In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed amendments to its rules under the Securities Act of 1933 and Securities Exchange Act of 1934, which would require registrants to provide certain climate-related information in their registration statements and annual reports. By a vote of 3-2, the SEC passed the final Climate Rules in March 2024, which was notably pared down from its proposed version.
The final Climate Rules directly defend against critics who argue the SEC lacks authority to promulgate such rules pursuant to the major questions doctrine (MQD). The Commission cites to section 7(a)(1) of the Securities Act, wherein Congress empowered the Commission to require registrants to disclose financial information as well as “such other information . . . as the Commission may by rules or regulations require as being necessary or in a publicly filed registration statement appropriate in the public interest or for the protection of investors.”
Recently, the Supreme Court has offered two distinct characterizations of the MQD. Justice Gorsuch’s clear-statement cannon sets forth a two-prong framework: 1. Is the agency action unheralded (i.e., “major”)? And, if so, 2. Did Congress provide clear authorization to the agency to exercise such authority? West Virginia v. Environmental Protection Agency, 142 S. Ct. 2587, 2614–16 (2022). In applying Gorsuch’s two-prong interpretation of the MQD, the Supreme Court determined the Environmental Protection Agency lacked statutory authority under the Clean Air Act to set emission caps for the purpose of generation shifting. Meanwhile, Justice Barrett’s semantic cannon employs the MQD as an “interpretive tool” as opposed to a formalized two-prong analysis. Justice Barrett characterizes MQD as a sliding scale, proffering that authorization might be more or less specific to overcome a more or less unlikely delegation from Congress. Biden v. Nebraska, 143 S. Ct. 2355 (2023) (Barrett, J., concurring).
Unsurprisingly, the SEC’s final Climate Rules were immediately met with legal challenges under the Administrative Procedure Act (APA). Petitioners sought to vacate the Climate Rules under the MQD, arguing that it would have vast economic and political significance and thus goes beyond the SEC’s legal authority. Other challengers contend the Climate Rules are a First Amendment violation because it impermissibly compels speech. Nat. Res. Def. Council, Inc. v. SEC, No. 24-707 (2d Cir. filed Mar. 12, 2024); Liberty Energy Inc. v. SEC, No. 24-60109 (5th Cir. filed Mar. 6, 2024); Louisiana v. SEC, No. 24-60109 (5th Cir. filed Mar. 7, 2024); Tex. All. of Energy Producers v. SEC, No. 24-60109 (5th Cir. filed Mar. 11, 2024); Chamber of Commerce of U.S. of Am. v. SEC, No. 24-60109 (5th Cir. filed Mar. 14, 2024); Ohio Bureau of Workers’ Comp. v. SEC, No. 24-3220 (6th Cir. filed Mar. 13, 2024); Iowa v. SEC, No. 24-1522 (8th Cir. filed Mar. 12, 2024); West Virginia v. SEC, No. 24-10679 (11th Cir. filed Mar. 6, 2024); Sierra Club v. SEC, No. 24-1067 (D.C. Cir. filed Mar. 13, 2024). The Judicial Panel on Multicircuit Litigation consolidated the petitions for review in the U.S. Court of Appeals for the Eight Circuit pursuant to 28 U.S.C. § 2112(a)(3). The lead case is now Iowa v. SEC, No. 24-1522 (8th Cir. filed Mar. 12, 2024). Thereafter, on April 4, 2024, the SEC exercised its discretion to voluntarily stay the Climate Rules pending the adjudication of the Eighth Circuit petitions.
On June 28, 2024, in Loper Bright Enterprises v. Raimondo, 603 U.S. ___ (2024), the Supreme Court put an end to Chevron deference, the doctrine that allowed federal agencies to fill the gaps in ambiguous provisions of congressional statutes, if delegation was implied and the traditional tools of statutory interpretation failed, based on their specialized expertise. Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984). In Chevron step one, the court asks, “whether Congress has directly spoken to the precise question at issue.” If it is determined that the meaning of the statute is “unambiguously expressed,” then “that is the end of the matter[.]” If the court continues to Chevron step two, and “the statute is silent or ambiguous with respect to the specific issue,” the court then asks, “whether the agency's answer is based on a permissible construction of the statute.” In Loper, the Court held that, under the APA, courts must “exercise independent judgment in determining the meaning of statutory provisions,” even ambiguous ones. This decision significantly lessens the ability of agencies to promulgate rules and regulations without direct, clear, and detailed marching orders from Congress and empowers courts to supply their own interpretations. According to the Supreme Court, there is a “best reading” of each statute, based on relevant interpretive tools.
On August 5, 2024, the SEC filed its brief in Iowa v. SEC, maintaining that the SEC has statutory authority to promulgate the Climate Rules after both West Virginia v. Environmental Protection Agency and Loper. The Commission clarifies that the intent of the Climate Rules is “not to influence companies’ approaches to climate-related risks or to protect the environment, but to advance traditional securities-law objectives of facilitating informed investment and voting decisions.” Much of the Climate Rules disclosures are accompanied by a materiality qualifier. In the seminal 1976 decision, the Supreme Court ruled that “an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” TSC Industries Inc. v. Northway, Inc. 426 US 438, 449 (1976). The brief posits that the Climates Rules approach to materiality is consistent with the Commission’s statutory authority.
The SEC’s defense of the Climate Rules is much less tenable without the ability to rely on the Chevron justification that the Commission, with 90 years of experience overseeing securities exchanges, securities brokers and dealers, investment advisors, and mutual funds, is best equipped to interpret the Securities Act and Securities Exchange Act as it relates to what requirements are necessary or appropriate necessary in the public interest or for the protection of investors.
The 135-page brief fails to reference Skidmore, wherein the Supreme Court held that an administrative agency's interpretative rules deserve respect proportionate to their persuasiveness. Skidmore v. Swift & Co. 323 U.S. 134 (1944). In Loper, the Supreme Court cites Skidmore approvingly. It is curious that the Commission’s brief does not mention Skidmore respect. Perhaps at this juncture in the litigation, the SEC is not yet prepared to concede that an objective best reading of the Securities Act and Securities Exchange Act, without giving any weight to the “body of experience and informed judgment” of the Commission when looking for interpretive guidance, would be insufficient to uphold the Climate Rules. Id.
It is anticipated that the challenger’s briefs, due September 17, will argue that under Loper, the best reading of the Securities Act and Securities Exchange Act does not permit the SEC to require disclosure of greenhouse gas emissions and other climate-related indices. The SEC must then decide if its legal strategy will involve leveraging Skidmore when arguing the text, history, and context of the Securities Act and Securities Exchange Act contemplates disclosure of climate-related information.
While litigation is ongoing and the Climate Rules are stayed, the Commission may, in the interim, advance it’s climate disclosure agenda by narrowing its focus to promulgating rules that require climate-related disclosure from Investment Advisers and Investment Companies, as opposed to all registrants. In May 2022 the SEC proposed additional amendments to the Securities Act and the Securities Exchange Act to require Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices. The proposed rule would create a categorization framework for ESG funds in an effort to prevent greenwashing. This proposal is more closely tied to the SEC’s purpose of protecting investors and thus is less vulnerable to Loper challenges. Further, it would not face the same first-amendment challenges the Climate Rules face because there is an opting-in component to identifying as an ESG fund. This proposal currently faces a delay in finalization. The SEC re-opened public comments in October 2022 after they were closed in August 2022 due to a technological error in receiving certain comments. Since then, there has been little to no movement with the proposed rule, and the SEC is still accepting comments online. This delay is also likely due to the SEC’s focus on defending the Climate Rules.
In the event the Climate Rules are overturned entirely or in part, the SEC may engage in administrative lobbying to advocate Congress to enact a statute clearly enabling the SEC to require climate-related disclosures. However, it is important to note that post-Loper, legislative drafters are going to have their hands full finding the words to properly delegate authority to administrative agencies, allowing them to fill ambiguous statutory gaps in such a way that will withstand legal challenge.
