SIFMA lawsuit against Missouri's anti-ESG investment law survives

A trial over Missouri's first-of-their-kind ESG investment rules will go ahead after a federal judge this month rejected the state's motion to dismiss.

The Securities Industry and Financial Markets Association sued the Show Me State last August over a pair of four-month-old anti-environmental, social and governance 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."

Missouri Secretary of State Office

SIFMA argued in its complaint the rules conflict with federal securities laws that call for a uniform regulatory and disclosure regime across the states.

"This type of regulation is entirely novel," the trade association said, 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."

SIFMA said the rules are preempted by the National Securities Markets Improvement Act and the Employee Retirement Income Security Act of 1974, and that they violate the First Amendment and are unconstitutionally vague.

The rules open 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.

SIFMA named Missouri Secretary of State John R. Ashcroft and the state's Securities Commissioner Douglas Jacoby as defendants. 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.

Last fall, Missouri asked the court to toss the lawsuit for a variety of reasons, including that SIFMA lacked standing and that its claims lack merit.

In a Jan. 7 decision, Judge Stephen Bough of the Western Missouri District rejected all of the state's arguments. SIFMA has standing, the judge ruled, because among other things, the rules impose compliance costs on SIFMA members. The relief that SIFMA is requesting — invalidation of the investment rules — would resolve each member's injuries, Bough said.

Bough rejected Ashcroft's arguments that SIFMA's claims lack merit, finding instead that the group adequately alleges that NSMIA preempts the Missouri investment advisor rule because it "regulates investment adviser representatives and federally covered investment advisers beyond what is permitted by NSMIA" and that the broker-dealer rule requires documents beyond federal requirements. Bough also said SIFMA had done enough to establish that the rules "'relate to' ERISA to support their preemption claim. Further, assuming the rules regulate securities, the court finds that SIFMA adequately alleges that the rules interfere with ERISA's 'comprehensive remedial scheme,'" the judge said.

The court also found that SIFMA adequately alleged that the rules violate the First Amendment and that the rules are unconstitutionally vague.

A spokesperson for Ashcroft said the Secretary of State "will continue in the fight to protect investors from hidden and misleading agendas that may not have their financial best interest in mind."