Board approval, the ETFs were liquidated.
Accordingly, WisdomTree was charged with violating, among other things, the anti-fraud provisions of the Advisers Act and Section 34(b) of the 1940 Act, which make it unlawful for any person to make any untrue statement of material fact in any registration statement or other document filed with the SEC. Without admitting or denying the findings set forth in the Order, WisdomTree consented to a cease-and-desist order, censure, and $4 million civil monetary penalty.
In the Matter of WisdomTree Asset Management, Inc., SEC Admin. File No. 3-22268 (Oct. 21, 2024), available at https://www.sec.gov/files/litigation/admin/2024/ia-6753.pdf.