Two new Missouri Securities Division rules that force investment professionals to obtain client signatures on state-scripted documents before recommending a social objective or other nonfinancial objective are being challenged in federal court.
The Securities Industry and Financial Markets Association (SIFMA) sued Secretary of State Jay Ashcroft in the U.S. District Court for Missouri’s Western District requesting the court to strike down the regulations that SIFMA alleges will confuse investors and violate federal law.
SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets.
“This lawsuit is necessary to prevent Missouri from both violating federal law, and potentially harming Missouri investors and the financial professionals and firms in Missouri who today serve their customers’ best interests,” said SIFMA’s President and CEO Kenneth E. Bentsen, Jr.
The state-mandated scripts require financial firms and clients to acknowledge that incorporating these objectives will allegedly result in investments and advice that are not solely focused on maximizing a financial return for the client.
The Rules, which became effective July 30, also require firms to provide the written scripts to clients annually, and to secure new client signatures on the scripts no less than every three years.
“This type of regulation is entirely novel,” wrote Jefferson City Attorney Angela Kennedy in the Aug. 10 complaint. “There is no precedent for it in the securities laws, and none of the other forty-nine states require it. 6. This is exactly the type of piecemeal state securities regulation that Congress prohibited more than 25 years ago when it passed the National Securities Markets Improvement Act of 1996.”
NSMIA solely authorizes the Securities and Exchange Commission to oversee the conduct of investment advisers who manage more than $100 million in client assets and states are not permitted regulate their activities.
“States only retain authority to investigate and bring enforcement actions with respect to fraud or deceit,” Kennedy stated. “NSMIA also prevented states from imposing conditions on federally covered securities. These include most of the securities ordinary investors buy and sell, such as mutual funds.”
SIFMA seeks to permanently enjoin the Rules, which allegedly violate federal proscriptions, and seeks a declaratory judgment under 28 U.S.C. § 2201, that rules violate the First and Fourteenth Amendments of the United States Constitution.
"NSMIA improved the national securities markets by preempting states from imposing overlapping and conflicting regulatory responsibilities that could undermine the markets’ efficiency and effectiveness," Bentsen added. "SIFMA has consistently supported NSMIA’s directive to ensure the efficiency, primacy, and preemptive effect, of federal securities laws.”