August 14, 2024
Contact: IAA VP of Communications & Marketing Janay Rickwalder
A federal district court in Missouri has handed SEC-registered investment advisers a sweeping victory in a case that directly addresses whether states can impose substantive regulation on SEC advisers and their adviser personnel. The court’s decision is a resounding “no.” The decision is in complete agreement with the Investment Adviser Association’s longstanding position that state laws or rules that attempt to impose substantive regulation on SEC advisers and their adviser personnel are preempted by federal law. The IAA submitted an amicus (“friend of the court”) brief in this case in June, explaining the limits on the ability of states to regulate SEC advisers and their adviser personnel under federal law.
This case challenged new Missouri rules that require investment advisers and their adviser personnel 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’s amicus brief pointed out that federal law (through a statute known as NSMIA) allows states only to license and qualify some adviser personnel of SEC advisers, and to investigate and punish fraud. NSMIA prohibits states from substantively regulating these parties. The court agreed, holding that the Missouri rule “is preempted because it impermissibly imposes new and different State regulatory obligations that are not required by federal law,” and “far exceed[s]” the limited authorities NSMIA gives to states.
Allowing Missouri to impose obligations on SEC advisers or their adviser personnel would have had widespread negative consequences for investment advisers with a national business. It would have subjected advisers’ 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. The IAA applauds today’s important decision, which recognizes and reaffirms the jurisdictional division between the SEC and the states that Congress ordered when it enacted NSMIA.
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