SIFMA v. Missouri ESG lawsuit heads toward August arguments

The Securities Industry and Financial Markets Association and State of Missouri have each filed summary judgement bids urging a judge to rule in their favor in a lawsuit over the state’s first-of-its-kind environmental, social and governance investment regulation.

The court has set an Aug. 13 date for oral arguments on the dueling motions.

SIFMA sued the Show Me State last August over a pair of four-month-old anti-ESG securities rules. The measures require advisors and broker-dealers to obtain written consent from customers to buy or sell an investment product based on social or other non-financial objectives, and 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.”

The regulation, which took effect last July, opened a new front in the national Republican-led anti-ESG battle by attempting to directly regulate asset managers. Previous bills passed to date have regulated state funds or contracts.

Missouri Secretary of State John R. Ashcroft enacted the rules after lawmakers failed to pass a bill with the same goals. SIFMA’s complaint named Ashcroft and Missouri’s Securities Commissioner Douglas Jacoby as defendants. States like Wyoming have eyed Missouri’s rules, though in February Wyoming Gov. Mark Gordon, a Republican, vetoed legislation that would have imposed similar ESG restrictions, saying it exceeded the state’s legal authority.

In January, Judge Stephen Bough of the U.S. District Court for the Western District of Missouri rejected Missouri’s request that he toss the lawsuit.

In its summary judgment motion, SIFMA argued the rules are preempted by two federal laws, the National Securities Markets Improvement Act and the Employment Retirement Income Security Act. The association also claims the rules violate the First Amendment by requiring firms to adopt and express the state’s position on the “nonfinancial” nature of ESG investing, and are unconstitutionally vague.

The “arguments for or against ESG investing are beside the point,” SIFMA said in its motion. “The question here is whether the rules comport with federal law. They do not. They intrude into areas that are the exclusive province of federal regulation. They abridge the freedom of speech by compelling speakers to make controversial, confusing, and misleading statements they do not wish to make. And they leave financial firms and professionals guessing as to what exactly the rules require.”

In its motion, the state argues that the “crux” of the law is “investor protection.”

“While federal securities regulation has expanded and grown over time, it has never been interpreted or applied to eliminate a state’s ability to protect its residents from fraud and deceit,” Missouri said.

Missouri said that NSMIA excludes the rules based on the state’s traditional police powers, and that the state securities regulation at issue is “expressly excluded” from ERISA preemption.

On the First Amendment argument, the state said that SIFMA and its representative member, Edward D. Jones & Co., L.P., “challenge language that is not found in the rules themselves. Even if the challenge involved language in the rules, the consumer protection disclosures at issue pass muster under the First Amendment.”