Yesterday, Judge Bough (W.D. Mo.) issued a decision barring the recent anti-ESG rules Missouri had promulgated that prohibited investment advisers from utilizing ESG factors when making investment decisions (absent written consent of the client). This summary judgment ruling permanently enjoined the Missouri laws and endorsed several independent legal grounds for this decision, holding that the “Rules are [1] preempted by NSMIA and ERISA, are [2] unconstitutional under the First and Fourteenth Amendments of the United States Constitution, and [3] are impermissibly vague under the Fourteenth Amendment of the United States Constitution.” The legal reasoning adopted by this ruling appears widely applicable and so could have a significant impact in future litigation concerning similar regulatory initiatives, or even discourage states from enacting such regulations in the first place.
Notably, the challenge to the Missouri rules was brought by SIFMA (the Securities Industry and Financial Markets Association), which is a trade association for broker-dealers, asset managers (including investment advisers), and investment banks. SIFMA is not a typical plaintiff for a lawsuit challenging anti-ESG regulations; rather, acting based upon the interests of its members, it frequently seeks to reduce regulatory burdens. Here, however, the anti-ESG rules enacted by Missouri were sufficiently intrusive and burdensome that the financial industry itself objected.
This decision is yet another clash in the ongoing conflict concerning the extent to which ESG factors may be considered when making investment decisions; however, due to the potentially far-reaching nature of the legal holding here, it may prove more significant than most.
A federal judge barred Missouri from enforcing 2023 rules restricting environmental, social, and governance investing after finding them unlawful on Wednesday.
The regulations violated federal law giving the Securities and Exchange Commission the power to regulate investment firms, Judge Stephen R. Bough of the US District Court for the Western District of Missouri said in an order. The rules require firms to get written consent from their Missouri clients before using any “social objective or other nonfinancial objective” when investing.
The Securities Industry and Financial Markets Association sued Missouri Secretary of State Jay Ashcroft (R) last year to stop the rules, saying they were “burdensome state regulation that Congress prohibited.” Ashcroft disputed the Wall Street trade group’s claims, asking Bough to toss the case.
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