As soon as the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies and in public offerings” in March (see this PubCo post, this PubCo post, this PubCo post, and this PubCo post), there was a deluge of litigation—even though, in the final rules, the SEC scaled back significantly on the proposal, putting the kibosh on the controversial mandate for Scope 3 GHG emissions reporting and requiring disclosure of Scope 1 and/or Scope 2 GHG emissions on a phased-in basis only by accelerated and large accelerated filers and only when those emissions are material. Those cases were then consolidated in the Eighth Circuit (see this PubCo post) and, in April, the SEC determined to exercise its discretion to stay the final climate disclosure rules “pending the completion of judicial review of the consolidated Eighth Circuit petitions.” (See this PubCo post.) There are currently nine consolidated cases—with two of the original petitioners, the Sierra Club and the Natural Resources Defense Council, having voluntarily exited the litigation (see this PubCo post), and the National Center for Public Policy Research having filed a petition to join the litigation more recently. (See this PubCo post). In June, petitioners began to submit their briefs (see this PubCo post). Now, the SEC has filed its almost 25,000-word brief in the consolidated case, contending that petitioners have set up a “strawman—challenging reimagined rules that the Commission did not enact and criticizing a rationale that the Commission expressly disclaimed.” More specifically, the SEC’s brief defends its authority to adopt these rules and the reasonableness of its actions and process under the APA and contends that, as compelled commercial (or commercial-like) disclosure, the rules are consistent with the First Amendment.
In one of their briefs, petitioners contend that the SEC’s climate rules create “an entirely new regulatory scheme for one topic—climate change”—that exceeds the SEC’s authority, violates the First Amendment and is arbitrary and capricious. In sum, the rules, they profess, are “unlawful several times over,” not to mention sweeping, expensive, prescriptive, unprecedented and unnecessary. The rules, they argue, represent another effort by the Executive Branch to achieve its environmental aims, not through Congress, but rather “through the back door.” According to petitioners, the climate rules are “the quintessential rule ‘in search of [a] regulatory proble[m].’” In petitioners’ view, the current Administration is bent on pursuing a broad climate agenda—regardless of whether Congress has authorized that agenda; the SEC has responded to the Administration’s demand with a proposal for “unprecedented new regulation that would require companies to disclose massive amounts of non-financial climate information.”
The SEC, however, begs to differ. In petitioners’ challenge, the SEC argues, they “attack a strawman. This case is not about climate change or environmental policy; it is about protecting investors.”
Statutory authority. In its brief, the SEC contends that it promulgated the climate disclosure rules under “its well-established statutory authority to require the disclosure of information important to investors in making investment and voting decisions.” The rules “require issuers of securities to disclose certain climate-related information, including risks that have materially impacted, or are reasonably likely to materially impact, the company. These disclosures will address inadequacies of existing climate-related disclosures and assist investors in making more informed decisions regarding securities in their portfolio.”
When Congress enacted the Securities Act and the Exchange Act, the SEC asserts, Congress “expressly delegated to the Commission authority to require disclosure of not only certain enumerated information, but also ‘such other information’ as the Commission determines to be ‘necessary or appropriate in the public interest or for the protection of investors.’” These statutory authorities, the SEC contends, citing Loper Bright v. Raimondo, “‘expressly delegate’ to the Commission ‘discretionary authority’ both to ‘fill up the details of a statutory scheme’ and to ‘regulate subject to the limits imposed by a term or phrase that leaves agencies with flexibility.’” (That is, the SEC appears to be suggesting that this authority is one of those express delegations to an agency referred to in Loper Bright that escapes the impact of the demise of Chevron deference.) (See this PubCo post.) The purposes of these statutes include “providing investors with information important to their investment and voting decisions, such as information that helps investors assess the value and risks of an investment in a company.” In adopting the climate disclosure rules, the SEC was simply exercising that authority consistent with “90 years of disclosure-based regulation.”
Under this statutory authority, the SEC explains, it has, over time, continually responded to the need of investors for additional disclosure, adding requirements for disclosure of material litigation, MD&A and risk factors. To that end, the SEC “has weighed the importance of information to investor decision-making against the burdens on issuers and the risk that too much disclosure will obscure important information.” Over the past 50 years, the SEC “has considered various proposals for additional environmental and climate-related disclosures and has issued guidance addressing how existing disclosure rules apply to such information.” That includes an “interpretive release in 1971 explaining that issuers should consider disclosing the financial impact of compliance with environmental laws when material,” rules adopted in 1973 requiring disclosures of the material effects of compliance with environmental laws and material judicial proceedings, and guidance issued in 2010 explaining how then-existing disclosure requirements could apply to climate issues. In 1975, the brief observes, the SEC “clarified that, while it did not interpret the securities laws to authorize it to require disclosures ‘for the sole purpose of promoting social goals,’ disclosure relating to environmental and other matters of social concern could be required when the information is ‘important to the reasonable investor.’” Interestingly, the brief observes, in that same year, in contrast to today, the SEC declined “to adopt rules that would have required ‘comprehensive disclosure of the environmental effects’ of an issuer’s ‘corporate activities’”; that decision was based on the record before the SEC at the time, the belief prevalent at the time that the information would not be useful in investment decisions, and the absence of direct investor interest.
The SEC maintains that its “approach to climate-related information has been consistent with its longstanding interpretation of its statutory authority: the Securities Act and the Exchange Act authorize the Commission to mandate disclosures that protect investors by facilitating informed investment and voting decisions.” Each disclosure requirement in the rules is designed to elicit information with that goal and is therefore “necessary or appropriate in the public interest or for the protection of investors.” For example, the requirements to disclose Scope 1 and Scope 2 GHG emissions are a central measure of exposure to transition risk, one of the business and financial risks facing companies. Consequently, the SEC argues, the information is elicited is “necessary or appropriate in the public interest or for the protection of investors” and within the SEC’s authority.
Petitioners’ arguments, the SEC contends, set up a “strawman—challenging reimagined rules that the Commission did not enact and criticizing a rationale that the Commission expressly disclaimed.” Contrary to petitioners’ arguments, the rules were adopted “to advance traditional securities-law objectives of facilitating informed investment and voting decisions,” not to “influence companies’ approaches to climate-related risks or to protect the environment.” As reflected in the extensive factual record, the rules respond to “changed facts, including subsequent market and regulatory developments,” such as the current importance of climate-related risk information to investor decision-making and investor interest in detailed, consistent and comparable information. In adopting the rules, the SEC emphasized that they “do not ‘determine national environmental policy or dictate corporate policy,’” and emphasized that it “is ‘agnostic as to whether and how issuers manage climate-related risks so long as they appropriately inform investors of material risks.’” In addition, the rules “do not ‘prescribe any particular tools, strategies, or practices with respect to climate-related risk.’”
Petitioners’ argued that the two Acts limit the SEC rulemaking to “financially related” information. The SEC responds that this “argument both sets a hurdle the Rules easily clear and grafts a new requirement onto the statutory text.” First, because climate-related risks and company responses do affect financial performance, the rules require disclosure of information that relates to a company’s financial condition and performance. Second, the SEC maintains, the statutes authorize the SEC “to require information that is not itself financial in nature, but that pertains to the company’s operations or financial condition, and thus affects the value and risks of an investment.” And the SEC has “long required disclosure of information that is not itself narrowly ‘financial.’” Even the statutes themselves exceed the narrow characterization that petitioners would impose.
The SEC also rejects petitioners’ contention that the SEC “exceeded its statutory authority by requiring disclosure of information that is not ‘material.’” According to the SEC, there were only two instances where the rules do not include materiality qualifiers, and, in those cases, “the required disclosure is still important to investment and voting decisions,” such as “disclosure of how an issuer’s board of directors oversees climate-related risk, if it does.” The SEC asserts that an express materiality qualifier is not required for every provision of the rules. Further, “in designing a prospective disclosure rule, the Commission is not required to establish that the information elicited will be material under all facts and circumstances. Rather, it can make a reasoned determination that its rules appropriately elicit information important to investment and voting decisions….”
For similar reasons, the SEC asserts, “petitioners’ invocations of the major questions doctrine and the nondelegation doctrine are unavailing.” Citing West Virginia v EPA (see this PubCo post), the SEC contends that the major questions doctrine “is reserved for ‘extraordinary cases’ in which an agency asserts ‘an unheralded power representing a transformative expansion in [its] regulatory authority’ by means of ‘a radical or fundamental change to a statutory scheme.’” The climate disclosure rules do not “effect a ‘transformative expansion in [the Commission’s] regulatory authority,’” nor is the SEC “regulating ‘outside its wheelhouse’” or lacking in “‘comparative expertise in making [the relevant] policy judgments.’” Rather, ensuring that investors have appropriate information for investment and voting decisions is “what [the SEC] does.” The SEC, it argued, based its authority, not on vague language, but on “core provisions of the securities laws that expressly authorize it to promulgate disclosure requirements to protect investors.” In support of their claim of lack of authorization, petitioners cited bills to accomplish the same goals rejected by Congress, but the SEC contends that those bills were much broader than the rules as adopted. With regard to the rules’ economic and political significance as asserted by petitioners, the SEC professes that the rules “do not implicate the debates petitioners invoke” and “are not designed to address climate change, do not require disclosure of information that does not bear on investment and voting decisions, and do not circumvent congressional limitations on the Commission’s authority.” And even if the major questions doctrine did apply, the SEC claims, the rules would still pass muster: the SEC is acting within the Acts’ express and broad delegation of authority to the SEC to adopt rules “requiring disclosure of information ‘necessary or appropriate in the public interest or for the protection of investors,’ as it did here.”
Nor does the non-delegation doctrine apply, the SEC contends, given that Congress has provided an “intelligible principle to which the person or body authorized to [exercise the delegated authority] is directed to conform.” The Acts clearly delineate the boundaries of the delegated authority and the general policy to pursue.
APA. The SEC maintains that the rules satisfy the APA: the SEC reasonably explained and substantiated the need for the rules, and analyzed their costs, benefits and economic impact. The proposal was subject to a “rigorous notice-and-comment process,” which led the SEC to make significant changes in response to commenters’ concerns, satisfying the APA’s procedural requirements.
In its brief, the SEC contends that, consistent with the APA, it reasonably explained its decision, “reasonably analyzed the evidence before it, considered reasonable alternatives, and reached a rational conclusion”; “no more is required under the APA’s ‘narrow’ and ‘highly deferential’ standard of review.” The SEC “reasonably determined,” on the basis of “substantial evidence,” including empirical studies and investor demand, “that information regarding climate-related risks is important to investment and voting decisions and that there is a need for more detailed, consistent, and comparable disclosure of that information.” Based on commenter feedback, the SEC determined that “the current state of climate-related disclosure has resulted in inconsistent, difficult to compare, and frequently boilerplate disclosures,” and reasonably explained why existing disclosure practice did not suffice, including that information provided in sustainability reports often is not prepared with the same rigor as SEC reporting. The SEC noted that numerous commenters indicated that they had “incurred costs and inefficiencies when attempting to assess climate-related risks and their effect on the valuation of a registrant’s securities.”
To the claim of petitioners that this issue was really in the EPA’s wheelhouse and that EPA authority was adequate, the SEC responds that the goals and subject entities of the EPA are different, as confirmed by the EPA’s own comments. The SEC also rejects the contention that it relied inappropriately on comments from investors—such as “cherrypick[ed]” comments from non-profit social responsibility advocates—that prefer nonpecuniary climate-related information, asserting that it actually relied on “comments from investors and asset-management firms [that] expressed pecuniary aims.” Nor, the SEC says, did it discount contrary evidence, but instead satisfied its obligation to respond to commenters’ concerns, often modifying the rules in response by adding materiality qualifiers and narrowing the scope. The SEC also declares that it satisfied its obligation to respond adequately to reasonable alternative proposals; it “considered—and explained why it declined to adopt—several alternatives to the Rules.” The SEC also maintains that its rules are internally consistent, contrary to allegations from petitioners.
The SEC also argues that it reasonably considered the economic impact of the rules, and satisfied its obligation to consider their impact on efficiency, competition and capital formation. While the SEC had acknowledged the limitations of existing data, the SEC argues, it reasonably considered various cost estimates from commenters and used medians throughout the process, acknowledging that “commenters offered a wide range of cost estimates.” The brief goes on to respond to various specific issues raised about the SEC’s economic analysis. For example, the Chamber’s estimate, the SEC said, inappropriately included Scope 3 and was an upper-end outlier among the estimates. The SEC also denied the Chamber’s assertion that the SEC “opportunistically framed the costs and benefits of the GHG disclosures.” While the SEC has recognized that companies might experience diminished shareholder value as a result of the rules, the SEC “also found that these effects were mitigated by modifications from the proposal.”
With regard to the procedural aspects of the APA, the SEC argues that it satisfied them: it “provided the public with a meaningful opportunity to participate in the rulemaking process,” adopted a final rule that was a “logical outgrowth of the rule proposed,” and issued a proposing release that “‘adequately frame[s] the subjects for discussion’ such that an ‘affected party should have anticipated the agency’s final course in light of the initial notice.’”
First Amendment. Finally, the SEC argues that its climate disclosure rules involve a form of compelled commercial speech and are consistent with the First Amendment. The SEC contends that compelled disclosures in the commercial context—and pursuant to securities regulations in particular—are subject to limited First Amendment scrutiny under Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio. Securities law disclosures “relate to the good or service offered by the regulated party.” As such, compelled securities law disclosures have long been recognized as “commercial speech, or a distinct form of speech akin to it” and “subject only to limited First Amendment scrutiny.” In either case, “the government’s power to regulate ‘[s]peech relating to the purchase and sale of securities…is at least as broad as with respect to the general rubric of commercial speech.’” The SEC rejected petitioners’ contention that commercial speech is limited to speech that “propose[s] a commercial transaction,” pointing out that, although that definition is used in some cases, “the Supreme Court also has defined it more broadly as encompassing ‘expression related solely to the economic interests of the speaker and its audience.’”
Under Zauderer, the SEC explains, compelled commercial disclosure is permitted under the First Amendment if it is “factual and uncontroversial information” and the law is “reasonably related” to an adequate government interest and is not “unjustified or unduly burdensome” on protected expression. In particular, the SEC maintains that the disclosures elicited “do not cease to be purely factual merely because they require issuers to draw a conclusion or inference based on factual information,” nor does the involvement of “assumptions” or “estimates” in making calculations “change their purely factual character.” Similarly, a disclosure does “not cease to be factual merely because it might provoke an ‘emotional response’ or has ‘ideological baggage.’”
In addition, the rules do not compel controversial disclosures; they require disclosure about risks and impact, but they do not “compel issuers to opine on matters such as ‘the scientific basis of…climate change’ or ‘appropriate responses to climate change’”: “‘[M]ere connection to a live, contentious, political issue’ does not render a factual statement controversial.” By contrast, in the conflict minerals case, the use of the term “not conflict free” was considered to “convey[] moral responsibility for the Congo war.”
The SEC rejects petitioners’ assertion that the SEC’s only interest is to protect investors from fraud: the SEC also has “a legitimate interest in promoting the free flow of commercial information.” The extensive record demonstrated that climate risks can significantly affect financial performance and position, while existing disclosures are inconsistent and not comparable. Investors have demanded decision-useful information that is consistent, comparable and reliable.
With respect to whether the rules are “unduly burdensome,” the SEC asserts that the inquiry under Zauderer is not a broad one, but is rather more narrowly focused on whether the disclosure requirement “unduly burden[s] expressive activity.” These rules impose “no such burden,” the SEC asserts. Accordingly, the SEC concludes, the climate disclosure rules would withstand scrutiny under the Zauderer standard.
According to the SEC, even if Zauderer did not apply, strict scrutiny would not be the applicable standard. Rather, the rules would be reviewed, and would pass muster, “under the intermediate-scrutiny standard for commercial speech under Central Hudson Gas & Electric Corp. v. Public Service Commission of New York.” Under Central Hudson, a “restriction on commercial speech is permissible if it ‘directly advances’ a ‘substantial’ governmental interest and is ‘not more extensive than is necessary to serve that interest.’” The SEC contends that the rules would survive scrutiny under Central Hudson for reasons similar to those discussed in connection with Zauderer. (For discussion of legal standards relating to compelled speech, see these PubCo posts of 4/14/14, 7/16/14, 7/29/14, 9/14/14 and 8/18/15.)
While the SEC urged the court to agree with its conclusions that all of petitioners’ challenges fail, if the court were to determine otherwise, the SEC requests the court to remand, not vacate, and to sever any provision that the court determines to be unlawful.
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