State lawmakers were informed last week it will cost taxpayers $1.2 million to defend a rule on investment brokers that Missouri Secretary of State Jay Ashcroft says is designed to stop "politically motivated" financial advisers who want to "fritter away Missourians' money."
Ashcroft issued a new rule in July targeting environmental, social and governance, or ESG, investing. His rule requires brokers and investment advisers to obtain annual, written consent to recommend an investment, or actually place any client funds in account that "incorporates a social objective or other non financial objective" for a reason "not solely focused on maximizing a financial return."
Shortly after the rule took effect, it was challenged in federal court by the Security Industries and Financial Markets Association, which claims Ashcroft is imposing conditions on the industry that violate federal law and the Constitution's First Amendment.
On Jan. 5, U.S. District Judge Stephen Bough denied Ashcroft's motion to dismiss the case. Ashcroft's office hired outside counsel, Ed Greim of the prominent Republican law firm Graves Garrett, who filed a formal answer in the case on Friday.
So far, the state has paid $167,000 to Graves Garrett. Ashcroft wants authority to spend up to $400,000 by July 1, and another $800,000 in the coming fiscal year. That request drew sharp questioning last week from Democrats on the House Appropriations Subcommittee on General Administration.
State Rep. Maggie Nurrenbern of Kansas City, ranking Democrat on the subcommittee, asked Ashcroft why he went ahead with the rule when lawmakers declined to pass legislation last year on ESG investing.
"Taxpayers are stuck with a $1.2 million bill for rules that you chose to promulgate," Nurrenbern said to Ashcfoft. "And again, we know because the federal courts, they've already ruled that yes, there are grounds to sue. We're going to be in this for a long haul. I just think that's so unfortunate to pass that burden on to taxpayers."
Ashcroft, however, said the lawsuit is a smokescreen by brokers who want to hide their decision making from investors.
"It's pretty sad that we have Missouri investment companies that don't want to tell their investors how they're investing their money," Ashcroft said.
Other Democrats denounced the request as taxpayer support for Ashcroft's campaign for the Republican nomination for governor.
"I don't want Missourians to foot the bill for his campaign stunt, especially when we could use that money to better invest in the children, seniors and public servants of this state," Democratic state Rep. Deb Lavender of Manchester said in a news release.
In most instances, a state action that brings a court challenge is defended by the attorney general's office with no additional cost to taxpayers. The case is a complex one in federal court and required specialized help, Ashcroft spokesman JoDonn Chaney said in a statement to the Independent.
"As this is a federal case, Secretary Ashcroft advised the attorney general's office that he would be seeking outside counsel due the specificity of the lawsuit," Chaney said. "The executive decision to hire Graves Garrett was based on the firm's expertise and experience in dealing with securities related issues."
In correspondence with Bailey's office, Ashcroft was denied money from the state Legal Expense Fund to pay Graves Garrett. Frank Jung, Ashcroft's general counsel, wrote that outside counsel was needed to get the expertise to defend the lawsuit and that Ashcroft expected help paying the bill.
The attorney general's office accepted that decision, but Jay Atkins, Bailey's chief of staff, wrote that he office could not support it with money from the Legal Expense Fund.
"Eligibility for coverage under the (fund) requires the Attorney General's Office ("AGO") to investigate, defend and maintain authority over claims made against the state," Atkins wrote. "Retaining independent counsel removes AGO oversight and thus negates coverage under the (fund)."
Under the current budget, Ashcroft has the flexibility to spend otherwise unused funds in his account but wants legislative approval to do so to make his spending fully transparent, Chaney said.
In a commentary published last year in the National Review, Ashcroft wrote that his rule is intended to counter President Joe Biden's veto of a federal law governing ESG investing.
"What's more, my rule requires that companies get clients' consent before investing their money in ESG products," he wrote. "Now, no politically motivated financial adviser can fritter away Missourians' money without their full knowledge and express approval."
In the lawsuit, the association argues Ashcroft's rules require brokers and advisers to make statements that they may not believe to be true, such as that a particular investment may not bring the biggest financial return possible.
Many investors have objectives other than a maximum return, the lawsuit argues, including estate planning, tax considerations, charitable giving, faith or values-based goals, or local community investment preferences, the lawsuit states.
Federal law preempts most state regulation of brokers and financial advisers, according to the complaint filed in the lawsuit by attorneys Angela Kennedy and William Ray Price.
"The irony of the rules could hardly be more pronounced," the attorneys wrote. "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 is targeting a class of investments he doesn't like regardless of the returns or wishes of the clients. Federal law bars brokerage firms and advisers from putting their interests ahead of customers, the lawsuit states.
"The rules require speech that is by no means politically neutral," the attorneys wrote. "In fact, the Secretary has argued the Rules are important to counter political or policy positions that he opposes."
The Missouri Independent,www.missouriindependent.com, is a nonprofit, nonpartisan news organization covering state government and its impact on Missourians.
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Missouri Secretary of State Jay Ashcroft's Rule on ESG Investing
Missouri Secretary of State Jay Ashcroft issued a new rule in July targeting environmental, social, and governance (ESG) investing. The rule requires brokers and investment advisers to obtain annual, written consent before recommending or placing client funds in an account that incorporates a social or non-financial objective. The rule aims to prevent financially motivated advisers from potentially misusing Missourians' money.
Lawsuit and Defense Costs
The rule issued by Jay Ashcroft was challenged in federal court by the Security Industries and Financial Markets Association (SIFMA). SIFMA claims that Ashcroft's rule violates federal law and the First Amendment of the Constitution. U.S. District Judge Stephen Bough denied Ashcroft's motion to dismiss the case, and Ashcroft's office hired outside counsel, Ed Greim of the law firm Graves Garrett, to defend the rule. So far, the state has paid $167,000 to Graves Garrett, and Ashcroft is seeking authority to spend up to $400,000 by July 1 and an additional $800,000 in the coming fiscal year.
Criticism and Democratic Response
State lawmakers, particularly Democrats, have criticized Ashcroft's rule and the associated defense costs. State Representative Maggie Nurrenbern questioned why Ashcroft proceeded with the rule when lawmakers did not pass legislation on ESG investing. She expressed concern about taxpayers being burdened with a $1.2 million bill for rules that were promulgated despite the potential for legal challenges. Other Democrats, such as State Representative Deb Lavender, criticized the defense costs as taxpayer support for Ashcroft's campaign for the Republican nomination for governor.
Justification and Opposition
Jay Ashcroft argues that the lawsuit is a smokescreen by brokers who want to hide their decision-making from investors. He believes that the rule is necessary to ensure transparency and prevent politically motivated financial advisers from misusing investors' money. On the other hand, the association challenging the rule argues that it requires brokers and advisers to make statements they may not believe to be true and that it infringes on their First Amendment rights. The association also claims that federal law preempts most state regulation of brokers and financial advisers.
In summary, Missouri Secretary of State Jay Ashcroft issued a rule targeting ESG investing, which has been challenged in federal court. The defense costs associated with the lawsuit have drawn criticism from lawmakers, particularly Democrats. Ashcroft justifies the rule as a means to prevent politically motivated advisers from misusing investors' money, while the association challenging the rule argues that it infringes on their rights and conflicts with federal law.
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