A District Court in Missouri ruled in favor of the Securities Industry and Financial Markets Association and against two Missouri state lawmakers in connection with ESG-related disclosure and consent rules the state passed last year.
U.S. District Court Judge Stephen R. Bough in Kansas City, Mo., on Aug. 13 issued a statewide permanent injunction prohibiting the rules that were linked to environmental, social and governance matters.
The case concerned two regulations enacted by the state of Missouri in July 2023 which, among other things, require securities firms and financial professionals to obtain a signature from client investors in Missouri on consent forms before incorporating a “social objective” or other “nonfinancial objective” into their securities recommendations or investment advice, according to court documents. In addition, the consent forms must include an express acknowledgment that such securities recommendations or investment advice will result in “investments and recommendations that are not solely focused on maximizing a financial return for the investor.”
The defendants in the case are John R. Ashcroft, secretary of state of Missouri, and Douglas M. Jacoby, Missouri securities commissioner. The rules were enacted under the authority of Ashcroft, while Jacoby wrote and drafted the rules.
SIFMA, a trade association for broker-dealers, asset managers, investment advisers and investment banks, had countered in its lawsuit, filed in August 2023, that the rules were preempted by the National Securities Markets Improvement Act of 1996 as well as the Employment Retirement Income Security Act of 1974. They also asserted that the rules violated First Amendment protections against “compelled speech” and that the rules are “unconstitutionally vague.”
The Missouri court supported SIFMA on all four counts, citing among other things that the rules imposed “new and different state regulatory obligations that are not required by federal law.”
Noting that the plaintiff had also shown that the rules comprised “a violation of its constitutional rights, and that those violations would be suffered by others in the future,” the court imposed a statewide permanent injunction that will prohibit enforcement of the rules.
SIFMA celebrated the court’s decision. “Congress enacted NSMIA to alleviate the redundant, costly, and ineffective dual federal/state regulation of our securities market system,” said Kenneth E. Bentsen Jr., SIFMA’s president and CEO, in a statement Aug. 14. “(This) 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. This decision marks a major victory not only for our national securities market system, but also for our nation.”
Bentsen added: “Under today’s federal securities laws, financial professionals are already required to provide investment advice and recommendations that are in their customers’ best interest. That means they cannot put their interests ahead of their customers’ interests when recommending securities. The Missouri rules were thus unnecessary and created confusion.”
Ashcroft said In an emailed statement about the case, “Notice and consent is a foundational approach to protect consumers without restricting their ability to make their own decisions free from government restriction.”
The court's decision, Ashcroft said, “was not just legally deficient but also morally wrong and puts Missouri investors at risk. The secretary of state's office will neither abandon its statutory duty to regulate securities nor allow Missouri investors to be preyed upon by investment individuals that are afraid to be upfront and honest about their investment advice.”
He added: “there are significant grounds for appeal, and we are reviewing options at this time.”
