SEC Accuses Investment Advisory Firm of Misleading Investors about its “Biblically Responsible Investing” Investment Strategy

The U.S. Securities and Exchange Commission (SEC) recently instituted administrative proceedings and issued a cease-and-desist order with sanctions against an Idaho-based investment adviser firm. According to the SEC’s order, Inspire Investing, LLC (“Inspire” or “Inspire Investing”) materially misled investors as to its so-called “biblically responsible investing” strategy. 

The SEC alleged that in addition to willfully misleading investors, the company didn’t have written policies or procedures defining how to evaluate whether or not companies they intended to invest in met the “biblically responsible” criteria. As a result, Inspire’s investment criteria were inconsistently applied, and at times, the firm invested in companies that were not “biblically responsible” — in direct opposition to its promises to investors. 

In response to the administrative proceedings, Inspire Investing submitted an Offer of Settlement to the SEC and agreed to the entry of the SEC’s cease-and-desist order “without admitting or denying” the allegations. It also agreed to pay a $300,000 penalty, retain an independent compliance consultant to review (among other things) its written policies and procedures, company practices, and disclosures regarding how the firm selects investments, and submit a report to the SEC. 

This latest enforcement action by the SEC may presage an “enforcement trend” targeting investment advisers. After all, the SEC brought 62 stand-alone enforcement actions against investment advisers in 2023. So let’s take a closer look at the duties of investment advisers and what Inspire is alleged to have done.  

Who qualifies as an “Investment Adviser”?

An investment adviser (spelled “adviser,” not “advisor,” in the applicable laws), can be anyone — whether a company or individual — who is engaged in the business of providing securities advice, issuing reports, or securities analyses for compensation. Of course, not everyone who provides securities advice fits the definition of “investment adviser” and the law provides certain exemptions even for those who arguably do. In addition, it should be borne in mind that an investment adviser’s relationship with his/its clients is not the same as the relationship that financial advisers, brokers, or broker-dealers have with their clients. 

Investment advisers who are paid for their advice regarding securities are required to register either with the Securities and Exchange Commission (SEC) or state securities administrators. These advisers are called registered investment advisers (RIA). RIAs provide advice on securities in exchange for fees and manage the assets of individual and institutional investors. The employees of an RIA are called “Investment advisor representatives.” They are the financial professionals who work for the RIA.

Getting paid for securities advice is one factor that determines whether someone is an investment adviser and it is the factor that mandates registration. However, it is the value of the assets under the investment adviser’s management that dictates which agency (SEC or state) the adviser must register with. Currently, “small” advisers (those with less than $25 million in assets under management) or “mid-sized” advisers (those with between $25 million and $100 million in assets under management) must register with state regulators only. They are prohibited from registering with the SEC. 

What Laws Define and Govern Registered Investment Advisers?

There are two major laws that define and govern the activities of investment advisers. They are the:

• Investment Advisers Act of 1940 (“Advisers Act”) and 

• Investment Company Act of 1940 (“Investment Company Act”)

The SEC has the authority to enforce both of these federal laws.

While the two laws sound very similar, they regulate different aspects of investment companies and investment advisers. Very briefly, the Advisers Act defines the role and responsibilities of investment advisers — including their fiduciary duties. It also sets out the standards and rules (for example, filings and disclosures) that investment advisers must comply with. 

The Investment Company Act, on the other hand, focuses on the regulation of open and closed-end investment companies. Whereas the Investment Company Act regulates the investment companies themselves, the Advisers Act regulates the actual investment advisers. 

 What are the Duties of a Registered Investment Adviser?

Because they are fiduciaries, investment advisers are held to the highest standard of conduct. This means that they have a “fundamental obligation” to act in the utmost good faith and in the best interests of their clients. 

The federal fiduciary duties of an investment adviser are not specified in the Advisers Act. Rather, they arise from the intent expressed in the Act to eliminate any conflict of interest between an investment adviser and his/her/its clients that would interfere with the adviser acting in a wholly disinterested manner on the client’s behalf. These fiduciary duties also arise from Congress’ recognition of the fact that the role of an investment adviser is one of a “delicate fiduciary nature.” 

The scope of an investment adviser’s fiduciary duties to his client is determined by the nature and scope of the relationship. Generally speaking, however, all investment advisers owe their clients two central, non-waivable fiduciary duties:

• a duty of care and 

• a duty of loyalty.

These two main fiduciary duties (both of which have subparts to them), require investment advisers to always act in the highest and best interests of their clients.

Duty of Care

The duty of care has several components to it. These include:

• The duty to provide advice that is in the client’s best interests

• The duty to obtain execution of transactions that are in the client's best interests — maximizing the value for the client of each transaction at the time of its execution, and

• The duty to act and provide advice and monitoring over the course of the relationship. 

(A full explanation of each of these subparts is beyond the scope of this post. However, you can learn more here, here, and here.)

Duty of Loyalty 

This duty requires the investment adviser to put his client’s interests above his own interests or those of other clients. The duty of loyalty encompasses an affirmative duty to treat all clients equally (i.e., not favoring one client over another) and to fully and fairly disclose any and all conflicts.

The duty of loyalty requires an investment adviser to fully and fairly disclose all conflicts of interest that might exist and to fully and fairly disclose any and all material facts that might affect the advisory relationship. This could relate to conflicts of interest or to an investment adviser’s business practices. Regardless of the issue at hand, all disclosures must be clear and have enough detail so that the client can make an informed decision regarding the conflict. 

In some instances, just disclosing the conflict won’t be sufficient for an adviser to fulfill his fiduciary duty. In those cases, the investment adviser must either eliminate the conflict, or adequately mitigate it.

The SEC’s Administrative Action against Inspire.

With that fundamental understanding of investment advisers and their fiduciary duties, let’s take a closer look at the SEC’s case against Inspire Investing.

According to the SEC’s cease-and-desist order, Inspire Investing is a registered investment adviser (RIA) advising eight exchange traded funds and separately managed accounts. The SEC’s administrative action arose out of Inspire’s material misstatements made to its investors.

During the relevant time period, Inspire represented to its clients that it engages in “biblically responsible investing.” Inspire’s investment materials declared that they took steps to ensure that Inspire invested only in companies that were aligned with “biblical values” and not in companies associated with a list of activities Inspire considered “Prohibited Activities.” Inspire told investors that it applied a scientific and data-driven strategy to examine investments to ensure that they invested only in companies aligned with “biblical values.” 

The company described its method as one in which it gave companies a positive or negative score based on their business practices, and that this score then determined whether or not Inspire would invest in any particular company. It also represented that it used “software that analyzes publicly available data relating to the primary business activities, products and services, philanthropy, legal activities, policies and practices when assigning Inspire Impact Scores to a company.”

In reality, however, Inspire did not apply a “science and data-driven proprietary method” to its investment analysis. Rather, the SEC discovered that during the relevant time period, they had a small group of employees who manually cross-checked company names on a list of well-known national organizations that, according to Inspire, were associated with the so-called “Prohibited Activities.” The employees did nothing else. Inspire did not research individual companies to determine whether or not they had engaged in any of the “Prohibited Activities.”

In short, according to the SEC, Inspire:

• Materially misrepresented its research process, and had a research process that did not prevent deviations from the stated investment criteria,

• Did not apply its investment criteria consistently,

• Invested in companies that did not meet its own stated investment criteria, and

• Failed to adopt policies and procedures related to its investment process.

The SEC’s order, which Inspire assented to without admitting or denying the allegations, accuses Inspire of willfully violating the securities laws by, among other things, making untrue statements of material fact that were misleading, and engaging in fraud. 

How can investment advisers maintain trust by ensuring compliance with their stated values and processes? 

Maintaining trust by ensuring compliance with their fiduciary duties is of the utmost importance to investment advisers. To attain that end, investment advisers must understand the seriousness and breadth of each of their fiduciary duties — and they must abide by them. As the SEC has pointed out, investors cannot waive an adviser’s fiduciary duties. Nor can an adviser dispense with these duties by trying to “disclose”, negotiate or contract them away.

Disclosing conflicts is critical for advisers to fully comply with their fiduciary duties. To be meaningful, disclosures must be “clear” and sufficiently “detailed” so that investors can make informed decisions regarding any conflicts.

Probably the simplest way to ensure compliance with your stated policies as an investment adviser or investment adviser firm, is to be honest. Keep in mind that you must always act in the best interests of your client and be transparent. Don’t make misleading statements. Don’t make untrue statements. Review all policies and procedures and make sure that they align with your stated investment criteria.

Investment advisers should periodically review their business practices to ensure that they fully align with their stated values and processes and comply with all of their fiduciary duties. If conflicts arise, investment advisers must disclose, change, or eliminate them. There is no single way to do this, of course, so be sure to consult professionals for assistance and seek out information, including SEC publications, that can help guide you.

The securities laws were designed to protect investors. As such, they touch on a vast array of investment issues — including investment adviser duties. The securities laws also govern an issuer’s duty to verify accredited investors. VerifyInvestor.com makes verifying accredited investors easy, cost-effective, secure, and reliable. Our accredited investor verification services, (which also include qualified purchaser and qualified client verification), are always code-compliant and confidential. We help companies fully and easily comply with their legal obligations to verify accredited investors.