ESG
SIFMA v. John Ashcroft in his official capacity as Secretary of State of Missouri
Date: Aug. 14, 2024
Issue: Whether Missouri’s “Dishonest or Unethical Business Practices by Broker-Dealers and Agents” rule (B-D Rule) and “Dishonest or Unethical Business Practices by Investment Adviser Representatives” rule (IA Rule) are preempted by the National Security Markets Improvement Act of 1996 (NSMIA) and the Employment Retirement Income Security Act of 1974 (ERISA) or violate the First Amendment.
Case Summary: A Missouri federal court granted the Securities Industry and Financial Markets Association’s (SIFMA) motion for summary judgment and a permanent injunction, ruling Missouri’s B-D Rule and IA Rule are preempted by NSMIA and ERISA, violate the First Amendment and are impermissibly vague.
In 2023, Missouri’s B-D Rule and IA Rule (collectively the rules) took effect. The Rules require broker-dealers and investment advisers to inform Missouri customers if they incorporate “a social objective or other nonfinancial objective” into their investment decisions. Broker-Dealers and Investment Advisers are also required to obtain a customer’s written consent using forms with language specified by the state. The Rules oppose environmental, social and governance (ESG) practices.
SIFMA sued John Ashcroft in his official capacity as secretary of state of Missouri and Douglas Jacoby in his official capacity as Missouri securities commissioner, seeking to enjoin the B-D Rule and IA Rule. SIFMA argued the Rules are preempted by NSMIA and ERISA and violate the First Amendment. Both parties moved for summary judgment.
Judge Stephen Bough of the U.S. District Court for the Western District of Missouri granted SIFMA’s motion for summary judgment and ordered a statewide permanent injunction prohibiting Missouri from implementing, applying or enforcing the rules. To obtain a permanent injunction, a party must show actual success on the merits rather than a likelihood of success typically required for a preliminary injunction. If the court finds actual success on the merits, it considers the threat of irreparable harm to the moving party; the balance of harms with any injury an injunction might inflict on other parties; and the public interest.”
While examining success on the merits, the court concluded the rules are preempted by NSMIA. Express preemption occurs when a federal law explicitly prohibits or displaces state regulation in a given field. Congress enacted NSMIA to alleviate the “redundant, costly, and ineffective dual federal/state regulatory” securities system. The court found the B-D Rule is expressly preempted by NSMIA because the B-D Rule requires broker-dealers to make and keep records that differ from—and are in addition to— federal requirements. Similarly, the court found that NSMIA preempts the IA Rule because it impermissibly imposes new and different State regulatory obligations which are not required by federal law.
Next, the court concluded ERISA preempts the rules. Congress enacted ERISA to protect interstate commerce and the interests of employee benefit plans by requiring disclosures and reporting to participants and beneficiaries of financial and other information. Congress included an express preemption clause in ERISA for the displacement of state action in private employee benefit programs. The court determined the Rules interfere with ERISA by restricting what investments may be recommended or selected, and by mandating disclosure and recordkeeping requirements not required by ERISA.
The court also concluded the rules are unconstitutional under the First Amendment. The rules impose a written consent requirement that must be “substantially similar” to the language provided by Missouri. SIFMA argued this requirement violates the First Amendment because it compels speech that is scripted, inaccurate, controversial, and thus, unconstitutional. The court relied on Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio. Under Zauderer, the Supreme Court concluded laws compelling disclosure must be “of purely factual and uncontroversial information.” The court determined the written consent requirements were neither “purely factual” nor “uncontroversial” and thus violated the First Amendment.
The court also determined the Rules are impermissibly vague. Under the void-for-vagueness doctrine, “a law is unconstitutional if 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.” The court agreed with SIFMA’s argument claiming the rules fail to define the phrase “nonfinancial objective” and provided no written guidance on the rules. Considering the remaining factors, the court concluded SIFMA proved its members would suffer irreparable harm absent a permanent injunction, the balance of harms favors a permanent injunction, and a permanent injunction is in the public interest.
Bottom Line: Missouri has not indicated whether it will appeal the district court’s decision.
Documents: Order
