A U.S. District Court in Missouri today handed SEC-registered investment advisors a sweeping victory that declared state regulations requiring advisors to file disclosures on ESG investing to be unconstitutional.
The court also ruled that states do not have the authority to impose substantive regulations on SEC-registered advisors.
The Securities Industry and Financial Markets Association (SIFMA) brought the lawsuit challenging new Missouri regulations that require advisors and their staffs to disclose to clients whether or not they consider ESG (environmental, social and governance) factors when making investment recommendations.
The rules characterized as “nonfinancial” any objective other than maximal “financial return.” The court, however agreed with SIFMA that the rules could easily be read to encompass objectives that are routinely part of investment decisions, such as tax considerations, diversification, risk tolerance, time horizon, liquidity needs, faith- or values-based objectives, and local community investment objectives, among others.
The court ruled in SIFMA’s favor on all counts.
SIFMA President and CEO Kenneth E. Bentsen Jr. said in statement, “Under today’s federal securities laws, financial professionals are already required to provide investment advice and recommendations that are in their customers’ best interest. That means they cannot put their interests ahead of their customers’ interests when recommending securities. The Missouri rules were thus unnecessary and created confusion.”
The court ruled that Missouri's rules “are preempted by [the National Securities Markets Improvements Act (NSMIA)] and [the Employee Retirement Income Security Act (ERISA)], are unconstitutional under the First and Fourteenth Amendments of the United States Constitution, and are impermissibly vague under the Fourteenth Amendment of the United States Constitution.” The court also ordered a statewide permanent injunction prohibiting the implementation, application or enforcement of the rules.
“The decision is in complete agreement with the Investment Adviser Association’s longstanding position that state laws or rules that attempt to impose substantive regulation on SEC advisers and their adviser personnel are preempted by federal law,” the IAA said in a statement.
The IAA submitted a “friend of the court” brief in this case in June, pointing out that states are limited in their ability to regulate SEC advisors and their advisor personnel under federal law.
According to the IAA, federal law limits state authority to licensing and qualifications for some personnel of SEC-registered investment adisors. States also retain the authority to investigate and bring enforcement actions against advisor fraud, the IAA acknowledged.
The court agreed, holding that the Missouri rule “is preempted because it impermissibly imposes new and different state regulatory obligations that are not required by federal law,” and “far exceed[s]” the limited authorities NSMIA gives to states.
According to the IAA, allowing Missouri to impose obligations on SEC advisors or their personnel would have had widespread negative consequences for investment advisers with a national business.
Giving states that authority “would have subjected advisers’ fiduciary judgment to divergent and shifting political influences on an endless range of issues, flooding the field of investment adviser regulation with inconsistent, unpredictable, overlapping, and costly state rules and regulations. The IAA applauds today’s important decision, which recognizes and reaffirms the jurisdictional division between the SEC and the states that Congress ordered when it enacted NSMIA,” the IAA said.