Yesterday, Judge Bough (WD, Missouri) issued a ruling invalidating Missouri’s recently enacted anti-ESG rules that prohibited investment advisers from considering ESG factors in investment decisions (without written client consent). This summary judgment permanently invalidated Missouri law and upheld several independent legal reasons for this ruling. It found that the “rules (1) are overruled by NSMIA and ERISA, (2) are unconstitutional under the First and Fourteenth Amendments to the United States Constitution, and (3) are impermissibly vague under the Fourteenth Amendment to the United States Constitution.” The legal reasoning behind this ruling appears to be widely applicable and could therefore have significant implications for future litigation over similar regulatory initiatives or even deter states from enacting such rules in the first place.
What is particularly notable is that the challenge to the Missouri rules was brought by SIFMA (Securities Industry and Financial Markets Association), a trade association for broker-dealers, asset managers (including investment advisers) and investment banks. SIFMA is not a typical plaintiff in a lawsuit against anti-ESG regulations; rather, it often seeks to reduce regulatory burdens on behalf of its members. In this case, however, the anti-ESG rules enacted by Missouri were so intrusive and burdensome that the financial industry itself objected.
This decision is another in the ongoing conflict over the extent to which ESG factors may be considered in investment decisions, but it could prove more significant than most due to the potentially far-reaching nature of the legal involvement.
“A federal judge on Wednesday barred Missouri from enforcing 2023 rules restricting environmental, social and governance investments after declaring them unlawful. The rules violate federal law that gives the Securities and Exchange Commission authority to regulate investment firms, Judge Stephen R. Bough of the U.S. District Court for the Western District of Missouri said in an order. The rules require firms to obtain written consent from their Missouri clients before pursuing a “social objective or other nonfinancial goal” in investments. The Securities Industry and Financial Markets Association sued Missouri Secretary of State Jay Ashcroft (R) last year to stop the rules, saying they “represent burdensome government regulation that Congress has prohibited.” Ashcroft disputed the Wall Street trade group’s claims and asked Bough to dismiss the case.”
