On March 15, 2024, the US Court of Appeals for the Fifth Circuit granted an administrative stay of the climate-related disclosure rules recently adopted by the US Securities and Exchange Commission (the “SEC”). The SEC rules require public companies to provide information about climate-related risks that could significantly impact their business or financial statements. See our previous Legal Update for a more detailed discussion of the SEC rules adopted on March 6, 2024.
The petition for administrative stay (i.e., a stop order) was filed by certain oil-field-services companies, who requested the stay as interim relief while the court continues to review the legal challenges to the SEC rules.The Fifth Circuit did not explain its one-sentence order granting the stay.
SOME ARGUMENTS MADE FOR THE STAY
In their motion, the petitioners argued that the stay was justified because the SEC rules:
- fail the “major-questions doctrine” (i.e., a federal principle of statutory interpretation in administrative law cases that courts will presume that Congress does not delegate to executive agencies issues of major political or economic significance) because the SEC lacks the authority to create a climate rule that effectively regulates the “controversial issue of climate change, at an acknowledged cost of over $4.1 billion,” and that Congress has instead given such authority to the US Environmental Protection Agency;
- are “arbitrary and capricious” because they fail to account for alleged drastic changes in the SEC’s positions and are premised on evidence the rules allegedly admit is “at-best mixed, which precedent holds is insufficient to justify an SEC rule”; and
- ·violate the US Constitution’s First Amendment (i.e., relating to freedom of speech) “by mandating controversial disclosures using controversial frameworks and effectively mandating discussions about climate change,” and that such violations are “imminent” as the petitioners are being “forced” to engage in climate-change dialogue.
The petitioners also argued that the stay was necessary because the rules created “irreparable injury in the form of unrecoverable compliance costs and constitutional injuries” and increased companies’ exposure to litigation risk. Regardless of future phase-in or compliance dates, the petitioners argued that they would be forced to start incurring compliance costs right away because they would need to prepare elaborate internal control systems and disclosure control procedures to capture and distill information on weather-related risks, greenhouse gas emissions and other risks.
WHAT THE SEC RESPONDED WITH
The SEC opposed the stay on the basis the claimed “harms” were not immediate enough on the basis that the rules had not yet been formally published and would not in any event require disclosures before March 2026 at the earliest. The SEC also argued that the claims were not likely to succeed on the merits because the rules “fit comfortably within the [SEC]’s long-standing authority to require the disclosure of information important to investors in making investment and voting decisions and are consistent with the [SEC]’s prior exercise of that authority.”
WHAT DOES THE STAY MEAN FOR COMPANIES OTHERWISE SUBJECT TO THE RULES?
The fact that the SEC’s rules have been challenged in court has not come as a surprise and the litigation subject to the administrative stay is just part of other litigation challenging the SEC’s climate change disclosure rules. For example, business groups (including the US Chamber of Commerce) and certain US states have challenged the SEC rules in multiple courts, including the Fifth, Sixth, Eighth and Eleventh Circuits. Additionally, and coming at it from a different angle, environmental groups (including the Sierra Club and the Natural Resources Defense Council) have filed suits arguing on administrative procedure grounds that the SEC rules do not in fact go far enough to protect investors. In circumstances like these, when petitions for judicial review of agency orders are pending in multiple circuits, federal requirements use a lottery system that randomly determines which circuit will in due course hear the consolidated cases.
Depending on which Court of Appeals hears the consolidated cases, the stay may be lifted or may remain in place. Practically, even if the stay remains in place, actual reporting under the new rules does not kick in until 2026 at the earliest, and later for companies that are not large accelerated filers. Regardless of the stay, companies should continue to reasonably prepare for compliance until there is a definitive ruling on the consolidated cases. For many larger public companies that already disclose information on a voluntary basis or pursuant to other comparable disclosure requirements, the outcome of the stay may not matter that much from a workflow perspective.
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