The Securities Industry and Financial Markets Association (“SIFMA”) recently filed a lawsuit against the Missouri Secretary of State, Jay Ashcroft, in U.S. District Court. This legal dispute is a result of new rules, which target broker-dealers and investment advisers for so-called “woke” investing, specifically using Environmental, Social, or Governance criteria (“ESG”) or other non-financial objectives (e.g., Bibically Responsible Investing, Halal Investing).
The new Missouri rules, effective from July 30, 2023, require broker-dealers and investment advisers to obtain written consent from customers to purchase or sell an investment product based on social or other nonfinancial objectives, such as combating climate change. This regulation was introduced after a similar “anti-woke” investing proposal failed in the Missouri Legislature. For specific details about the applicable rule for investment advisers, please read our Regulatory Alert: Missouri Is Now Requiring Written Client Consent for ESG Investing (7/13/2023) at https://www.ria-compliance-consultants.com/2023/07/missouri-investment-adviser-regulatory-alert/ .
SIFMA argues in its complaint that these new rules conflict with federal securities laws, which aim to provide a uniform regulatory regime for investors across all 50 states. The trade organization believes that these rules are unnecessary and create confusion, as broker-dealers and investment advisers are already required to provide investment advice in the best interest of their customers under existing federal laws.
The lawsuit further alleges that the rules violate the right to free speech under the U.S. Constitution by requiring brokers-dealers and investment advisers to adhere to a script outlined in the new rules. SIFMA’s stance is that “the government cannot compel professionals to make policy statements on political issues.”
SIFMA is seeking a declaratory judgment that the Missouri Secretary of State, in promulgating its new rules, violated the First and Fourteenth Amendments to the U.S. Constitution and pre-empted by National Securities Markets Improvement Act, the Investment Advisers Act and Employee Retirement Income Security Act and an enjoinment of the Missouri Secretary of State from implementing, applying, or taking any action whatsoever to enforce these rules.
For additional details, please review SIFMA’s complaint at https://www.sifma.org/resources/submissions/complaint-filed-in-the-u-s-district-court-for-the-state-of-missouri/ .
Implications for Investment Advisers
At this early stage of the litigation, an investment adviser in Missouri (i.e., an investment adviser firm which is state registered in Missouri, an investment adviser representative who is registered with Missouri and affiliated with a state registered firm, and an investment adviser representative of a federally covered investment adviser if such investment adviser representative has a place of business in Missouri) is still required under the new rule to disclose the use of non-financial objectives to the Missouri client and obtain clear and conspicuous written consent. This consent must be obtained at the time of establishing the account or prior to initial advice, recommendation, or use of discretionary authority. For purposes of investment advisers, this new rule made the failure to obtain such consent a dishonest and unethical act. All investment advisers should closely monitor this case and consider its potential impact on their compliance practices, especially those working with clients 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 Baseat 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 Storeat 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 Baseat 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 Storeat https://www.ria-compliance-consultants.com/product/esg-investment-adviser-best-compliance-practices-checklist/.
The information contained in this blog post is general in nature intended for educational purposes only. This is not a comprehensive summary or analysis of the complaint. RIA Compliance Consultants, Inc. has not verified the accuracy of the allegations of the pleadings and is not offering any opinion whether the allegations referenced above are accurate. This post will not necessarily be updated to reflect the most current activity and/or pleadings related to the dispute. Please consult the pleadings in this legal proceeding and applicable securities regulator’s rules and published guidance for more details about the topics referenced above. This communication is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.