Missouri Anti-ESG Rules At Risk In Court Decision

On January 5, 2024, Judge Bough (W.D. Mo.) denied the motion to dismiss filed by the Missouri Secretary of State and the Missouri Securities Commissioner in the SIFMA v. Ashcroft litigation.  This case concerns a legal challenge to the rules promulgated by Missouri that require financial services professionals--broker-dealers, agents, investment advisers, and investment adviser representatives--to specifically disclose if they “incorporate a social objective or other nonfinancial objective into a discretionary investment decision.”  In other words, Missouri sought to require that any use of ESG objectives in investment decisions be specifically disclosed--and thus, in effect, discouraged.  

In response to SIFMA's complaint--which, among other things, alleged that the Missouri rules were preempted by federal legislation, unconstitutionally vague, and constituted compelled speech in violation of the First Amendment--the Missouri defendants sought to dismiss the case on procedural and substantive grounds before the Court could rule on the merits of SIFMA's allegations.  This effort backfired dramatically.  While SIFMA must still sustain its claims over the course of the litigation, Judge Bough signaled that SIFMA's arguments have substantial merit.  In particular, Judge Bough held that “SIFMA has adequately alleged that [federal law] preempts the [Missouri] Rule because it regulates investment adviser representatives and federally covered investment advisers beyond what is permitted by [federal law],” and “because they indirectly impose merit-based conditions on the sale of securities.”  Additionally, Judge Bough held that “SIFMA adequately alleges that the Rules violate the First Amendment” because, among other things, “the speech is controversial 'because the Rules' required scripts express only one side of a debate over the merits of ”social objectives" [when] investing.'"  While these rulings were made at a relatively early juncture of the case, these are indicative of the hurdles that Missouri will have to surmount in order to successfully defend its anti-ESG investing rules from challenge.   

The overall impact of this decision is likely to be significant.  A number of other states, like Missouri, have either promulgated or contemplated similar anti-ESG investing rules.  Judge Bough's decision represents a setback for these efforts--or at least signals that such anti-ESG rulemaking is subject to potent legal challenges.  It thus seems probable that this decision may restrain, at least for the moment, anti-ESG investing rules based upon similar principles in other states.  However, it must be emphasized that this litigation is still at an early stage, and that it is altogether possible that a later decision, on a more developed record, may produce a result more favorable to Missouri's anti-ESG policies.