A Missouri law aimed in part at
So argues the Securities Industry and Financial Markets Association, an industry and lobbying group for banks, asset managers and securities firms,
Missouri Secretary of State John Ashcroft insists that so-called
"Most people, when they invest their money, they want to get the best return they can," Ashcroft said in an interview.
ESG investing is generally seen as a way to support companies that are perceived to pursue certain environmental or social goals such as combating climate change or promoting diversity on corporate boards. Though ESG principles have existed in some form or another for decades, the three-letter acronym has become a bête noire in recent years for Republicans bent on defeating what many deem "woke capitalism."
Missouri isn't the only state where lawmakers, almost always Republicans, have been
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But Missouri's rules, according to SIFMA, go farther than any of that.
"This type of regulation is entirely novel," the group argued. "There is no precedent for it in the securities laws, and none of the other forty-nine states require it."
SIFMA's lawsuit accuses Ashcroft and Missouri Securities Commissioner Douglas Jacoby of overstepping the limits on their authority by seeking to regulate parts of the securities and investing industries already covered by federal law. SIFMA argues that the National Securities Markets Improvement Act of 1996 gave the Securities and Exchange Commission the exclusive right to regulate advisory firms with $100 million or more in assets under management, leaving states only the ability to bring enforcement actions against firms accused of fraud.
Congress's goal in adopting this act, SIFMA argues, was to ensure market governance differs little from one state to the next. Missouri's rules, according to SIFMA, are "exactly the type of piecemeal state securities regulation that Congress prohibited more than 25 years ago."
"The national nature of our securities market system helps ensure that the U.S. has the deepest, most liquid markets in the world," said SIFMA President and CEO Kenneth Bentsen in a press release.
SIFMA's suit also alleges Missouri's rule could undermine the Employee Retirement Income Security Act of 1974, which regulates investments by pension trusts and providers of retirement plans like 401(k)s and individual retirement accounts.
Ashcroft said Missouri's new rules fall squarely under his responsibility to combat investment fraud.
"Anybody who cares about the truth can look at the state statute that authorizes us to do this," he said.
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SIFMA's lawsuit contends it's hard to argue that ESG and similar types of investing are always about something besides maximizing returns.
"For example, a financial professional may view a company making only internal combustion engines as riskier than a similar company diversifying into electric motors," the group wrote.
Missouri's rules, argues SIFMA, could force advisors and brokers into being disingenuous with clients. Wealth managers could find themselves attesting to having "nonfinancial objectives" when in fact their main goal is to help investors make money.
"The irony of the Rules could hardly be more pronounced," according to SIFMA. "Financial professionals may be deemed to be engaging in 'dishonest' conduct for refusing to agree to statements in a state-mandated script they do not believe to be true."
Ashcroft said he thinks the requirements should apply to all investing goals that look beyond financial returns.
"This isn't about stopping anyone from investing in ESG, or in their church, or in a faith-based way," he said. "I want to leave all of that up to the individual. I am just mandating that investment advisors or broker-dealers disclose a material fact."
Ashcroft said he views Missouri's rules not only as a protection to investors but also to advisors and brokers. He said wealth managers who never receive explicit consent for ESG or similar investments might have a hard time justifying their decisions years later if a client decides to sue after seeing disappointing returns.
Ashcroft said his overarching goal is to ensure advisors and brokers are being forthcoming about the reasons behind their investing recommendations. He said if a financial planner chooses to recommend investing in something for reasons other than the prospect of high returns, that "material fact" should be disclosed to investors. Advisors who don't take that step, he said, can't be said to be working in their clients' best interests.
SIFMA separately argues that there's nothing new or unusual about advisors and brokers taking objectives beyond investment returns into account. Wealth managers have long been under an obligation to weigh investors' appetite for risk, ability to bear losses and retirement goals when offering advice.
"The Rules treat common considerations like these as 'nonfinancial objectives' and lump them together without distinction or difference," SIFMA wrote.
Above all, SIFMA argues Missouri's rule is too broad.
"For example, are pooled investments focused on rural development within the ambit of the Rules?" states the suit. "What about mutual funds focused on emerging sources of energy, local community improvement bonds, or church bonds? … The Rules are drafted such that financial firms and professionals are left guessing as to when a written consent must be secured."
