HR2358-119

What This Bill Does

The ESG Act changes securities regulation in three ways. First, broker-dealers and investment advisers must determine a customer's best interest using pecuniary factors unless the customer gives written informed consent to consider non-pecuniary factors. If consent is given, the adviser must disclose expected pecuniary effects over a customer-selected period of up to three years and then disclose actual effects against a comparable index or basket, including fees and costs. Second, SEC must study climate change and environmental disclosures in the municipal bond market, including frequency, consistency, standards, investor use, financial risks, disclosure adequacy, and possible regulatory or legislative steps. Third, SEC must study MSRB Rule G-38 and Advisers Act Rule 206(4)-5 on solicitation of municipal securities business, including enforcement, political-participation effects, small-business and minority or women-owned business impacts, and recommendations.

Who Benefits and How

Consumer investment customers benefit from written consent and performance-effect disclosures before advisers consider non-pecuniary ESG factors. Municipal bond lenders benefit from an SEC review of climate and environmental disclosure practices and related financial risks. Municipal bond disclosure administrators benefit from a study that can clarify whether issuer environmental disclosures are consistent across investor and non-investor audiences. Small municipal finance employers benefit if the SEC study identifies pay-to-play rules that unnecessarily disadvantage small, minority-owned, or women-owned businesses. Municipal Securities Rulemaking Board compliance staff benefit from a congressional request for evidence on Rule G-38 effectiveness. Minority-owned municipal finance employers benefit if the study documents barriers created by solicitation rules.

Who Bears the Burden and How

Broker-dealer compliance staff must document written consent and disclose expected and actual pecuniary effects when using non-pecuniary factors. Investment adviser compliance staff must compare actual pecuniary effects against a reasonably comparable index or basket and include fees, costs, and expenses. SEC municipal securities staff must issue implementing rules within 12 months and complete two municipal securities studies with public comment and congressional reports. ESG adviser managers may face reduced discretion to subordinate financial factors to non-pecuniary objectives without explicit customer consent. Municipal securities dealer managers must participate in the study record on pay-to-play rules, enforcement, and solicitation practices.

Key Provisions

• Requires customer best-interest determinations to use pecuniary factors unless written informed consent allows non-pecuniary factors.
• Requires expected and actual pecuniary-effect disclosures over a customer-selected period of up to three years.
• Directs SEC to study climate and environmental disclosures by municipal securities issuers and report within one year.
• Directs SEC to study municipal securities solicitation rules, enforcement, political-participation effects, and impacts on small, minority-owned, and women-owned businesses.
• Requires SEC implementation rules within 12 months after enactment.