State Actions Can Create Litigation and Investigation Risk for Financial Services Firms in a Politicized Era | Morgan Lewis – All About FinReg


A group of state treasurers and state attorneys general (AGs) have raised concerns that certain environmental, social and governance (ESG) characteristics of certain fund disclosures and other marketing safeguards could create liability under unfair and deceptive or abusive acts or practices of the state (UDAAP) and anti-boycott, divestment and sanctions (anti-BDS) laws.

AGs believe that claims about environmental practices are potentially misleading because such practices do not maximize shareholder value or obscure true value as they believe it exists. Additionally, considering that social issues in financial products run counter to state laws prohibiting the state from doing business with entities perceived to be anti-Israel through conduct-related actions of BDS.

More recently, GAs in Arizona and Nebraska led a joint letter as listed financial companies that have been or will be disqualified from certain state enterprises for their alleged boycott of energy companies. This letter was joined by AGs from Alabama, Arkansas, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana , Ohio, Oklahoma, South Carolina, Texas, Utah, Virginia and West Virginia. The Missouri AG also announced the issuance of a Civil Investigation Request (CID or administrative subpoena) (joined by 19 other state AGs) to at least one ESG rating entity, seeking non-public documents under -tending its ratings, including an internal report issued by its lawyers. While the CID itself is not public, the Missouri AG has included a list of document requests in its Press release.

Interestingly, the Texas AG released what appears to be a copy of Missouri CID as part of A press release in which he states, “The ESG movement is the latest tool woke corporations are using to push a radical, left-wing social agenda into every corner of American life.

While the rhetoric and timing that accompanies these actions suggests political motivation, the state laws under which these actions are threatened are real and enforceable and could lead to enforcement action. Due to the possible underlying political motivations, the ordinary first phases of otherwise non-public investigations can take place in the harsh light of media attention. Accordingly, it is prudent to develop a bespoke legal strategy that combines public relations, communications and government affairs in an age of the 24-hour news cycle and in an age where the boundaries between law and politics fade away.

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