Dive Brief:
- Western Missouri’s federal district court last week denied a motion to dismiss a Securities Industry and Financial Markets Association challenge to two Missouri regulations that require state financial institutions and asset managers to retain written permission to include the use of any “social” or “nonfinancial” objective in their portfolio decisions.
- SIFMA sued Missouri Secretary of State John Ashcroft in his official capacity in August, alleging the rules created a legal environment in the state unlike that in any other state. Ashcroft argued in an October motion to dismiss that the national trade association lacked the standing to bring the suit.
- In Judge Stephen Bough’s Jan. 5 ruling, he found SIFMA had standing to sue and agreed with the merits of the group’s other arguments as well. While the case is still in the pleading stage, the ruling focuses on the compliance burdens of the rule rather than wading into deciding how much asset managers can consider ESG factors, Jonathan Richman, partner at Proskauer Rose LLP, wrote in a firm blog post.
Dive Insight:
The pair of Missouri Securities Divisions regulations went into effect at the end of July, at the direction of Ashcroft after state legislators ended the session without passing a similar bill. The regulations amend the state’s laws for financial institutions to require written consent for the use of social objectives or nonfinancial objectives, which are defined to include tax considerations, risk tolerance, time horizon, faith or values-based objectives, and local community investment objectives.
SIFMA’s lawsuit argued that the rules violate the spirit of, and are preempted by, the National Securities Markets Improvement Act of 1996, which sought to create a uniform national landscape. The law, in part, was established to prevent states from adopting rules “that require financial professionals to create records ‘that differ from or are in addition to’ those imposed by the federal law, SIFMA President and CEO Kenneth Bentsen said in a release announcing the suit.
“NSMIA improved the national securities markets by preempting states from imposing overlapping and conflicting regulatory responsibilities that could undermine the markets’ efficiency and effectiveness,” Bensten said.
The organization also argued its grounds for standing by citing the increased compliance costs for their members due to the rules, which Bough agreed with. SIFMA’s other arguments include the rules’ preemption under the Employee Retirement Income Security Act of 1974 and that they are a violation of the First Amendment.
In the state’s motion to dismiss, joined on the filing by Missouri Securities Commissioner Douglas Jacoby, Ashcroft argued SIFMA additionally failed to establish that NSMIA and the ERISA preempt the rule. Ashcroft and Jacoby also rejected the claim that the rule violated the first amendment’s protections against compelled speech.
“The Rules do not violate the First Amendment, in that they merely require disclosures that are commercial speech, are factual, and are not controversial, and otherwise survive either rational basis or intermediate scrutiny,” the motion said.
Judge Bough disagreed with the Missouri officials on every count, allowing the case to proceed with SIFMA’s claims the rule is preempted by federal laws, a potential First Amendment violation and that the rules are “unconstitutionally vague.”
The case shows how government efforts to restrict ESG factor consideration is interfering with asset managers’ and financial institutions’ ability to “do their jobs as they see fit,” Richman wrote.
Financial professionals “even in some ‘red’ states have complained that anti-ESG edicts have hampered their ability to use their best judgment to generate financial returns,” Richman said. “But if rules such as Missouri’s are adopted at least in part for political motives, rulings such as the SIFMA decision might not have much impact on some states’ appetite for further attempts at regulation and political point-scoring.”
