June 26, 2024
On Tuesday, June 25, the IAA submitted a “friend of the court” or amicus brief in a lawsuit filed in federal court in Missouri. The IAA’s brief focuses on the critically important issue of whether Missouri or other states have the legal authority to impose substantive regulation on SEC-registered investment advisers and their adviser personnel. Our answer is a resounding “no.”
As the leading organization representing the interests of fiduciary investment advisers, the IAA is in a unique position to help the court understand this issue. We played a key role in passing the federal statute at issue in this case – the National Securities Markets Improvement Act of 1996 (“NSMIA”). That statute broadly preempts – i.e., prohibits – state regulation of SEC advisers and their adviser personnel, with very limited exceptions.
Missouri law requires investment advisers to disclose to clients if they consider ESG factors when making investment recommendations. Clients must then provide written consent before an adviser can use these factors in its investment strategy. The disclosure would need to state that the ESG factors are being considered for non-financial reasons, regardless of whether this is the case. The IAA strongly believes that regulation should be strategy neutral. Policymakers should not put their thumb on the scale on how fiduciary advisers make investment decisions on behalf of their clients.
While NSMIA allows states to license and qualify some adviser personnel of SEC advisers, and to investigate and punish fraud, the law prohibits states from substantively regulating these parties. This regulatory responsibility was explicitly given to the SEC. Congress enacted NSMIA specifically to create a clear division of responsibilities between state and federal regulators. This division is crucial for overseeing the investment adviser industry to avoid inefficient, duplicative or contradictory regulations that impose an unnecessary burden on investment advisers, and ultimately on the clients they serve.
The IAA decided to weigh in in this case because of its importance to our members as a whole. Allowing Missouri to impose obligations on SEC advisers or their adviser personnel will have widespread negative consequences for investment advisers with a national business. It will subject their fiduciary judgment to divergent and shifting political influences on an endless range of issues, flooding the field of investment adviser regulation with inconsistent, unpredictable, overlapping, and costly state rules and regulations, creating an even more challenging situation than the one Congress outlawed almost 30 years ago.
The IAA continues to actively engage policymakers and courts to address issues of relevance to our members and advocate for changes that benefit you.
Please contact the IAA legal team at iaalegalteam@investmentadviser.org with questions or comments.
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