As you probably recall, in March 6, the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies and in public offerings.” (See this PubCo post, this PubCo post, this PubCo post, and this PubCo post.) Even though, in the final rules, the SEC scaled back significantly on the proposal—including 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—all kinds of litigation immediately ensued. 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.” There are currently nine consolidated cases—with two petitioners, the Sierra Club and the Natural Resources Defense Council, having voluntarily exited the litigation (see this PubCo post), and a new petition having just been filed by the National Center for Public Policy Research, a familiar presence in various cases, such as the legal challenges to the Nasdaq board diversity rules (see this PubCo post), state and corporate DEI initiatives (see this PubCo post and this PubCo post), and litigation over shareholder proposals (see this PubCo post). Petitioners have recently begun to submit briefing. One that has been made available is the brief that was filed on behalf of the U.S. Chamber of Commerce, Texas Association of Business, Longview Chamber of Commerce and the National Center for Public Policy Research.
As represented by petitioners, the SEC’s climate rule creates “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 rule, they contend, is “unlawful several times over,” not to mention sweeping, expensive, prescriptive, unprecedented and unnecessary. The rule, they argue, represents 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 rule is “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 responded to that demand with a proposal for “unprecedented new regulation that would require companies to disclose massive amounts of non-financial climate information.” After receiving pushback in comments on the proposal, petitioners contend, the SEC re-tooled its proposed rules, but “rather than design proposed fixes and put them out for public comment, the Commission jammed through an 886-page final rule—over two vigorous dissents—that preserved the proposal’s fundamental flaws.” (See this PubCo post.) Although the rule tones down the proposal, it still “adheres to the proposal’s basic approach of dictating climate-related disclosures far beyond what existing law requires on any other topic and disregarding core corporate governance precedents.”
Against that background, petitioners bring out their best shots: the rule is arbitrary and capricious under the APA, exceeds the SEC’s statutory authority (with a shout-out to the “major questions” doctrine) and is unconstitutional because it violates the First Amendment. And they take the opportunity to quote generously from the statements of the dissenting SEC Commissioners.
To begin, Petitioners contend that the rule is arbitrary and capricious under the APA because it “does not reflect reasoned decision-making.” It is “irrational because it purports to solve a ‘securities’ problem that the SEC failed to show exists. In reality, it is a climate rule, not a securities regulation.” While the SEC attempted to justify the rule on the basis that investors demanded more climate information, the securities laws “already require the disclosure of material information, so the rule is necessarily duplicative and of no value. The SEC has not shown that investors need additional climate-related information, and it arbitrarily ignored significant evidence that they do not.” The SEC claimed that climate information is underreported, but “‘failed to substantiate [the] conclusion’ that this supposed underreporting is ‘a problem [that] ever existed,’” or that the unreported information was even material. And to the extent that the SEC relied on investor comments, they assert, it failed to distinguish comments attributable to interests other than increasing shareholder value and ignored or discounted commentary and evidence that was contrary.
In addition, the climate rule, they profess, demands disclosure of information that is not material under well-settled standards. But the SEC “failed to justify, or even acknowledge, its departure from decades of agency precedent limiting disclosures to ‘material’ information.” Instead, they maintain, quoting Commissioner Peirce, the SEC “simply purported to follow ‘traditional’ materiality principles and ‘decorated the final rule with materiality ribbons.’… But the rule ‘embraces materiality in name only.’”
What’s more, petitioners contend, the SEC “had no serious response to the rule’s massive costs.” The SEC actually conceded “that compliance with the proposed rule would cost more than double the costs of compliance with all major existing SEC disclosures combined,” but “claimed that the final rule reduced those costs ‘by almost 90%.’” According to petitioners, however, commenters had pointed out that “that calculation ‘duck[ed] serious evaluation of the costs,’… and rested on an economic analysis riddled with errors that public comments would have laid bare—had the SEC, as required, invited input on its massively revised final rule before adopting it.” “Instead,” they assert, “the SEC cooked its own books, relying on biased, flawed information from environmental activists to slash its estimate of the rule’s costs. Further confirming that providing material information to investors was not the rule’s objective, the Commission failed to consider reasonable, less-burdensome alternatives that would have achieved that purported aim at far less cost.”
In addition, they claim, the rule is “independently unlawful because it exceeds the SEC’s statutory and constitutional authority. Congress never authorized the Securities and Exchange Commission to mandate climate disclosures in this fashion. The rule sweeps far beyond the type of material, financial disclosures Congress authorized the Commission to require. And it does not advance the only objectives that the SEC is authorized to pursue.” By contrast, “when Congress has permitted the SEC to require disclosures outside that traditional, financial-information domain, it has expressly directed the SEC to require such disclosures,” such as the Dodd-Frank requirement to make disclosure about conflict minerals. In this case, “[t]o the extent Congress has authorized regulations of climate-related matters—such as emissions reductions, the avowed goal of many of the rule’s proponents,…—Congress reserved those issues to the Environmental Protection Agency.” In addition, they contend, the SEC conflates the objective of ‘protect[ing] investors’ with responding to ‘investors’ *** demand[s].’… Those things are not the same.” This rule, they assert, “is a climate rule, not an investor rule,” and one that is a “direct outgrowth” of the Paris Agreement. The Administration, petitioners charge, “has been unabashed in this approach, vowing to advance its ‘climate agenda using every tool at [its] disposal’—with or ‘without Congress’—and to ‘continue to do the whole-of-government approach’ on its own if Congress does not cooperate.”
And even if the securities laws could be stretched this far, they maintain, “the Court should still reject the Commission’s strained reading under the major-questions doctrine” enunciated by SCOTUS in West Virginia v EPA.
Here, petitioners claim, the SEC is seeking “to work ‘transformative expansion[s] in [their] regulatory authority,’ through ‘modest words, vague terms, or subtle devices,’” a position that is ripe for application of the major questions doctrine.
Finally, petitioners argue that “the rule abridges the freedom of speech by forcing thousands of companies to speak against their will on a contentious political issue. If the SEC can press-gang all of corporate America into a discussion about climate change, it can do so for virtually anything.” By “requiring companies to wade into this debate, the rule infringes on companies’ freedom ‘to remain silent,” and, “more specifically compels ‘political speech,’” which, they assert, demands “strict scrutiny.” But, the “rule cannot survive strict scrutiny” because, they believe, there is no compelling state interest in requiring the information, and the rule is “not narrowly tailored to that purported compelling interest.” While they reject the argument that less stringent standards should apply, such as in Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, the disclosures would fail that test too, they contend, because they “are neither factual nor uncontroversial.” (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.)
Accordingly, they declare, the court should vacate the rule.
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