Dive Brief:
- A federal judge in Missouri struck down a pair of anti-ESG rules the state implemented in 2023 and issued a permanent statewide injunction on the regulations Wednesday. The rules required that securities professionals receive written consent before investing using any “social” or “nonfinancial” objectives.
- The rules were challenged by trade group the Securities Industry and Financial Markets Association, who argued to the U.S. District Court for the Western District of Missouri that the rules were preempted by the National Securities Markets Improvement Act of 1996 and the Employment Retirement Income Security Act of 1974.
- The injunction marks the latest legal loss for state anti-ESG laws, and SIFMA CEO Kenneth Bentsen, Jr. said in a release that the ruling “marks a major victory not only for our national securities market system, but also for our nation.”
Dive Insight:
SIFMA filed the lawsuit challenging the rules last August, with Missouri Secretary of State John Ashcroft and Missouri Securities Commissioner Douglas Jacoby as named defendants.
Judge Stephen Bough’s ruling Wednesday said that in addition to being preempted by NSMIA and ERISA, the anti-ESG regulations were unconstitutionally vague and also ran afoul of the First Amendment.
The ruling extends to a pair of rules that created additional documentation requirements for securities agents who consider “socially responsible criteria in the investment or commitment of customer funds for the purpose of obtaining an effect other than a maximized financial return to the customer.”
“The Court finds a statewide injunction is warranted,” Bough wrote. “[SIFMA] has shown a violation of its constitutional rights, and that those violations would be suffered by others in the future. Because the constitutional violations in this case are not based on unique facts or circumstances, a statewide permanent injunction is warranted.”
In granting SIFMA’s motion for summary judgment and ruling that a permanent injunction is “in the public interest,” Bough also denied a dueling motion from Ashcroft and Jacoby. A prior bid from the state to dismiss the challenge was denied by Bough in January.
“The Rules are preempted by federal law and violate Plaintiff’s constitutional rights,” Bough said. “This significant harm outweighs any interest Defendants may have in the Rules and enforcing them.”
Bentsen said the 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.” He said the Missouri rules were unnecessary and created confusion for securities professionals in the state.
“Under today’s federal securities laws, financial professionals are already required to provide investment advice and recommendations that are in their customers’ best interest,” Bentsen said. “That means they cannot put their interests ahead of their customers’ interests when recommending securities.”
The rule would have “forced investment advisors to make unfactual, politically charged statements using a state-mandated script,” Pleiades Strategy’s founder, Frances Sawyer, said in an email to ESG Dive. Pleiades tracks state-level anti-ESG legislation and executive actions.
“The Missouri court's ruling puts an end to this politicized rule-making that sought to dissuade investment managers from making clear-eyed risk assessments related to climate change, gun safety, workplace diversity, civil rights, and other important factors,” Sawyer said. “The overturning of the rule is another failure for so-called anti-ESG policies.”
The ruling comes after a federal judge in Oklahoma last month permanently blocked the state’s Energy Discrimination Elimination Act, which barred the state from working with financial institutions who allegedly boycott fossil fuels.
