A federal judge recently struck down two Missouri investment rules that regulated “non-financial” investment advice from broker-dealers and investment advisors. This decision was made following oral arguments from both parties, which resulted in a permanent injunction against the implementation, application, or enforcement of the rules.
Missouri Secretary of State John R. Ashcroft enacted the regulations after the failure of lawmakers to pass a bill with similar objectives. The rules required broker-dealers and investment advisors to disclose and obtain written consent from customers before buying or selling investment products based on environmental, social, or other non-financial objectives. This annual disclosure included language emphasizing that ESG considerations would lead to investments not solely focused on maximizing financial returns for clients, with consent required every three years.
The Securities Industry and Financial Markets Association (SIFMA) filed a lawsuit against the state, arguing that the rules were preempted by federal laws and violated the First Amendment. SIFMA claimed that the regulations imposed new and different state regulatory requirements not mandated by federal law, undermining existing federal legislation such as the National Securities Markets Improvement Act and the Employment Retirement Income Security Act. Additionally, the association contended that the rules infringed on freedom of speech by compelling firms to adopt and express the state’s position on nonfinancial ESG investing, and lacked clarity in defining “nonfinancial objectives.”
The judge ruled in favor of SIFMA on all counts, agreeing that the rules were preempted by federal laws, undermined ERISA’s enforcement scheme, and violated the First and Fourteenth Amendments by being unconstitutionally vague and promoting controversial language. This decision was based on the judge’s interpretation that the regulations failed to adequately define “nonfinancial objectives” and forced firms to adopt a specific political stance, as evidenced by statements made by Missouri Secretary of State John R. Ashcroft.
Following the court’s decision, Ashcroft’s office expressed concern that Missouri investors were now at risk due to the ruling. The office maintained that the regulatory duty to oversee securities would not be abandoned, noting that the state would continue to protect investors from individuals who were not transparent about their investment advice.
SIFMA president and CEO Kenneth E. Bentsen, Jr. welcomed the court’s ruling, emphasizing the importance of upholding federal laws and protecting the rights of broker-dealers and investment advisors. Bentsen highlighted the association’s commitment to advocating for a regulatory environment that promotes transparency and compliance with existing laws.
The striking down of Missouri’s investment rules has significant implications for broker-dealers, investment advisors, and investors in the state. The decision underscores the importance of clarity, consistency, and adherence to federal regulations in the financial industry to ensure the protection of investors and the integrity of the market.