Judge strikes down Missouri anti-ESG investment rules

A federal judge Wednesday struck down a pair of year-old Missouri investment rules that regulated “non-financial” investment advice from broker-dealers and investment advisors.

Judge Stephen Bough of the U.S. District Court for the Western District of Missouri issued the order the day after hearing oral arguments from both parties, which had submitted dueling summary judgment motions. He ordered a statewide permanent injunction prohibiting the implementation, application, or enforcement of the rules.

Missouri Secretary of State John R. Ashcroft enacted the regulation 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.

A spokesperson for Ashcroft’s office said Bough’s ruling was “not just legally deficient but also morally wrong.”

The two rules require broker-dealers and investment advisors to disclose and obtain written consent from customers to buy or sell an investment product based on environmental, social or other non-financial objectives.

The annual disclosure requirement includes language that says incorporating ESG considerations “will result” in investments and advice “that are not solely focused on maximizing a financial return for the client.” Client consent in the form of a signature is required every three years.

SIFMA, which sued the state last August, argued that the rules are preempted by two federal laws, the National Securities Markets Improvement Act, and the Employment Retirement Income Security Act. The association also claimed 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.

Bough ruled in SIFMA’s favor on all four counts. On the NSMIA question, the judge wrote the rules are preempted because each one “impermissibly imposes new and different state regulatory obligations that are not required by federal law.” On the ERISA count, Bough cites SIFMA in saying the rules “undermine ERISA’s exclusive enforcement scheme and are therefore preempted.”

The court also agreed with SIFMA that the rules violate the First and Fourteenth Amendment as unconstitutionally vague — failing to adequately define “nonfinancial objectives” — and compelling language that is, among other things, controversial. Bough cites a ruling Missouri Times column by Ashcroft titled “Opinion: It’s Time to Rein In ESG,” and notes that these “statements discussing political priorities are not uncontroversial.”

In an emailed statement, Ashcroft’s office said Bough’s ruling was “puts Missouri investors at risk,” and that the “secretary of state’s office will neither abandon its statutory duty to regulate securities nor allow Missouri investors to be preyed upon by investment individuals that are afraid to be upfront and honest about their investment advice.”

SIFMA president and CEO Kenneth E. Bentsen, Jr. said the “decision marks a major victory not only for our national securities market system, but also for our nation.”

“Under today’s federal securities laws, financial professionals are already required to provide investment advice and recommendations that are in their customers’ best interest,” Benstsen said. “That means they cannot put their interests ahead of their customers’ interests when recommending securities. The Missouri rules were thus unnecessary and created confusion.”