On August 14, 2024, the U.S. District Court for the Western District of Missouri issued a statewide permanent injunction against two ESG-related rules issued by the Missouri Securities Division that took effect in July 2023 (the Rules).  In general, the Rules required investment advisers and broker-dealers and certain covered financial professionals of such firms to provide disclosure to, and obtain written consent from, Missouri investors if their securities recommendations or investment advice incorporated a “social objective” or other “nonfinancial objective” and imposed various potential penalties for noncompliance, including loss of registration, civil monetary penalties and criminal penalties.  In August 2023, an industry trade association filed suit, claiming that the Rules: (1) are preempted by the National Securities Markets Improvement Act of 1996 (NSMIA); (2) are preempted by the Employment Retirement Income Security Act of 1974 (ERISA); (3) violate the protection against compelled speech under the First and Fourteenth Amendments to the U.S. Constitution; and (4) are impermissibly vague under the Fourteenth Amendment to the U.S. Constitution.  The court granted summary judgment to the plaintiff trade association, finding in its favor with respect to each of its claims, and issued a statewide permanent injunction against the Rules.

The court held that the Rules are preempted by NSMIA—which the court notes was enacted to “alleviate the redundant, costly, and ineffective dual federal/state regulatory securities system” by designating “the federal government to oversee nation-wide securities offerings while allowing the states to retain control over small, regional or intrastate offerings”—because each Rule “impermissibly imposes new and different State regulatory obligations that are not required by federal law.” The court also held that the Rules are preempted by ERISA 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 respect to the constitutional claims, the court held that the Rules violate the First and Fourteenth Amendments’ protection against compelled speech, finding that the written consent statement required by the Rules is “not purely factual” and is “misleading” and that the Rules are “more extensive than necessary to further the government’s interest.”  Finally, the court held that the Rules are impermissibly vague under the Fourteenth Amendment.  The court cites the Rules’ inadequate definition of “nonfinancial objective” and notes that the vagueness of the Rules is “particularly troublesome” in light of the penalties that may be imposed for noncompliance.

The order was issued under the caption Securities Industry and Financial Markets Association v. John R. Ashcroft and Douglas M. Jacoby, No. 23-cv-04154-SRB.