A U.S. federal court has overruled recent Missouri regulations designed to restrict financial advisors from integrating ESG factors into their investment strategies.
According to ESG Today, the rules, introduced by Missouri Secretary of State Jay Ashcroft in 2023, mandated that securities professionals obtain written consent from clients to include non-financial or social objectives in investment advice. This consent was required to state explicitly that such advice could detract from maximising financial returns.
The regulations are part of a broader movement led by some U.S. Republicans against ESG investing. Notably, in 2022, Missouri’s state pension fund withdrew significant investments from BlackRock, citing an overemphasis on ESG concerns over shareholder returns. In addition, Missouri joined a multi-state alliance in 2023 spearheaded by Florida Governor Ron DeSantis. This alliance aims to shield individuals from the ESG movement, including prohibiting ESG considerations in state and local pension funds.
The Securities Industry and Financial Markets Association (SIFMA) challenged the Missouri rule, arguing it was overly broad and could include various typical considerations like tax implications, liquidity, and diversification. The district judge, Stephen Bough, ruled the regulation “unconstitutionally vague” and noted the severity of the penalties for non-compliance, which could include loss of registration and civil penalties up to $25,000 per violation, alongside potential criminal penalties.
In response to the ruling, SIFMA President and CEO Kenneth E. Bentsen, Jr. highlighted the victory for both the national securities market and the broader U.S. public. He emphasised that financial professionals are already bound by federal laws to prioritise their clients’ interests above their own in securities recommendations, rendering the Missouri regulations redundant and confusing.
“The decision marks a major victory not only for our national securities market system but also for our nation,” Bentsen Jr. said. He further added, “Under today’s federal securities laws, financial professionals are already required to provide investment advice and recommendations that are in their customers’ best interests. That means they cannot put their interests ahead of their customers’ interests when recommending securities. The Missouri rules were thus unnecessary and created confusion.”
This ruling is expected to have significant implications for how financial advice can incorporate ESG factors, reinforcing the trend towards considering broader social and environmental impacts in investment decisions.
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