The "Ensuring Sound Guidance Act of 2025" requires investment advisors to prioritize financial factors in investment decisions unless clients provide written consent otherwise, mandates studies on climate change disclosures and political influence in the municipal bond market, and requires the SEC to report findings and recommendations to Congress.
Garland "Andy" Barr
Representative
KY-6
The "Ensuring Sound Guidance Act of 2025" amends the Investment Advisers Act of 1940, requiring brokers and advisors to prioritize financial factors in investment decisions unless clients provide written consent otherwise, and mandates disclosures of expected and actual financial effects of investments. Additionally, the SEC is required to conduct studies on climate change disclosures in the municipal bond market and on regulations preventing the use of funds to influence officials in exchange for municipal securities business, and provide recommendations to Congress based on the findings.
Bill Mandates 'Finance-First' Investment Advice Without Consent, Launches Muni Market Probes
The Ensuring Sound Guidance Act of 2025 proposes changes to how investment advisors operate and kicks off two significant studies into the municipal bond market. At its core, the bill amends the Investment Advisers Act of 1940 to require that brokers and investment advisors prioritize 'pecuniary factors' – things expected to significantly impact an investment's risk or return – when acting in a client's best interest. Considering non-financial factors would require explicit, written consent from the customer.
Financial Focus First: What It Means for Your Portfolio
This legislation directly impacts how investment advice is tailored. Under Section 2, unless you sign off in writing, your advisor must focus solely on financial risk and return. If you do consent to considering non-financial elements (like environmental, social, or governance – ESG – factors), the advisor must disclose the expected financial effects over a period you choose (up to three years). Later, they must report the actual financial performance, including all fees, compared to a relevant benchmark index you select. This means someone wanting strictly the best financial return might see little change, but an investor wanting to align investments with specific environmental or social values would need to take the extra step of providing written consent. The rules also mandate clearer reporting on how these choices affect the bottom line.
Digging into Muni Bonds: Climate Risk & Influence
Beyond individual investment advice, the Act directs the Securities and Exchange Commission (SEC) to conduct two major studies within a year, both requiring public feedback. The first (Section 3) examines how often municipal bond issuers (like cities or states raising money for projects) disclose climate change and other environmental risks to investors. It will look at whether these disclosures are consistent and how much investors actually use them. The goal is to assess if investors are getting a clear picture of potential environmental risks tied to these bonds.
The second study (Section 4) focuses on 'pay-to-play' concerns in the municipal securities business. It directs the SEC to evaluate how well current rules (like MSRB Rule G-38 and Rule 206(4)-5) prevent funds from being used to improperly influence elected officials for bond business. This study will also specifically consider the impact on small, minority, and women-owned businesses competing for this work.
The Real-World Ripple Effect
These changes could bring more transparency for investors focused purely on financial metrics, thanks to the enhanced disclosure requirements. The municipal bond studies could also lead to clearer information about climate risks and fairer competition for city contracts down the line. However, the requirement for written consent to consider non-financial factors introduces a potential hurdle for investors interested in ESG principles. Much depends on how 'pecuniary factor' is interpreted and applied in practice. The investment advice changes are set to take effect 12 months after the Act becomes law, while the SEC has one year to complete its reports on the municipal market studies and recommend any further actions.