A federal judge struck down a Missouri state securities regulation regarding advisers' disclosures 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 went into effect in July 2023. Ashcroft and the state Securities Commissioner Douglas Jacoby was named as a co-defendant.
State rule would require clients to sign disclosure forms indicating that their advisors may consider ESG factors (or “social” or “non-financial” objectives) in their recommendations and advice and that these recommendations will not focus on maximizing financial returns.
According to SIFMA's complaint last year, the new rule treated “shared considerations” as “non-financial disclosures”.
“The regulations then go a step further and require clients to sign a state-mandated script whenever they are given a recommendation or advice that takes into account non-financial objectives,” the complaint said. “This type of arrangement is completely new. 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 Independent Missourithe state legislature considered similar bills during last year's session, but the Senate decided not to take them up. Ashcroft then moved forward with his rulebook. SIFMA then sought an injunction to stop the rule from continuing to apply, specifically to SEC-registered advisers.
The rule itself was also confusing for advisers to follow, SIFMA argued.
“For example, a financial professional might view a company that makes only internal combustion engines as riskier than a similar company that diversifies into electric motors,” the complaint said. “Will the defendants see such an analysis as 'incorporating a social or other non-financial objective?'
Ashcroft's office did not respond to a request for comment before publication.
SIFMA argued that federal law (namely, the National Securities Markets Improvement Act of 1996) prevented state securities regulators from enacting rules that overrode the federal mandates of SEC-registered advisers of more than $100 million in managed assets.
This ensured there would not be a “patchwork quilt” of “inefficient, confusing and burdensome” conflicts between state and federal regulations for advisers to navigate, according to SIFMA. Missouri's rule conflicted with NSMIA by regulating the activities of federally registered advisers and firms while “indirectly” regulating those firms themselves.
SIFMA also argued that the rule violated the Employee Retirement Income Security Act of 1974 and that advisers and broker/dealers were required to put their clients' interests first (either through compliance with a fiduciary duty or the Rule of SEC, Best Interest).
The Financial Services Institute, the Association of Investment Advisers and the Institute of Insured Retirees all filed amicus briefs in support of SIFMA's position, according to the case filing.
However, the Securities Administrators Association of North America supported Ashcroft and Jacoby in an amicus brief, arguing that neither NSMIA nor ERISA preempted Missouri's rules and that a decision upholding SIFMA “may be used in other contexts to undermine the authority of other state securities regulators.”
But Circuit Judge Stephen Bough agreed with SIFMA that the rules were “unconstitutionally vague” and threatened to do “irreparable harm” to advisers operating within Missouri.
“(SIFMA) has shown violations of its constitutional rights and that those violations will be suffered by others in the future,” the judge's order said. “Because the constitutional violations in this case are not based on unique facts or circumstances, a statewide permanent injunction is warranted.”