Part 3: Reasons a Court Should Find that the SEC Lacked Legal Authority for the Climate-Change Disclosure Rules
Part 3: Reasons a Court Should Find that the SEC Lacked Legal Authority for the Climate-Change Disclosure Rules
Part 3 of a 4-part series
In this series of blog posts, I am discussing the SEC’s assertions about its statutory authority to adopt the climate-change disclosure rules. That power is in doubt for several reasons:
The first post summarized the SEC’s position on its statutory authority and explained the statutory analysis the SEC should have done. The SEC’s position failed to follow the method of statutory interpretation prescribed by the Supreme Court and instead relied on isolated statutory language taken out of context. The SEC neglected to address the full text and context of the statutes, which grant but restrict the SEC power to issue disclosure rules. The comment on authority I submitted to the SEC during the rulemaking, which has some further details, is here.
The second post described the ways the SEC’s approach to its authority departed from restrictions on the SEC in the text and context of the relevant securities statutes. The SEC relied on considerations not in the statutes and ignored the narrow form of the disclosure obligations Congress used.
In this third blog, I review legislative history from the Securities Act and the Securities Exchange Act that corroborates restrictions evident from the statutory text on the SEC’s authority to adopt disclosure rules. A key congressional committee for each enactment stated explicitly that the SEC’s authority to create new disclosure rules was limited.
The fourth and final post shows the SEC ignored its own earlier decisions that the agency lacked the power to adopt special disclosure rules on environmental, climate change, and social policy issues. In the earlier decisions, the SEC said it needed a specific congressional mandate to have that power, which it did not have for the new climate-change disclosure rules. These decisions confirm that the SEC lacked authority for the new rules.
The series of blogs will refer to the SEC’s statement supporting the final rules as the “Release.”[1] The new “Rules” are at the end of the Release. References to page numbers of the Release will usually be inside parentheses in the text.
We have been discussing the SEC’s position in the Release that it has enormous discretion to build on provisions in the Securities Act and the Securities Exchange Act to issue disclosure regulations and develop its own disclosure system. The first two posts in this series explained that the text and context of the disclosure statutes of the Acts, starting with the provisions referring to the list of disclosure items in Schedule A of the Securities Act, restrict the SEC’s discretion.
Legislative history of the Securities Act and Schedule A
The legislative history of the Securities Act and Schedule A bears directly on these opposing interpretations. Legislative history is not statutory text and should not carry the same weight, but it can help illuminate. Here, it supports the reading of limitations on the SEC’s authority and does not support the SEC’s position.
The drafting of the Securities Act is particularly notable because it involved well-known figures in the nation’s history: President Franklin Roosevelt; Representative Sam Rayburn, later Speaker of the House; Harvard Law Professor Felix Frankfurter, later a Supreme Court Justice; and proteges of Frankfurter, including James Landis, also a Harvard Law professor and later Chairman of the SEC and then dean of Harvard Law School. Landis did much of the work with Benjamin Cohen, a lawyer from private practice knowledgeable about securities whom William O. Douglas described as “the best and most intelligent man in the New Deal.”[2]
In April 1933, the White House asked Frankfurter to help draft a bill on securities offerings. He put together a team that included Landis and Cohen, who worked with Rayburn on a House bill that became the main basis for the Act.[3]
During the drafting, Cohen wanted the statute to have a detailed schedule of data to be disclosed by each company issuing securities, but Landis wanted to give an administrative agency general power to issue disclosure rules based on the expertise it developed.[4] The two clashed, and Cohen telephoned Frankfurter to threaten to quit. Frankfurter intervened with the President about the disagreement, informing him that the omission of specific data to be disclosed would, among other problems, “jeopardize effective enforcement because of the enormous discretion it leaves to Commission … thereby [inviting] laxity, favoritism, and indifference.”[5] Roosevelt agreed and contacted Rayburn.[6] The drafters decided to put the items for disclosure in a schedule of the act.[7]
The drafters worked on the list of disclosure items so that the information would meet the needs of investors. The list was also the subject of comments from a small group of New York lawyers versed in securities matters who were given access to a draft of the bill. Lawyers from Sullivan & Cromwell and the Cravath firm met with Landis and Cohen, producing “a number of technical changes particularly in the schedules to the bill.”[8]
Landis and Cohen wrote a report for the responsible House committee, the Committee on Interstate and Foreign Commerce chaired by Rayburn, to accompany the House bill.[9] The report vouched for the Schedule A disclosures: “The items required to be disclosed, set forth in detailed form, are items indispensable to any accurate judgment upon the value of the security” and the proper direction of capital resources.[10] The required disclosures fulfilled the President’s demand that no essentially important element about the securities to be sold should be concealed from the public.[11]
The House report also warned that an administering agency should not have broad power over disclosures. The report used language resembling Frankfurter’s telegram to Roosevelt about the need for the statute to specify disclosure items: “To assure the necessary knowledge for [an investor’s] judgment, the bill requires enumerated definite statements. Mere general power to require such information as the Commission might deem advisable would lead to evasions, laxities, and powerful demands for administrative discriminations.”[12]
References to “full and fair disclosure” in the preamble to the Securities Act or in the report of the House committee did not mean unlimited disclosure at the discretion of the administering agency. (21683 n.180) They did not mean anything the SEC wants goes. They meant that the terms of the bill and Schedule A accomplished the goal of full and fair disclosure.
Legislative history of the Securities Exchange Act
A report of the House committee working on the Securities Exchange Act expressed similar concern about granting an agency too much discretion to impose disclosure obligations. We already discussed that the main disclosure provisions of the Exchange Act, sections 12 and 13, severely limited the SEC’s ability to add disclosure items. The SEC could issue rules on disclosure but needed to remain within the subjects Congress enumerated, such as the nature of the company’s business, the terms of securities, balance sheets, and profit and loss statements.[13] For registering a security on an exchange under section 12, the SEC could relieve a class of issuers of the need to file a listed item not applicable to the class and to order the submission of comparable information, but it could not add to the disclosure list. The report said the committee 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.”[14]
The SEC in the Release did not cite this part of the Exchange Act report but cited another part to bolster its assertion of broad authority to require additional disclosures to protect investors.[15] The pages the SEC cited do support the general position that the House committee wanted the administering agency to have certain amounts of discretion and flexibility to write regulations for abuses covered by the Exchange Act but do not support a grant of such discretion for disclosure rules. The text of the relevant statutes in the Exchange Act together with the comment from the House committee report restrict disclosure rulemaking power.
The passages from the two House committee reports refute the SEC’s position that it has power to build on the statutory framework in some unconfined way to ensure that public company disclosures provide investors with information important to making investment decisions. (21683). The relevant statutes have not changed in a way that matters since they were enacted in the early 1930s.
[1] SEC, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 89 Fed. Reg. 21668 (Mar. 28, 2024).
[2] Joel Seligman, The Transformation of Wall Street 62 (3d ed. 2003); see also James M. Landis, The Legislative History of the Securities Act of 1933, 28 Geo. Wash. L. Rev. 29, 29 n.*, 33 (1959).
[3] Seligman 56-57, 61-63, 69; Landis 33, 45.
[4] Seligman 64.
[5] Seligman 64-65 (quoting telegram from Frankfurter to Roosevelt; ellipsis and brackets in Seligman).
[6] Seligman 65.
[7] Landis 38.
[8] Landis 38, 40-41.
[9] Landis 41.
[10] H.R. Rep. No. 73-85, at 3 (1933).
[11] Id. 4.
[12] Id. 7.
[13] 15 U.S.C. §§ 78l(b)(1), 78m(b)(1).
[14] H.R. Rep. No. 73-1383, at 23 (1934).
[15] Release 21683 & n.181 (citing H.R. Rep. No. 73-1383, at 6-7 (1934)). That footnote in the Release also quoted NRDC v. SEC, 606 F.2d 1031, 1045, 1050 (D.C. Cir. 1979), which referred to the SEC’s broad discretion to promulgate rules on corporate disclosure. Since the 1979 decision, much has changed in statutory interpretation, especially when evaluating rulemaking power claimed by an administrative agency. Courts defer to agencies less and are more attentive to the text, structure, and context of statutes. See cases cited in note 3 of first post in this series.
Andrew N. Vollmer is a senior affiliated scholar 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.