The Securities Industry and Financial Markets Association (SIFMA) filed a challenge in federal court to documentation rules for financial firms that were recently enacted in Missouri.
The rules, which went into effect July 30, require financial firms and professionals that incorporate any “social objective or other nonfinancial objective” into their analysis to obtain their customers’ written consent on a state-written prescribed script.
“Social” or “nonfinancial” objectives may include a variety of client objectives, such as tax considerations, diversification, risk tolerance, time horizon, liquidity needs, faith or values-based objectives, and local community investment objectives, among others.
As a result, the new rules require financial professionals in Missouri to create a highly prescriptive documentary record that no other U.S. states require. Thus, SIFMA argues, the rules directly conflict with a primary objective of the federal securities laws — namely, to create a uniform, consistent, regulatory regime across all 50 states to enhance the efficiency of the capital markets and ensure the free flow of capital nationwide.
“U.S. capital markets are the bedrock of our nation’s economy. They drive funds and human capital to the best ideas and the best enterprises. They provide substantial benefits to individual investors, institutional investors, governments and corporations. The national nature of our securities market system helps ensure that the U.S. has the deepest, most liquid markets in the world,” SIFMA’s President and CEO Kenneth Bentsen, Jr. said. “For that reason, in 1996, Congress passed the National Securities Markets Improvements Act (NSMIA) to, among other things, prevent states from adopting regulations that require financial professionals to create records ‘that differ from, or are in addition to’ those imposed by federal law.”
Bentsen added that NSMIA improved the national securities markets by preempting states from imposing overlapping and conflicting regulatory responsibilities that could undermine the markets’ efficiency and effectiveness.
He also pointed out that the new Missouri rules fill no void or blind spot that would protect Missouri investors. Broker-dealers and investment advisers are already required to provide investment advice that is in the best interest of their customers under existing federal securities laws. That means that firms must base their advice on the customers’ individual investment objectives and cannot put their interests ahead of their customers’ interests.
In the suit, SIFMA is asking the federal court to declare that Missouri overstepped its boundaries in violation of both federal preemption statutes and federal constitutional requirements. They said it will prevent Missouri from both violating federal law, and potentially harming Missouri investors and the financial professionals and firms in Missouri.