SIFMA sues Missouri over ESG investment rules

The Securities Industry and Financial Markets Association this month launched the latest volley in the battle over environmental, social and governance investment factors, filing a federal lawsuit over Missouri’s first-of-its-kind ESG securities rules.

The Show Me State’s new rules require advisors and broker-dealers to obtain written consent from customers to buy or sell an investment produced based on social or other non-financial objectives. The disclosure would require an acknowledgment that incorporating ESG considerations “will result” in investments and advice “that are not solely focused on maximizing a financial return for the client.”

SIFMA named Missouri Secretary of State John “Jay” Ashcroft, who has jurisdiction over the state’s securities, and Missouri Securities Commissioner Douglas Jacoby in the complaint, which was filed in the U.S. District Court of Western District of Missouri, Central Division.

SIFMA says the rules conflict with federal securities law that calls for a uniform regulatory and disclosure regime across the states. “This type of regulation is entirely novel,” the trade association said in the complaint, adding that Missouri goes “grossly overboard” lumping all nonfinancial objectives together. “There is no precedent for it in the securities laws and none of the other 49 states require it.”

Ashcroft, who is the son of the former U.S. Attorney General John Ashcroft, enacted the rules after lawmakers failed to pass a bill with the same goals. Other Republican states are eying the measure, with Wyoming’s Secretary of State laying out a similar proposal.

The rules open a new front of efforts in the Republican-led anti-ESG battle by attempting to directly regulate asset managers, as bills passed to date have regulated state funds or contracts, according to K&L Gates, which tracks ESG-related state legislative activity.

This “appears to be the first instance of a state regulatory body moving independently of the state legislature on ‘anti-ESG’ matters,” said K&L said in a July 25 blog post. Direct state regulation “could lead to “significant fragmentation of asset manager compliance obligations across the United States,” and raises “important legal questions concerning the pre-emption of asset manager regulation at the state level for federally-registered asset managers.” 

The Missouri rules conflict with the National Securities Market Improvement Act of 1996, which was an effort to combat a “balkanized state-by-state regulatory framework that hampered the markets’ growth,” SIFMA president and CEO Kenneth E. Bentsen, Jr. said Friday in an opinion column that ran in the St. Louis Dispatch.

The rules “only serve to undermine our national securities market structure to the detriment of our retail and institutional investors and companies, governments and non-profits who today access this critical structure to grow and preserve wealth and fund capital formation,” Bentsen wrote, adding the measures are unnecessary because federal laws already require financial advisors to act in the best interest of their clients when providing advice.

Ashcroft, who is running for governor, defended the rule, saying it was aimed at protecting investors “from those who disguise the truth.”

“The rule implements client disclosure standards pertaining to security investments and how investment advisors and broker-dealers disclose investment strategies that propagate values-based agendas that are not purely focused on generating profit for their clients,” he said in a statement.