Part 2: Briefs Supporting the SEC Climate-Change Disclosure Rules Commit Serious Errors
Part 2: Briefs Supporting the SEC Climate-Change Disclosure Rules Commit Serious Errors
Statutory Arguments Are Not Sustainable
This is the second post to discuss briefs supporting the SEC in the Eighth Circuit case challenging the validity of the SEC’s climate-change disclosure rules. An important question for the Court is whether securities statutes allowing the SEC to impose disclosure obligations authorized the new rules. The brief from the SEC and amicus briefs on the SEC side take the position that the SEC did have statutory authority. Those briefs lack persuasiveness, however, because a variety of their arguments are questionable.
My first post on briefs in the Eighth Circuit case is here.
The SEC Brief and supporting amicus briefs referred to the relevant statutes but then leaped to a high level of generality to derive a standard for SEC disclosure rule-writing that ignored all the statutory context and limitations and seized on all the broadly worded phrases granting discretion to the SEC. The SEC Brief argued that the climate-change disclosure rules “built on Congress’s enumerated disclosures” (9) to achieve Congress’s purpose, which was to provide information “important” to investors, such as “information that helps investors assess the value and risks of an investment in a company” (29, 31, 53).
An amicus brief from former SEC officials and scholars of law, finance, and economics (“Scholars Amicus Brief) used this legal standard: the SEC may order “disclosure related to securities-related risks and opportunities” (2; see also 3). They used two “related”s, which is a broad connector. A disclosure needed only to be related to something related to something else.
This method of statutory interpretation is problematic because nearly every statute has several purposes, which ascend into greater abstraction. An interpreter climbing up the ladder is able to change the meaning of a statute according to the level of generality. Shifting the level of generality liberates a construction from the text. In the end, all statutes seek to promote justice and do good, but allowing high levels of generality to govern a statute’s interpretation puts no effective limit on the words the legislature used.
No statute pursues its goals at all costs. Legislators engage in negotiations and compromise on restrictions, qualifications, exceptions, and omissions to collect the votes needed to pass a bill. Provisions with limitations are part of a statute’s purpose, and a court or agency should not use an interpretation that alters the legislation’s compromises. Extracting a principle or purpose must proceed concretely and precisely. The Supreme Court requires close attention to text, structure, and context.[1]
The SEC Brief (27) and the Scholars Amicus Brief (5-6) paid considerable attention to the power granted to the SEC in section 7(a)(1) of the Securities Act. Both briefs relied heavily on the final sentence giving the SEC the ability to require additional disclosure. To them, the final sentence gives the SEC an independent and unlimited authorization to create and impose new disclosure duties (as long as they are in the public interest or for the protection of investors). Neither brief gave a fair reading to section 7(a)(1).
Look at the section yourself, but, in summary, the text says this: The section is about information required in a registration statement for a public offering of securities and begins by stating that a registration statement shall contain the information and documents specified in Schedule A. It then creates an exception. The SEC may by rule provide that a class of issuers does not need to include information listed in Schedule A if the SEC finds that the information is not applicable to that class and that the remaining disclosures are adequate for the protection of investors. Then section 7(a)(1) has sentences about the need for the registration statement to include the written consent of certain professionals, such as engineers or appraisers, involved with a registration statement. The final sentence allows the SEC to add disclosures: “Any such registration statement shall contain such other information, and be accompanied by such other documents, as the Commission may by rules or regulations require as being necessary or appropriate in the public interest or for the protection of investors.”
The better reading of section 7(a)(1) is that Schedule A is the base disclosure for a registration statement. The statute then permits the SEC limited discretion to create certain exceptions. It may relieve a class of issuers of a Schedule A disclosure. It also may add to Schedule A items, but the addition is on top of the Schedule A disclosures and the SEC needs a good reason to add something (public interest; protection of investors). The agency is not free to treat a power to create exceptions as the power to develop a new system. The SEC and supporters took the final sentence out of context. The sentence takes on a different and much more circumscribed meaning when read together with the mandatory use of Schedule A and the SEC’s power to issue rules relieving a class of issuers of a Schedule A requirement.
In several places, I spelled out my understanding of section 7(a)(1) and the other securities statutes that the SEC used as authority to require climate-change disclosures. They include a comment filed with the SEC during the comment period on the proposed climate-change disclosure rules, my amicus curiae brief joined by the Cato Institute in the Eighth Circuit arguing that the SEC lacked statutory authority, and a series of earlier blog posts giving reasons a court should find that the SEC lacked power to issue the rules.
The Scholars Amicus Brief made several further errors in construing section 7(a)(1). These amici found hidden instructions from Congress in the statute, inferring that the statute made clear “that Congress expected and directed the Commission to go beyond the content for registration statements specified in the Act” and that Congress expected the SEC “to use expert judgment to update disclosure mandates over time” (5). An order to go beyond Schedule A and an expectation that the SEC would “update” statutory disclosures are not in the statutory text and are not fairly implied from the text.
The Scholars Amicus Brief argued that the last sentence in section 7(a)(1) on additions is disconnected from the first sentence in section 7(a)(1) specifying that a registration statement must contain the information and documents in Schedule A (6 & n.12). Additional disclosures for registration statements do not even need to be similar to the disclosures Congress specified (id.). Important to the amici was that the final sentence allowing additions began “Any such registration statement shall contain such other information ….” The amici reasoned that “In context, it is clear that the statutory phrase “such other information” does not refer back to Schedule A, but refers forward to the limiting phrase, ‘as the Commission may by rules . . . require . . . for the protection of investors’” (id.).
Section 7(a)(1) does not permit that construction. We know that the relevant sentence is in section 7(a)(1). We know the sentence refers to the registration statement. We know it refers to information in the registration statement. We know that the registration statement must contain the information in Schedule A. We know the sentence refers to “such other information.” The information that is “other” can mean only information other than the information a registration statement already must contain, which is Schedule A information. The SEC authority is to add to Schedule A items, and it should do so only on an exceptional basis when Schedule A is not properly serving investor protection as defined by Congress. No alternative reading is plausible. The final sentence and the first sentence of section 7(a)(1) are directly connected and must be read as a whole.
The Scholars Amicus Brief did not recognize other limitations on the SEC’s authority to order disclosures. Every time Congress gave the SEC a power to adopt a disclosure rule for a selling or reporting company, the power was subject to important subject-matter and form restrictions in addition to the need to act in the public interest or for the protection of investors. In each instance, Congress specified disclosures about the business, securities, or financial characteristics of the company and not about events affecting the company.
The Scholars Amicus Brief did not properly convey limitations in section 12 of the Exchange Act. Section 12 concerns the information to be filed and made public by a company registering securities on an exchange. The amici said Congress conveyed to the SEC authority to prescribe the content of the information and emphasized the SEC’s rulemaking power (9-10). When providing statutory support, the amici cut short the quotation of section 12(b)(1) and did not explain that the rulemaking power was limited to 12 specifically enumerated categories of information. They did not inform the Court that section 12(c) gives the SEC a method to deal with an item in section 12(b) that is not applicable to a class of issuers but does not give the SEC power to add to the items. Section 12 significantly limits the SEC’s legal authority to require disclosures.
The discussion in the Scholars Amicus Brief of disclosures under section 13(a) of the Exchange Act is similarly incomplete. The amici emphasized the SEC’s authority to prescribe rules for disclosures in annual and periodic reports and argued that the “statutory language imposes no subject-matter restriction on the Commission’s authority to mandate these reports” (10-11). That is not correct. Section 13(a) must be read with section 13(b)(1). Section 13(b)(1) does limit the subject-matter of disclosures in annual and quarterly reports by listing the types of rules the “Commission may prescribe, in regard to reports made pursuant to this title.” The SEC could prescribe the form, the items or details to be in the balance sheet and earnings statement, and the methods for preparing parts of the financial statements.
The Scholars Amicus Brief argued that legislative history of the Exchange Act supported a construction of a “grant of authority to the Commission to make ongoing refinements in disclosure requirements as circumstances warrant.” (12; see also 11-13). The brief quoted general statements from a House committee report, but they do not support the amici’s argument, and the amici did not quote the most pertinent part of the House report. The House report said the committee listed the specific disclosure topics for registering a security for exchange trading in section 12 because it did not want to give too much disclosure discretion to the SEC. The SEC was not to have “unconfined authority to elicit any information whatsoever.” H.R. Rep. No. 73-1383, at 23 (1934).
These deficiencies should give the Court pause about the strength of the arguments supporting the SEC’s statutory authority to impose the new climate-change disclosure rules. The next post will provide further examples.
[1] See Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 18-19, 21, 56-57 (2012) (citing sources); see also Rodriguez v. United States, 480 U.S. 522, 525-26 (1987) (per curiam) (“But no legislation pursues its purposes at all costs.”); John F. Manning, Federalism and the Generality Problem in Constitutional Interpretation, 122 Harv. L. Rev. 2003, 2004 (2009) (“abstracting from a law’s specific means to its general aims dishonors the level of generality at which lawmakers choose to legislate”); Frank H. Easterbrook, Text, History, and Structure in Statutory Interpretation, 17 Harv. J. L. & Pub. Pol'y 61, 64 (1994) (“sticking to lower levels of generality, preferring the language and structure of the law whenever possible over its legislative history and imputed values”).
Andrew N. Vollmer is a distinguished senior fellow with the Mercatus Center at George Mason University; former deputy general counsel of the Securities and Exchange Commission; former professor of law, general faculty, at the University of Virginia School of Law; former partner in the securities enforcement group of Wilmer Cutler Pickering Hale and Dorr LLP.