A $2.5 billion investment advisor that touts “biblically responsible investing” for its line of ETFs and separately managed accounts hasn’t always practiced what it preaches, according to an SEC settlement filed Thursday.
The Idaho-based shop has claimed to use a science- and data-driven methodology to screen companies, called the Inspire Impact Score, the Securities and Exchange Commission stated. That has been used to exclude companies for numerous reasons, including unfavorable scores in categories ranging from abortion to alcohol and LGBT support.
“In practice, however, Inspire misrepresented its research process, did not apply its investment criteria consistently, invested in companies that should have been excluded based on Inspire’s stated investment criteria, and had a research process that failed to prevent departures from its stated investment criteria,” the SEC stated. “Inspire also failed to adopt reasonably designed policies and procedures related to its investment process.”
Among the firm’s nine ETFs are products with tickers such as BIBL, BLES, WWJD, GLRY, and RISN. Despite the stated screening processes, there were instances in which the ETFs and client portfolios held companies that “engaged in prohibited activities,” including donating to advocacy groups or sponsoring events, the SEC wrote. The filing did not point to any specific public companies in the portfolios.
“Inspire made material misrepresentations to clients and investors about how it would invest and failed to adhere to the Inspire ETFs’ and SMA clients’ investment criteria,” the regulator stated.
The case could be considered a testament to the SEC’s focus on fund advisor representations and marketing. The regulator has previously brought charges against asset managers over ESG claims that it said were misleading.
In Inspire ETF prospectuses, the firm notes that “it is not possible for the advisor to be aware of every action a company takes, and there may be additional positive or problematic activities which a company engages in that are beyond what is included in the Inspire Impact Score calculation.”
In a statement on the firm's site, it indicated it was pleased to have resolved the matter and that it cooperated with the SEC's investigation.
"In recent years, the SEC has investigated a significant number of investment firms offering screened investments, including secular firms with ESG or similar strategies, as well as faith-based firms. As a prominent provider of faith-based investing solutions, Inspire Investing was included in this process with a non-public fact-finding inquiry beginning in September 2022. We are pleased with the resolution of this matter and offer the following statements regarding the process," the statement read.
"We are thankful to have resolved this matter, which relates to certain historic processes, procedures, and marketing practices. We are grateful to receive guidance from the SEC on what it considers important regarding modern faith-based investment screening. 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."
As part of the agreement with the SEC, the firm will pay $300,000 and hire an independent consultant to review its practices and disclosures.
Inspire, like other fund sponsors that focus on social criteria, doesn’t fit neatly into a category, which can make performance evaluations tricky, said Daniel Sotiroff, manager research analyst, passive strategies, at Morningstar Research Services.
“They’re kind of like a small, standalone shop. This is all they do,” Sotiroff said.
The ETFs track indexes, but they have elements of active management, he said.
“Just because you’re tracking an index doesn’t mean you’re a passive strategy,” he said. “You can look very, very different and have some very active decisions that go into that index.”
BIBL, the Inspire 100 ETF, is in the US large blend category, where outperformance is already very difficult, he noted. That ETF has underperformed in the US large blend category over one-, three-, and five-year periods, while carrying higher risks during those timeframes, he said, citing Morningstar Direct data.
That ETF has faced performance headwinds in part because of high allocations to industrials (nearly a quarter of its portfolio) and low allocations to consumer stocks (about 1 percent of assets), Sotiroff said. In 2021, that fund had turnover of 100%, he noted.
The firm notes that its news product, the Inspire 500 ETF, does not invest in the “Magnificent Seven.”
Year to date through August, as well as over 12 months, four of the nine ETFs have been in net outflows, the Morningstar data show. BIBL is the company's second-biggest ETF, at nearly $342 million, behind the $367 million Inspire Corporate Bond ETF, according to figures from its site.
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