Investment advisors may not be legally prohibited from investing hate groups’ money, but there are other reasons advisors may want to steer clear of these controversial organizations.
For instance, taking money from “hate” groups could damage a firm’s public image, and may run counter to internal ethics policies, according to several law professors.
They caution, too, that specific groups and individuals need to be screened for being on terrorism watch lists before firms accept them as customers.
“Legally speaking, neither banks, investment advisors, nor any other financial services firm is permitted to assist, in any way, persons or groups that have been designated terrorists or terrorist groups,” Robert C. Hockett, a professor at Cornell Law School, told ThinkAdvisor.
Beyond this, there is not a lot of regulatory or contract law governing investment advisors’ relations with extremists who have not been designated terrorists, Hockett said.
One exception he highlights is an investment advisor who may be required by a contract “to keep clients apprised of the existence of one another as clients of the same advisor,” Hockett said. “Were there any such case, then a failure to disclose would … be breach of contract and, thereby, a possible breach of the fiduciary requirements.”
An advisory firm also might get into trouble by holding itself as a “socially responsible” or “angel” advisor specializing in assisting clients to “do well by doing good” by assisting with investments in worthy causes, according to Hockett. “Under some circumstances, aiding extremists who push goals inimical to the advertised ‘worthy causes,’ could open the advisor to legally cognizable charges of fraud — either by the SEC, by private investors, or both.”
Also, there can be “adverse publicity” for the advisory firm, Hockett said, adding that in “extreme cases” it can be “nearly as harmful to the advisor as civil or criminal legal actions themselves.”
Meanwhile, there is a concern about Bitcoin, too. Many hate groups, which have been banned by such organizations as Amazon Smile, PayPal and credit card processors, have opted to fund operations or accept donations in Bitcoin, according to the Southern Poverty Law Center. In response, some bitcoin wallet companies, like Coinbase, have chosen not to do business with extremists, the center said.