SIFMA has amended its complaint in a challenge to Missouri securities rules that purport to “require transparency regarding ESG.” The new complaint clarifies how the rules allegedly compel speech and provides more detail on SIFMA’s standing to challenge the rules. The new complaint also argues the rules are prohibited by NSMIA and preempted by ERISA (SIFMA v. Ashcroft, October 23, 2023).
In the update to its initial complaint, the securities industry association is seeking declarative and injunctive relief to invalidate the rules.
ESG disclosure rules. The Missouri rules impose new disclosure and consent requirements for broker-dealers and investment advisers in providing ESG-related advice. The rules are codified at 15 CSR 30-51.170 and 15 CSR 30-51.172 and became effective July 30, 2023.
According to Missouri Secretary of State Jay Ashcroft, the rules require disclosure of “value-based agendas” that “often reduce the financial performance of a given investment strategy.”
“This proposed rule … is intended to better protect investors from companies that engage in risky, misleading and sometimes unethical practices when investment models are utilized which are not purely profit based,” Ashcroft stated upon the submitting the proposal.
The rules require financial firms and professionals to obtain client signatures on state-scripted documents before providing advice that “incorporates a social objective or other nonfinancial objective.”
The state-mandated scripts force financial firms to state that incorporating these objectives “will result” in investments and advice “that are not solely focused on maximizing a financial return” for the client.
SIFMA noted that investment advice routinely requires consideration of customer-specific objectives that may not be solely focused on maximizing financial returns, such as the customer’s appetite for risk and ability to bear losses. Some customers also wish to incorporate faith- or values-based objectives into their investment selections.
SIFMA said the rules are novel and no other state has adopted such rules. Significantly, a violation could result in revocation of firm registration, as liability may be imputed to an individual’s firm.
First Amendment. SIFMA argued the rules run afoul of one of the “fixed stars” of the Constitution—the principle that the government may not interfere with an uninhibited marketplace of ideas—by requiring firms and professionals to make controversial, politically charged statements that are not purely factual.
Specifically, said SIFMA, the rules violate the First Amendment protection against compelled speech by “requiring affected persons to adopt and express the government’s position on a controversial matter subject to public debate that is not purely factual.”
SIFMA argued the state-scripted statements incorporate “politically-weighted language” created by the defendants to “advance specific policy views.” The compelled speech is not politically neutral, said SIFMA, citing to public statements by Ashcroft indicating that the rules involve a political issue and are important to counter political or policy positions he opposes.
SIFMA noted that neutral disclosures about criteria used to make investment decisions are already required by federal law.
SIFMA also argued the rules are unconstitutionally vague because SIFMA members are unable to adequately discern what the rules require of them.
Prohibited by NSMIA. According to SIFMA, several rule provisions are “categorically prohibited” by the National Securities Markets Improvement Act of 1996 (NSMIA), which created a uniform and consistent regulatory regime across all fifty states.
- The rules directly regulate the activities of investment adviser representatives working for federally-registered firms—and thereby indirectly regulate the firms themselves, as Missouri law makes firms responsible for many of the acts of their representatives.
- The rules impose new recordkeeping requirements on brokerage firms by requiring them to create and maintain state-scripted consent forms that are not required under federal law.
- The rules place restrictions on the sale of covered securities.
Preempted by ERISA. SIFMA also argued the rules are preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”), which broadly preempts states from regulating private and employer-sponsored pension and welfare plans.
According to SIFMA, Ashcroft said the rules apply to pension accounts, even though ERISA “could not be clearer” in superseding state laws as they relate to any employee benefit plan.
Standing. SIFMA also enhanced its argument that it has associational standing.
SIFMA submitted declarations from six member firms that have standing to present SIFMA’s claims in their own right. These members are altering their business practices in response to the rules and do not wish to do so, said SIFMA.
SIFMA contended that the action does not require an individual member to participate because only declarative and injunctive relief is requested, not monetary.
Finally, SIFMA asserted that the interests it seeks to protect are core to the member organization’s purposes, which include advocating for regulations that promote fair and orderly markets, informed regulatory compliance, predictability and consistency, and efficient market operations.
The case is No. 2:23-CV-4154-SRB.