SIFMA v. Ashcroft. In Securities Industry and Financial Markets Association v. Ashcroft et al, before the Federal District Court for the Western District of Missouri, the plaintiff, a trade association for broker-dealers, asset managers (including investment advisers), and investment banks, sued the Missouri Secretary of State of Missouri and the Commissioner of the Missouri Securities Division challenging two rules regulating financial professionals.  The rules were promulgated under the authority of the Secretary of State, drafted by the Securities Commissioner and issued by the Division. As described by the court, the Rules generally “require that securities firms and professionals obtain a signature from Missouri investors on consent forms before incorporating a ‘social objective’ or other ‘nonfinancial objective’ into their securities recommendations or investment advice.  The written consent form must contain mandatory language that is set forth in the Rules, or language that is ‘substantially similar’ thereto.  Among other things, the mandatory language includes an express acknowledgment that 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 second rule is similar to the first but applies to investment advisers.  (Notably, the first rule is under the caption “Dishonest or Unethical Business Practices by Broker-Dealers and Agents” and the second rule under the caption “Dishonest or Unethical Business Practices by Investment Advisers and Investment Adviser Representatives.”) Failure to comply can result in punishment, including civil and criminal penalties.

In August 2023, plaintiff sued, claiming that the rules were preempted by NSMIA and ERISA, are unconstitutionally vague and compel speech in violation of the First Amendment.  Both parties moved for summary judgment.  The court granted summary judgment in favor of plaintiff and issued a permanent injunction. Both rules were expressly preempted by NSMIA, the court found, because they required record-keeping or other new and different State regulatory obligations not required by federal law.   The court also found that the rules were preempted by ERISA, in part because they “interfere with ERISA by restricting what investments may be recommended or selected, and by mandating disclosure and recordkeeping requirements not required by ERISA.” 

With regard to the First Amendment claim, plaintiff gave the two Missouri officials a taste of their own medicine. (The State is one of the petitioners challenging the SEC’s climate disclosure rule on First Amendment grounds.) In a refrain familiar from other contexts, Plaintiff contended that the consent requirement compelled “speech that is scripted, inaccurate, controversial, and thus, unconstitutional.”   The court held that the more lenient standard of scrutiny for compelled disclosure under Zauderer—which is applicable to compelled disclosures . . . of “purely factual and uncontroversial information”—did not apply. (For a discussion of First Amendment standards applicable to compelled commercial disclosure, see this PubCo post and this PubCo  post.)  The court agreed with plaintiff that the requirement in the written consent—that the customer “acknowledge and understand that incorporating a social objective or other nonfinancial. . . will result in investments and recommendations/advice that are not solely focused on maximizing a financial return for me or my account”—was not purely factual. “Stated differently,” the court said, “the customer must ‘acknowledge[] their choice to surrender higher returns for non-financial objectives.’”  In addition, statements in an op-ed by the Secretary discussing political priorities were “not uncontroversial and may be considered in determining the appropriate level of scrutiny to be applied.”  Accordingly, intermediate scrutiny under Central Hudson applied. And under intermediate scrutiny, the court held, the rules did not survive because they were “more extensive than necessary to further the government’s interest.” The rules, the court said, could have been more narrowly tailored and less coercive.   

The court also found that the rules were unconstitutionally vague, such as the failure to adequately define “nonfinancial objective.”  That vagueness was “particularly troublesome given the penalties for failure to comply.” The court also found that plaintiff showed irreparable harm, and that the balance of the harms was in favor of a permanent injunction. Because a permanent injunction was in the public interest, the court held that the rules should be enjoined, statewide, and in their entirety.

American Sustainable Business Council v. Hegar and Paxton.   In this new complaint, just filed in a U.S. District Court in Austin, Texas, plaintiff, a “national association of individual businesses, investment companies, and other business associations,” sued the Texas Comptroller of Public Accounts and the Attorney General of Texas, challenging Texas Senate Bill 13, which, the complaint charges, “bars state public entities from investing and contracting with companies on the basis of the companies’ actual or perceived political views regarding fossil fuels.” In its complaint, plaintiff claimed violation of the First and Fourteenth Amendments. Sound familiar?

As plaintiff sets the stage, “Texas has long presented itself as a business-friendly state where limited state regulation facilitates the ability of businesses to conduct themselves as they see fit….Yet in 2021, the Legislature passed SB 13 to coerce and punish businesses that have articulated, publicized, or achieved goals to reduce reliance on fossil fuels.” The impact of this legislation, they argue, “has been negative.  According to a recent study conducted for the Texas Association of Business, SB 13 and a companion law related to firearms cost Texans approximately $668 million in lost economic activity and 3,034 fewer jobs in the 2022–2023 fiscal year, as well as reduced competition and directly increased State entities’ costs for banking, investment, and finance by approximately $270 million.”  

Plaintiff asserts that, in light of the significant risks that climate change poses to the American economy, “many companies take that risk into account in operating their business, including in choosing investments, manufacturing and other process designs, and in developing product and service offerings.”  In addition, mindful of that economic risk, many investment firms and banks “understand that companies that integrate climate risk and sustainability considerations into their strategic decisions, business processes, product and service offerings, and risk management frameworks are more likely to preserve their credit quality than companies that do not. Recognizing this, many financial companies have already incorporated or have begun incorporating climate risk considerations into relevant analyses and decision-making.”

As described in the complaint, first, SB 13 “prohibits certain state entities from investing in, and requires them to divest from, financial companies that ‘boycott energy companies.’… Second, SB 13 generally prohibits a governmental entity (including counties, cities, public retirement funds, schools, etc.) from contracting with a company for goods or services unless the company confirms in writing that it does not ‘boycott energy companies.’” Plaintiff contends that “boycott energy companies” is broadly defined, establishing “a viewpoint that is disfavored (‘boycotting’ fossil fuel companies) and attach[ing] punishment to conduct that expresses that viewpoint, including pure expressions of speech and association on a matter of public concern (‘any action . . . intended to penalize, inflict economic harm on, or limit commercial relations with’ a fossil fuel company).”  

The First Amendment, plaintiff charges, prohibits “states from restricting expression on the basis of content or viewpoint. This constitutional prohibition of viewpoint and content discrimination applies to states’ awards of government contracts or other benefits. SB 13’s definition of ‘boycott energy company’ reaches protected expression and violates the First Amendment because, on its face and as interpreted and applied by the Comptroller, it discriminates against financial companies and would-be government contractors on the basis of the content and viewpoint of their speech.” In effect, plaintiff professes, this statute “effectively muzzles companies that wish to express criticism of unchecked fossil fuel consumption or take affirmative steps to reduce carbon emissions.” The Comptroller and the Attorney General, plaintiff asserts, have applied SB 13 to “reach companies based on their speech and associations.”

Not only does the statute prohibit speech, plaintiff asserts that it also “unconstitutionally compels other speech by requiring companies to verify agreement with Texas’s preferred position regarding fossil fuels as a condition of managing investments for or contracting with state entities. It is unconstitutional for a state to condition a benefit, such as a contract or investment, on the recipient’s agreement to restrict their constitutionally protected association with others.”

Because it codifies viewpoint-based discrimination, plaintiff maintains that SB 13 “is presumptively unconstitutional”; both of its provisions fail strict scrutiny because they are “not narrowly tailored to advance a compelling government interest.”  And even if they were subject to rational basis review, they would be unconstitutional: the state has “no legitimate interest in prohibiting state entities” from “investing with financial companies that the state perceives to engage in anti-fossil fuel speech or expression” or “in prohibiting governmental entities from contracting with companies that the state perceives to engage in anti-fossil fuel speech or expression.”

In addition, plaintiff charges that SB 13 is “unconstitutionally vague in violation of the Fourteenth Amendment’s Due Process Clause” because “by  failing to provide those targeted by the statute a reasonable opportunity to know what conduct is prohibited,” the statute “fails to provide people of ordinary intelligence a reasonable opportunity to understand what conduct it prohibits.” While SB 13 states “that ‘any action that is intended to penalize, inflict economic harm on, or limit commercial relations with a company’ in the fossil fuel industry will be construed as a ‘boycott,’ the statute leaves the sweeping scope of this provision undefined. Moreover, the statute fails to establish how ‘boycotting’ shall be identified and evaluated. It gives unlimited discretion to the Comptroller to both rely upon any publicly available information to make his determinations and to accept or reject information supplied by the companies that the Comptroller has identified as boycotters.”

According to Reuters, “Hegar maintains a list of 16 financial companies and more than 350 investment funds whose ESG policies he believes impermissibly target fossil fuel-based energy.” In that regard, plaintiff maintains that the actions that have been taken are arbitrary: “[m]any companies informed the Comptroller that they employed climate-related investing principles for one or more ordinary business purposes. The Comptroller nevertheless listed some, but not all, of these companies on the blacklist. The Comptroller has also blacklisted entities holding large stakes in fossil fuel companies because those entities express support for sustainable climate goals. It is clear the Comptroller is committed to punishing voices that are opposed to fossil fuel reliance.”  The Texas blacklist includes flagship investment funds of two ASBC members, and plaintiff claims, did not provide the members with “meaningful process.”

In sum, according to the complaint, ASBC members and others are “unable to compete for business with Texas entities solely due to the content and viewpoint of their speech and the associations they choose to make. The law also denies them any avenue for challenging their exclusion from this major market. The defects of overbreadth, vagueness and lack of due process written into SB 13 limit the constitutional rights of countless other businesses.”

Plaintiff requests the court to “declare SB 13 unlawful and permanently enjoin Defendants from enforcing it.” 

Reuters reports that Hegar issued a statement accusing “plaintiff of pursuing a ‘radical environmental agenda’ requiring companies to prioritize politics over shareholders. He called the lawsuit a frivolous attempt to force Texas and its taxpayers to invest ‘in a manner inconsistent with their values and detrimental to their own economic well-being. That is absurd.’”

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