Yesterday, 14 August 2024, a United States District Court issued a decision in Securities Industry and Financial Markets Association vs. Ashcroft finding that a pair of “anti-ESG” regulations promulgated by the Missouri Securities Division were both preempted by federal law and unconstitutional. While specifically applicable only to the Missouri regulations, this decision sets new guardrails for existing and future state regulation of federally-registered broker-dealers and investment advisers both generally and relating to environmental social and governance (ESG) investing.

The case involved a pair of regulations (the ESG Regulations) requiring broker-dealers and investment advisers who “incorporate[] a social objective” in their recommendations or advice to make specific disclosures to their customers/clients and obtain a consent substantially similar to specific language prescribed in the regulations. The Securities Industry and Financial Markets Association (SIFMA) filed suit against the Missouri Secretary of State claiming that the ESG Regulations were: (i) preempted by federal law; (ii) in violation of the First Amendment guarantee of freedom of speech; and (iii) impermissibly vague.

The District Court found in favor of SIFMA on all claims. Of note, the District Court found that the ESG Regulations required federally-registered broker-dealers to create and maintain records that differ from and were in addition to federal requirements and imposed regulatory obligations on federally-registered investment advisers that were “new and different” from federal law.  In addition, the District Court found that the specific consent was prohibited under the First Amendment because it compelled speech that was not purely factual and was not controversial. This holding is a significant victory federally-registered broker-dealers and investment advisers, as it specifically acknowledges a federal preemption of state securities laws. As a corollary, this decision will also pose new challenges for state lawmakers and regulators who are seeking to implement “anti-ESG” laws similar to Missouri’s, as any such laws or regulations will need to conform to the federal preemption.