Part 4: Reasons a Court Should Find that the SEC Lacked Legal Authority for the Climate-Change Disclosure Rules
Part 4: Reasons a Court Should Find that the SEC Lacked Legal Authority for the Climate-Change Disclosure Rules
The final part 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 four main 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 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.
The third blog reported an anecdote from the drafting history of the Securities Act that confirms the statutory context imposing restrictions on the discretion of the SEC to create new disclosure obligations. The anecdote involved President Franklin Roosevelt, Representative Sam Rayburn, and Harvard Law Professor Felix Frankfurter. The report of the House Commerce Committee on the bill that became the Securities Act contained language evidencing the episode, and a House report for the bill that became the Securities Exchange Act also had language restricting the discretion of the SEC to compel company disclosures. The relevant statutes have not changed in a way that matters since they were enacted in the early 1930s.
This 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 refers 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.
This post examines the fourth reason a court should find that the SEC lacked legal authority for the Rules: Earlier SEC decisions confirm that the proper interpretation of the relevant statutes is that the agency lacks the power to adopt the new climate-change disclosure rules. In a series of actions from the 1970s to 2020, the SEC took the position that it could not or should not adopt special disclosure rules on environmental, climate change, or social policy issues without a specific congressional mandate. The SEC has now issued such disclosure rules without having received the necessary congressional mandate. Earlier Commissions recognized the statutory restrictions, and the current Commission was not free to ignore them. As explained below, the SEC was wrong to claim in the Release that two of the earlier actions were precedent for the new Rules.
The SEC recognized limitations on its disclosure authority in the 1970s when it considered the possibility of ordering disclosure of environmental matters. Congress passed the National Environmental Policy Act in 1969 and required agencies to consider the promotion of environmental protection as a factor when making decisions.
Even in the face of a statute from Congress, the SEC contested and took a narrow view of its disclosure authority on environmental matters. In 1975, the Commission concluded that “it is generally not authorized to consider the promotion of social goals unrelated to the objectives of the federal securities laws.”[2] The SEC asserted it had broad discretion to require disclosures under the federal securities laws but had the “view that the discretion vested in the Commission under the Securities Act and the Securities Exchange Act to require disclosure which is necessary or appropriate ‘in the public interest’ does not generally permit the Commission to require disclosure for the sole purpose of promoting social goals unrelated to those underlying these Acts.”[3] Disclosures under the Acts were to be limited to information about the financial condition of and matters of economic significance to the disclosing company.[4]
The SEC therefore proposed and ultimately adopted a small number of narrow rules generally consistent with the disclosure approach and framework in the securities acts. An example was that a reporting company needed to disclose material effects on capital expenditures, earnings, and competitive position from compliance with government provisions on the protection of the environment.[5]
In the discussion of authority in the Release on the new climate-change disclosure rules, the SEC cited the disclosure rules from the 1970s on environmental matters as precedent. (21685) That is true only in an alternative reality. In the 1970s, the SEC was responding to NEPA, a congressional enactment. It did not have a specific statutory mandate for the new climate-change disclosure rules. NEPA did not provide a statutory basis for them. The SEC completed its response to NEPA in 1976[6] and did not cite NEPA as authority for the new Rules.
As a result, the SEC’s reliance on the environmental disclosure rules from the 1970s as precedent for the new Rules concedes the entire debate about the SEC’s lack of authority to adopt the new Rules. The SEC had explicit statutory authority for the earlier environmental disclosures and did not have it for the new climate-change disclosure rules. Without it, the Rules are not valid.
On top of that, in the 1970s, the SEC strongly argued that its power to order company disclosures was restricted. When it did adopt some disclosure obligations in response to NEPA, the rules fit the pattern of existing disclosure obligations. The limited disclosure rules adopted for NEPA were not examples of an SEC initiative, based on the standard disclosure statutes from the Securities Act or Exchange Act, to satisfy an investor need for important information. They are precedent for the SEC’s lack of authority to issue the Rules.
The SEC returned to the question of company disclosures on climate-change matters in 2010, when it issued guidance on that topic. The Release also cited the 2010 Guidance as precedent for the new Rules (21685), but, as with the environmental rules from the 1970s, issuance of the Guidance weakens rather than strengthens the case for the SEC’s authority to issue the Rules. The 2010 Guidance was totally in keeping with the existing statutory authority for disclosures because it explained how a reporting company could apply items of disclosure already in Regulation S-K to weather events and other effects from climate-change.
In 2016, the SEC again looked at its legal power to require disclosures on environmental and social issues. The SEC summarized its 1975 conclusion on lack of power and said the relevant statutes had not changed:
In 1975, the Commission considered a variety of “environmental and social” disclosure matters, as well as its own authority and responsibilities to require disclosure under the federal securities laws. Following extensive proceedings on these topics, the Commission concluded that it generally is not authorized to consider the promotion of goals unrelated to the objectives of the federal securities laws when promulgating disclosure requirements, although such considerations would be appropriate to further a specific congressional mandate.[7]
The SEC noted that Congress had not given new statutory authority for disclosures in these areas.
The final part of this saga occurred in 2020. The SEC, at Congress’s demand, was immersed in a process to revise the disclosures in Regulation S-K and in 2020 modernized certain of the disclosure items.[8] It did not include disclosures on climate-change risk, although one commissioner advocated at the proposing and adopting stages to require such disclosures.
These earlier SEC conclusions that it had no power to or should not issue disclosure rules on climate change are reason to hesitate finding now that the agency does have this unheralded power.[9] A court of course should reach its own decision by interpreting the text, context, and structure of the relevant statutes.
* * *
No matter which way the SEC turns, legal support for the new climate-change rules is missing. The SEC sought to construct a statutory case for broad disclosure rulemaking power in the Release, but that case disregarded the method of statutory interpretation required by the Supreme Court. The SEC neglected to address the full text and context of the relevant statutes in the Securities Act and the Securities Exchange Act, which grant but restrict the SEC power to issue disclosure rules, and instead relied on isolated statutory language taken out of context. The SEC’s arguments that investors need the climate-change information, that the information is important, and that mandatory disclosure rules would serve the interests of consistency and comparability are not sufficient grounds for the Rules. Finally, the SEC failed to mention legislative history of the securities acts and its own earlier decisions that confirm restrictions on the agency’s discretion to issue disclosure rules.
[1] SEC, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 89 Fed. Reg. 21668 (Mar. 28, 2024).
[2] SEC, Environmental and Social Disclosure, 40 Fed. Reg. 51656 (Nov. 6, 1975).
[3] Id. 51660.
[4] Id. 51658.
[5] SEC, Conclusions and Final Action on Rulemaking Proposals Relating to Environmental Disclosure, 41 Fed. Reg. 21632 (May 27, 1976).
[6] Id. (concluding that “its existing rules, previously adopted, along with the action it is taking today, satisfy the Commission’s obligations under the federal securities laws and the National Environmental Policy Act of 1969”) (footnote omitted).
[7] Business and Financial Disclosure Required by Regulation S-K, 81 Fed. Reg. 23916, 23971 (Apr. 22, 2016) (concept release) (footnote omitted).
[8] SEC, Modernization of Regulation S-K Items 101, 103, and 105, 85 Fed. Reg. 63726 (2020).
[9] See West Virginia v. EPA, 142 S. Ct. 2587, 2610 (2022).
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.