District Court Strikes Down Missouri Anti-ESG Rules, Grants Statewide Injunction

A federal court in Missouri ruled Wednesday in a favor of the Securities Industry and Financial Markets Association’s lawsuit against two regulations enacted by the state that require additional recordkeeping for advisers and brokers recommending or selecting investments with a “nonfinancial objective.”  

The Missouri rules, which took effect on July 30, 2023, required financial professionals who consider “a social objective or other nonfinancial objective”—such as environmental, social and governance factors—in their investment advice to disclose this to their clients and obtain their clients’ written consent to state-mandated language in the rules. In the order filed Wednesday, U.S. District Judge Stephen Bough issued a statewide permanent injunction halting the rules.  

In those rules, an investment adviser’s client would be required to re-sign the document at least once every three years and every time new advice is given. 

In SIFMA v. John R. Ashcroft, Secretary of State of Missouri; and Douglas M. Jacoby, Missouri Securities Commissioner, filed in U.S. District Court for the Western District of Missouri, SIFMA argued that federal law already required advisers to act in their clients’ best interest and that the regulation would restrict that ability because it does not precisely define what a “financial objective” means.  

The first Missouri rule states that a “nonfinancial objective” is “the material fact to consider criteria in the investment or commitment of customer funds for the purpose of seeking to obtain an effect other than the maximization of financial return to the customer.” 

SIFMA also argued in its complaint that Missouri cannot, without violating the First Amendment, require financial professionals to make “politically charged statements” that are not factual. According to the complaint, the state-mandated scripts require financial firms and clients to acknowledge that incorporating these objectives will result in advice and investments “that are not solely focused on maximizing a financial return” for the client.  

The court ruled in favor of SIFMA on all counts, stating that “the rules are preempted by [the National Securities Markets Improvements Act (NSMIA)] and [Employee Retirement Income Security Act (ERISA)], are unconstitutional under the First and Fourteenth Amendments of the United States Constitution, and are impermissibly vague under the Fourteenth Amendment of the United States Constitution.”  

Because the plaintiff showed a violation of constitutional rights and that those violations would “be suffered by others in the future,” the court also ordered a statewide permanent injunction prohibiting the implementation, application or enforcement of the rules. 

SIFMA’s president and CEO, Kenneth E. Bentsen, wrote in a statement: “Congress enacted NSMIA to alleviate the redundant, costly, and ineffective dual federal/state regulation of our securities market system. Today’s ruling was necessary to prevent Missouri from violating NSMIA, among other things, and from hindering communications between Missouri investors and the financial professionals who serve them. This decision marks a major victory not only for our national securities market system, but also for our nation.”  

Bentsen also stated that federal securities laws already require financial professionals to provide investment advice and recommendations that are in their clients’ best interest, thus rendering the Missouri rules “unnecessary” and responsible for confusion. 

The Investment Adviser Association applauded the court’s decision, stating in a press release that “allowing Missouri to impose obligations on SEC advisers or their adviser personnel would have had widespread negative consequences for investment advisers with a national business.” 

The Department of Labor also has litigation pending on its ESG rule issued in 2022 regarding investing in DC retirement plans. That rule allows for ESG factors to be considered but does not require them. The lawsuit, Utah v. Su, was  from the U.S. 5th Circuit Court of Appeals. 

Any appeal of the Missouri decision would be made to the 8th Circuit Court of Appeals.