On March 3, the U.S. Securities and Exchange Commission’s (SEC) Division of Examinations released its 2021 examination priorities. According to the release, the Division of Examinations will prioritize the examination of a wide range of practices, products, and services that it believes present heightened risks to investors, including a greater focus on climate-related risks.
Correspondingly, on March 4, the SEC announced the creation of a Climate and Environmental, Social, and Governance (ESG) Task Force in the Division of Enforcement. This task force will focus on developing initiatives to proactively identify misconduct related to climate and ESG issues. The task force will additionally “evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues.”
The Division of Examinations releases its examination priorities annually. The Division completes on-site exams of market participants in order to inform the SEC’s rule-making initiviates, identify risks, and pursue misconduct. In instances where exams reveal potential misconduct, the Division of Examinations refers the matter to the Division of Enforcement.
The examination priorities for the 2021 fiscal year include many areas that have been prioritized in recent years. Some of these priorities are “retail investors, including seniors and those saving for retirement, through Reg. BI and fiduciary duty compliance,” “financial technology (Fintech) and innovation, including digital assets,” and “information security and operational resiliency.” While these have all been priorities in recent years, the Division of Examinations intends to focus more greatly on the ways these areas intersect with climate and ESG issues.
“This year, the Division [of Examinations] is enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans in light of intensifying physical risks associated with climate change,” said Acting Chair Allison Herren Lee. “Through these and other efforts, we are integrating climate and ESG considerations into the agency’s broader regulatory framework.”
“Our priorities reflect the complicated, diverse, and evolving nature of the risks to investors and the markets, including climate and ESG,” said Division of Examinations Director Pete Driscoll. “In this unprecedented time, the Division is committed to continuing to adapt examination processes and find innovative ways to enhance the effectiveness of examinations and our risk-based approach. However, the bedrock of our examination program remains unchanged. The work we do, from examinations to publishing risk alerts and conducting outreach, serves our mission to promote compliance and protect investors.”
The newly announced Climate and ESG Task Force will be led by Kelly L. Gibson, the Acting Deputy Director of Enforcement. According to the SEC, the task force’s initial focus “will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.”
“Climate risks and sustainability are critical issues for the investing public and our capital markets,” said Acting Chair Lee. “The task force announced today will play an important role in enhancing and coordinating the efforts of the Division of Enforcement, the Office of the Whistleblower, and other parts of the agency to bolster the efforts of the Commission as a whole on these vital matters.”
Following the SEC’s announcement, the National Whistleblower Center (NWC) released a statement commending the task force’s creation. In July of 2020, the NWC released a report “Exposing a Ticking Time Bomb: How Fossil Fuel Industry Fraud is Setting Us Up for a Financial Implosion – and What Whistleblowers Can Do About It.” The report details “the dramatic understatement of risks posed by climate change to fossil fuel companies’ own financial condition and to the economy at large,” and highlights the crucial role whistleblowers can play in exposing these types of fraud.
“We applaud the SEC’s commitment to addressing fraudulent concealment of climate risk through the creation of this task force,” said John Kostyack, Executive Director of the NWC. “Decades of deception in the fossil fuel industry have cheated investors of critical information and left our economy woefully unprepared to address climate change. We look forward to working with whistleblowers and others fighting climate-related corruption to ensure that this task force succeeds with its critical mission.”
Since the SEC Whistleblower Program was created in 2010, whistleblowers have played a crucial role in the SEC’s enforcement efforts. According to the program’s 2020 annual report to Congress, $2.7 billion in total monetary sanctions have been triggered by whistleblower disclosures, including “more than $1.5 billion in disgorgement of ill-gotten gains and interest, of which more than $850 million has been, or is scheduled to be, returned to harmed investors.” Since issuing its first whistleblower award in 2012, the SEC has awarded approximately $758 million to 142 individuals.
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SEC Division of Examinations Announces 2021 Examination Priorities
SEC Announces Enforcement Task Force Focused on Climate and ESG Issues
