A U.S. federal court has issued a ruling blocking new regulations in Missouri aimed at limiting the ability of financial professionals to integrate ESG considerations into their investment advice, finding that the regulation was vague and unconstitutional.
The regulation, initiated by Missouri Secretary of State Jay Ashcroft, and passed in 2023, required securities firms and professionals to receive written consent from clients before being allowed to incorporate a “nonfinancial objective,” or a “social objective,” including social or environmental goals, into their securities recommendations or investment advice, with the consent including mandatory language acknowledging that the advice “will result in investments and recommendations that are not solely focused on maximizing a financial return.”
The rule formed part of an ongoing anti-ESG movement by Republican politicians in the U.S. Missouri has been actively involved in several anti-ESG initiatives, with the state pension fund announcing in 2022 that it was pulling hundreds of millions of dollars from BlackRock for “prioritizing ESG initiatives over shareholder return,” and joining a multi-state alliance in 2023 led by Florida Governor Ron Desantis, aimed at coordinating actions to “protect individuals from the ESG movement” with actions including banning the use of ESG considerations in state and local pension funds.
A legal challenge brought against the rule by Securities Industry and Financial Markets Association (SIFMA), however, argued that the rule, which characterized “nonfinancial objectives” as anything that did not target maximizing financial returns, could also encompass other objectives that are typically considered by financial professionals, such as tax considerations, liquidity, diversification, and time horizon, among others.
In the decision, district judge Stephen Bough found that the new Missouri rules were “unconstitutionally vague,” adding that “the vagueness of the Rules is particularly troublesome given the penalties for failure to comply,” with penalties including loss of registration, a civil penalty of up to $25,000 for each violation, and even criminal penalties. The court issued a statewide permanent injunction prohibiting the implementation, application or enforcement of the rule.
In a statement issued following the ruling, SIFMA President and CEO, Kenneth E. Bentsen, Jr., said that the decision “marks a major victory not only for our national securities market system, but also for our nation”
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