The Missouri Secretary of State has amended its rule of what constitutes a dishonest and unethical act to include an investment adviser or an investment adviser representative’s failure to obtain written consent when recommending or utilizing discretionary authority to select an investment or third-party manager/sub-adviser based upon environmental, social or governance criteria (“ESG”) or other non-financial objectives.
Missouri Secretary of State
15 CSR 30-51.172 at https://www.sos.mo.gov/cmsimages/adrules/csr/current/15csr/15c30-51.pdf and Missouri Secretary of State: Code of State Regulations (mo.gov) at pages 17-19.
Depending upon the Facts and Circumstances, This Rule Amendment May Apply, But Is Not Limited To, The Following:
- An Investment Adviser Firm Which Meets the State’s Definition of Investment Adviser in Missouri;
- An Investment Adviser Representative of an Investment Adviser Firm Which Meets the State’s Definition of Investment Adviser in Missouri; and
- An Investment Adviser Representative of a Federally Covered Investment Adviser Firm (i.e., SEC Registered) If Such Investment Adviser Representative Has a Place of Business in Missouri.
High Priority If Investment Adviser Firm or Investment Adviser Representative Includes ESG or Other Non-Financial Objectives in Advice, Recommendations or Selections of Securities, Commodities and/or Third-Party Managers/Sub-Adviers
Summary of Key Requirements
To the Extent That an Investment Adviser or Investment Adviser Representative Incorporates ESG or Other Non-Financial Objectives Into Recommending or Selecting Securities, Commodities or Third-Party Money Managers/Sub-Advisers, Must Disclose Use of Such Objectives to the Client
- Clear & Conspicuous Written Consent by Client (i) At Time of Establishing Account, or (ii) Prior to Initial Advice, Recommendation or Use of Discretionary Authority
- Consent Language Must Be Substantially Similar to Example in Missouri’s Amended Rule
- Disclosure of Use of ESG & Other Non-Financial Objectives Required Annually Thereafter
- Must Obtain Additional Written Authorization No Less Than Every Three Years
CCO Action Items
The Following Are Possible Action Items that a CCO Could Take (Subject to Discussions with the Firm’s Executives and Outside Compliance Professionals):
- Develop & Obtain a Written Client Consent for ESG Investing and Other Non-Financial Objectives & Incorporate Into Client Agreement and/or Client Questionnaires for Any Investment Advisory Clients Residing in Missouri;
- Update Investment Adviser’s Compliance Manual to Reflect New Written Consent & Disclosure Requirements for ESG Investing and Other Non-Financial Objectives in Missouri;
- Conduct Compliance Training of New Written Consent & Disclosure Requirements for ESG Investing in Missouri;
- Update Form ADV Part 2A Item 8 Regarding Use of ESG & Other Non-Financial Objectives; and
- Deliver Annually to Each Applicable Client a Disclosure that ESG Objectives or Other Non-Financial Objectives Are Utilized When Recommending or Selecting Investments or Third-Party Money Managers/Sub-Advisers
- This New Requirement Is Also Applicable to Missouri Clients of a SEC Registered (Not Just State Registered) Firm if the Investment Adviser Representative Working with Such Clients Has a Place of Business in Missouri.
- This Rule Amendment Could Mark the Start of a New Trend Among Securities Regulators in Certain “Red” States – Consequently, Investment Advisers Should Monitor Other State Securities Regulators For Similar Rules Concerning ESG Investing.
- In Addition to ESG Investing, Other Investment Approaches Such as Biblically Responsible Investing or Halal Investing May Be Subject to this Amended Rule in Missouri.
- ESG Investing – Client Consent of Adviser’s Use of ESG Objectives
- Included with an Annual Compliance Program (Bronze, Silver, Gold, Platinum & Titanium packages) through our Knowledge Base at https://www.ria-compliance-consultants.com/knowledge-base/esg-investing-client-consent-of-advisers-use-of-esg-objectives/, or
- Available for an a la carte purchase through our Online Store at https://www.ria-compliance-consultants.com/product/investment-adviser-client-consent-esg/
- ESG Investing – Best Compliance Practice Checklist
- Included with an Annual Compliance Program (Silver, Gold, Platinum & Titanium packages) through our Knowledge Base at https://www.ria-compliance-consultants.com/knowledge-base/esg-investing-best-compliance-practices-checklist/, or
- Available for an a la carte purchase through our Online Store at https://www.ria-compliance-consultants.com/product/esg-investment-adviser-best-compliance-practices-checklist/.
- SEC Charges Investment Adviser for Alleged Misstatements About ESG Investing
- In Matter of Wahed Invest LLC (2/12/22)
- SEC Announces 2021 Examination Priorities for RIAs
- SEC is Focusing on ESG Investing by RIAs
- SEC’s Investor Advocate Supports Forming ESG Advisory Committee to Recommend ESG Disclosure Standards
This regulatory alert is a brief summary which is general in nature and offered only for educational purposes. It should not be considered as a comprehensive review or analysis of this development. This communication is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation without further analysis. This regulatory alert is not a safe harbor or a legal opinion. The reader should study the actual guidance, rule or enforcement action in detail and consult with his or her compliance professionals. This information in this regulatory alert may become out of date.