A federal judge struck down a Missouri state securities regulation concerning advisors’ disclosure to clients when considering ESG factors in investment decisions.
The Securities Industry and Financial Markets Association (SIFMA) filed the lawsuit shortly after Missouri Secretary of State (and former Republican gubernatorial candidate) Jay Ashcroft’s regulation took effect in July 2023. Ashcroft and State Securities Commissioner Douglas Jacoby were named as co-defendants.
The state rule would require clients to sign disclosure forms indicating that their advisors may consider ESG factors (or “social” or “nonfinancial” objectives) in their recommendations and advice and that these recommendations will not be focused on maximizing financial returns.
According to SIFMA’s complaint last year, the new rule treated “common considerations” as “nonfinancial disclosures.”
“The Rules then go one step further and require clients to sign a state-mandated script any time they are provided a recommendation or advice that considers nonfinancial objectives,” the complaint read. “This type of regulation is entirely novel. There is no precedent for it in the securities laws, and none of the other forty-nine states require it.”
According to the complaint and reporting from the Missouri Independent, the state legislature considered similar bills during last year’s session, but the Senate opted not to pass them. Ashcroft then moved forward with his own regulation. SIFMA subsequently sought an injunction to stop the rule from continuing to take effect, particularly for SEC-registered advisors.
The rule itself was also confusing for advisors to follow, SIFMA argued.
“For example, a financial professional may view a company making only internal combustion engines as riskier than a similar company diversifying into electric motors,” the complaint read. “Will defendants view such an analysis as ‘incorporating a social objective or other nonfinancial objective?’”
Ashcroft’s office did not respond to a request for comment prior to publication.
SIFMA argued that federal law (namely, the National Securities Markets Improvement Act of 1996) preempted state securities regulators from making rules overriding the federal mandates of SEC-registered advisors with more than $100 million in managed assets.
This ensured there wouldn’t be a “patchwork quilt” of “inefficient, confusing and burdensome” conflicts between state and federal regulations for advisors to follow, according to SIFMA. The Missouri rule ran afoul of NSMIA by regulating the activities of advisors and federally-registered firms, “thereby indirectly” regulating those firms themselves.
SIFMA also argued that the rule violated the Employee Retirement Income Security Act of 1974 and that advisors and broker/dealers were required to put their clients’ interests first (whether through adhering to a fiduciary duty or the SEC’s Regulation Best Interest, respectively).
The Financial Services Institute, the Investment Adviser Association, and the Insured Retirement Institute all submitted amicus briefs in support of SIFMA’s position, according to the case docket.
However, the North American Securities Administrators Association supported Ashcroft and Jacoby in an amicus brief, arguing NSMIA or ERISA did not preempt the Missouri rules and that a decision in support of SIFMA “could be used in other contexts to undermine the authority of other state securities regulators.”
But District Judge Stephen Bough agreed with SIFMA that the rules were “unconstitutionally vague” and threatened to do “irreparable harm” to advisors operating within Missouri.
“(SIFMA) has shown a violation of its constitutional rights, and that those violations would be suffered by others in the future,” the judge’s order read. “Because the constitutional violations in this case are not based on unique facts or circumstances, a statewide permanent injunction is warranted.”
