The Securities Industry and Financial Markets Association is challenging two new Missouri rules that would require financial firms and professionals to detail further reporting when considering investments that incorporate social or “nonfinancial objectives.”
Filed in the U.S. District Court for the Western District of Missouri, the lawsuit argues that the state of Missouri has enacted unnecessary recordkeeping rules as of July 30, and “fails to acknowledge that federal law, regulations, and applicable rules already require financial advisors to act in the best interest of their clients when providing personalized investment advice.”
Under Missouri Securities Division rules, financial firms and professionals are required to obtain client signatures on state-scripted documents before providing advice on “social objectives or nonfinancial objectives.” These mandated scripts require financial firms and clients to recognize that adding such objectives could result in investments and advice “that are not solely focused on maximizing a financial return.”
According to the complaint, “social objectives” encompass socially responsible criteria, which includes: “A. International, domestic, or industry agreements relating to environmental or social goals; B. Corporate governance structures based on social characteristics; or C. Social or environmental goals.”
The rules also mandate firms provide written scripts to clients annually and requires them to be resigned at least every three years.
SIFMA further contends that such rules are already in motion under federal law, in which firms are not allowed to place their interests ahead of clients’ interests.
Past legislation
The complaint points to the National Securities Markets Improvement Act of 1996 (NSMIA), which created a uniform regulatory regime for the fifty states and reallocated authority to federal regulators.
Under NSMIA, only the Securities and Exchange Commission (SEC) can regulate investment advisors managing $100 million or more in client assets, while states may only “retain authority to investigate and bring enforcement actions with respect to fraud or deceit.”
Furthermore, as part of NSMIA, the SEC regulates multiple central functions of brokerage firms, including the amount of capital firms must maintain, the margin accounts they may offer, and the type of records they must make and keep, and prevents states from imposing on federal “covered securities” like mutual funds, according to the complaint.
SIFMA thus argues that Missouri’s rules violate NSMIA by regulating the activities of investment advisors, mandating new recordkeeping requirements, and placing restrictions on covered securities.
The complaint also states that Missouri’s rules are preempted by the Employee Retirement Income Security Act of 1974 (ERISA), in which advisors who provide fiduciaries services to ERISA plans are regulated by the law.
Violation of constitutional amendments
Lastly, SIFMA argues that Missouri’s rules are unconstitutional and vague, noting that by requiring financial advisors to write documents related to controversial matters, the state is violating First and Fourteenth Amendment rights.
“The statements the Rules require are not purely factual but rather constitute a regurgitation of a script created by Defendants relating to a controversial political issue,” SIFMA writes. “Specifically, the Rules require financial professionals to describe common investment strategies, and many federal covered securities, as ‘not solely focused on maximizing a financial return for me or my account’ even in situations where the financial professional does not believe that statement to be accurate.”
SIFMA is seeking declaratory judgements under NSMIA, ERISA, and the First and Fourteenth Amendments.
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.