Inspire Investing, a faith-based Idaho RIA, has agreed to a $300,000 fine after the Securities and Exchange Commission filed a complaint against him alleging he misled investors regarding its “biblically responsible investing” strategy.
The SEC yesterday imposed the fine, plus a censure and cease-and-desist order, on Inspire for what it described as its “material misstatements concerning how it managed investments for clients.”
The SEC said that the firm misrepresented its asset allocation process, advertising it as scientifically based when in actuality it was driven by a small internal staff that sometimes made investments that were contrary to the firm's stated goals.
The agency said that from at least 2019 to March, Inspire stated on its Form ADV brochure and its exchange-traded funds (ETF) prospectuses that its ETFs and its separately managed accounts (SMA) would not invest in companies that have any dealings with activities or products that do not align with the firm’s biblical values. But the SEC said the firm failed to live up to those claims.
Inspire did not admit to or deny the SEC’s findings.
Robert Netzly, Inspire’s CEO, told Financial Advisor that he is pleased to have resolved this issue. “We are thankful for getting some guidance from the SEC on this really important matter regarding faith-base investing,” he said, noting that the firm has been working with the SEC for a few months to resolve the issues.
The firm also issued a statement on its website, which in part states, “We have full confidence that the enhancements we have made and will continue to make to our processes and procedures put us and our clients on solid ground in the current regulatory landscape.”
Inspire, which as of March reported having about $2.5 billion in regulatory assets under management, advises eight ETFs and SMAs, the SEC noted. The activities and products the firm deemed unsuitable for its investments include, among others, abortion philanthropy, legislation and procedures; alcohol, cannabis retail, cultivation and processing, embryonic 3 stem cell research; gambling; human rights exploitation; in vitro fertilization; LGBT legislation, philanthropy and promotion; pornography; and tobacco.
The SEC said Inspire’s prospectuses stated that the firm utilizes “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.” The firm also promoted its methodology on its website as “objective” and “rules-based” and said it “brings together the most robust data sets from the world’s leading providers.”
Inspire, the SEC said, further boasted about the “reliability” of its methodology in a white paper posted on its website, which noted that the analysis “reflects a rules-based, scientifically rigorous methodology of faith-based ESG analysis which creates a level of consistency and reliability of results necessary for making well-informed, quantitatively sound, biblically responsible investment decisions.”
But the SEC said there was nothing scientific about Inspire’s research. The agency said the firm instead relied on research conducted manually by a small staff of its employee “and did not introduce best-practice disciplines of data science into the collection, organization, and analysis of faith-based screening data, as represented to investors.”
The employees’ research, the SEC noted, was “primarily limited to cross-referencing company names with donor and sponsor lists of well-known national organizations that it determined were associated with Prohibited Activities.”
“Inspire’s screening process resulted in numerous instances of the Inspire ETFs and client portfolios investing in companies that engaged in" activities the firm said it prohibited, the SEC said.
In a statement, Corey Schuster, co-chief of the asset management unit in the SEC's Division of Enforcement, said, “Investors must be able to rely on advisers acting consistently with their represented investment process or strategy.” He added, “Here, Inspire Investing’s investment screening process was not what it represented to investors, resulting in it making investments that were contrary to its stated investment criteria.”
In addition to the sanctions, Inspire consented that it violated the antifraud provisions of the Investment Company Act of 1940 and Investment Advisers Act of 1940. The firm also agreed to retain an independent compliance consultant to “review the firm’s practices, disclosures, and written policies and procedures concerning selection of investments and application of investment criteria.”