On August 14, 2024, the U.S. District Court for the Western District of Missouri (the “District Court”) issued a decision ordering a permanent injunction against rules promulgated by the Missouri Securities Division, colloquially referred to as Missouri’s “Anti-ESG” Rules, requiring that broker dealers and investment advisers disclose to and obtain written consent from customers if their investment decisions or advice “incorporate[] a social objective or other nonfinancial objective” (the “Rules”). The District Court held the Rules were preempted by both the National Securities Markets Improvement Act of 1996 (“NSMIA”) and the Employment Retirement Income Security Act of 1974 (“ERISA”). The District Court also held the Rules violated the First Amendment’s protection against compelled speech and were unconstitutionally vague. The decision highlights the limits of U.S. state power in policing the social objectives broker dealers and investment advisers incorporate into their practice and, if not overturned on appeal, suggests that broker dealers and investment advisers may face less legislative pushback, at least at the state level, in pursuing environmental, social, and governance (“ESG”) objectives in the future.
Background
The Rules, which took effect in July 2023, had two core components. First, the Rules mandated that broker dealers and investment advisers disclose to their customers if they “incorporate[d] a social objective or other nonfinancial objective” into their investment decisions or advice.[2] Second, if their decisions or advice did incorporate such social or other nonfinancial objectives, the Rules required that broker dealers and investment advisers obtain written consent from customers in a form “substantially similar” to language prescribed by the statute (and keep record of that consent).[3] The Rules in turn imposed stiff penalties for failure to comply, “including the loss of registration, a civil penalty of up to $25,000 for each violation, and—if the violation was willful—criminal penalties.”[4] The Securities Industry and Financial Markets Association (SIFMA) sued to enjoin the Rules in August 2023, arguing the Rules were preempted by NSMIA and ERISA, violated the First Amendment’s protection against compelled speech, and were unconstitutionally vague.[5]
District of Missouri’s Decision
On summary judgment, the District Court sided with SIFMA, holding the Rules were invalid under the four independent bases expounded by SIFMA and issuing a permanent injunction barring their enforcement.
NSMIA
The District Court first held the Rules were expressly preempted by NSMIA because they required broker dealers and investment advisers to make and keep records that “differ[ed] from” and were “in addition to” NSMIA’s requirements.[6] The District Court reasoned NSMIA, which was enacted “to alleviate the ‘redundant, costly, and ineffective dual federal/state regulatory’ securities system” by “‘designat[ing] the federal government to oversee nation-wide securities offerings,’” prevented Missouri from requiring dealers and advisers “to make and keep a new document that is not required by federal law.”[7] The District Court also held NISMA’s savings clause did not salvage the Rules because the clause did not authorize a state to engage in its own rulemaking.[8]
ERISA
The District Court also held that the Rules were preempted by ERISA, which establishes “standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans” and displaces state regulation of such plans.[9] Specifically, the Court held the Rules interfered with ERISA because they “restrict[ed] what investments may be recommended or selected” and “mandat[ed] disclosure and recordkeeping requirements not required by ERISA.”[10] Further, and similar to its holding regarding that of NISMA, the Court held ERISA’s savings clause was inapplicable where the Rules undermined ERISA’s exclusive enforcement scheme.[11]
First Amendment
In addition, the District Court held the Rules violated the First Amendment. For one, the District Court held the Rules were subject to intermediate scrutiny because their written consent provision compelled speech of more than “purely factual and uncontroversial information.”[12] Applying that standard, the District Court held the Rules did not survive because they were more extensive than necessary and could have been more narrowly tailored to achieve Missouri’s unarticulated but possible interests in “preventing fraud and deceit” or of “addressing a policy debate.”[13]
Vagueness
Finally, the District Court held that the Rules were unconstitutionally vague. The District Court noted that under the “void-for-vagueness” doctrine, a law is unconstitutional where it “fails to provide a person of ordinary intelligence fair notice of what is prohibited, or is so standardless that it authorizes or encourages seriously discriminatory enforcement.”[14] Block quoting SIFMA’s opening brief, the District Court held that Rules were unconstitutionally vague because they left “many concepts in [the] definition [of ‘nonfinancial objective’] unexplained” and had failed to provide written guidance more generally on how to interpret the Rules.[15] The District Court remarked this vagueness was especially troublesome in light of the hefty penalties, both civil and criminal, the Rules imposed.[16]
Permanent Injunction
After deciding the Rules were invalid on these grounds, the District Court opted to strike out the Rules in their entirety.[17] Ticking through the test for a permanent injunction, the District Court held SIFMA had shown irreparable harm where the Rules violated SIFMA’s First Amendment rights, that that significant harmed weighed in favor of a permanent injunction, and that other members of the public were likely to suffer similar harm in the future were the Rules allowed to remain intact.[18]
Key Takeaways
The District Court’s decision suggests that laws similar to those of Missouri’s will be subject to the same challenges as those raised by SIFMA. Moreover, states considering this route as a means of regulating dealers and advisers may now think twice before enacting them. Broker dealers and investment advisers may find some comfort in the fact that they will likely not be subject to similar disclosure and consent regimes in other U.S. jurisdictions.
More broadly, the District Court’s decision may mark a turning point in anti-ESG public sentiment and general backlash against the investing strategy, given that many aspects of the court’s reasoning would likely be applicable to other similar “anti-ESG” investing rules. The decision sets clear limits on the actions states may take to regulate the decisions broker dealers make and the advice investment advisers provide as it relates to ESG.
Still, the District Court’s decision will likely not forestall all efforts to limit the consideration of ESG in investment decisions. Anti-ESG advocates may shift their resources away from state and towards federal legislation as a means of combatting the investment strategy, or may seek to modify their proposed state rules to increase the chances that they survive challenge.
For now, Missouri will have thirty days to decide whether to appeal to the decision after the District Court enters judgment. The State has not yet issued a statement on the decision.
[1] Securities Industry and Financial Markets Association v. Ashcroft et al., Case No. 23-cv-04154-SRB (W.D. Mo. Aug. 14, 2024), ECF No. 115 [hereinafter District of Missouri Opinion].
[2] District of Missouri Opinion at 2–3 (quoting 15 C.S.R. § 30-51.170) (the Rules for broker dealers); 15 C.S.R. § 30-51.172 (the Rules for investment advisers).
[3] District of Missouri Opinion at 4–5 (quoting 15 C.S.R. § 30-51.170(3); 15 C.S.R. § 30-51.172(3)).
[4] District of Missouri Opinion at 5, 20.
[5] District of Missouri Opinion at 5.
[6] District of Missouri Opinion at 8, 10.
[7] District of Missouri Opinion at 7–9 (quoting Lindeen v. SEC, 825 F.3d 646, 650 (D.C. Cir. 2016)).
[8] District of Missouri Opinion at 9–10 (citing 15 U.S.C. § 77r(c)(1).
[9] District of Missouri Opinion at 12–13 (quoting Wilson v. Zoellner, 114 F.3d 713, 715 (8th Cir. 1997); 29 U.S.C. § 1001(b)).
[10] District of Missouri Opinion at 13.
[11] District of Missouri Opinion at 14.
[12] District of Missouri Opinion at 16–17 (citing Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557, 563 (1980)).
[13] District of Missouri Opinion at 18.
[14] District of Missouri Opinion at 19 (quoting Smith v. Truman Rd. Dev., LLC, 414 F. Supp. 3d 1205, 1239 (W.D. Mo. 2019)).
[15] District of Missouri Opinion at 19–20.
[16] District of Missouri Opinion at 20.
[17] District of Missouri Opinion at 22.
[18] District of Missouri Opinion at 22–23.