The Securities and Exchange Commission is facing a barrage of lawsuits over its new rule requiring companies to disclose climate-related information. The challengers in those suits have strong arguments, and the SEC has likely internalized the serious prospect that a federal court will declare the climate rule invalid (full disclosure: my law firm, Boyden Gray PLLC, represents several parties suing the SEC, led by Liberty Energy Inc.).
But the SEC apparently hasn’t fully appreciated how a loss here could have serious repercussions for the agency down the road. These lawsuits ask a federal appeals court to determine the limits of the SEC’s statutory authority to mandate public disclosures.
In what I call “abuse it, and lose it,” federal agencies recently putting forward novel and expansive views of their own authority have repeatedly been on the losing end of federal court decisions not only rejecting the novel rule itself, but also concluding the agency possessed even narrower authority than it had long thought. By forcing the issue, the agency ended up far worse off than if it had never issued the new rule in the first place.
The SEC in particular has long exerted significant soft power over public companies by pointing to New Deal-era statutes giving the agency the power to mandate disclosures “in the public interest.” Over decades, the SEC has accumulated a long list of mandatory disclosures companies must make. But the SEC has carefully avoided pushing an overly aggressive view of those vague powers, lest the SEC have to defend its interpretation in court.
For example, the SEC said as far back as 1975 that it lacked authority from Congress to impose broad climate-related disclosure obligations on public companies. President Obama’s SEC came to the same conclusion in 2016.
But that all changed in March 2024, when the SEC formalized the new climate rule. Stretching 886 pages, the rule requires most public companies to compile and disclose detailed and often speculative information not just about their own greenhouse gas emissions and climate-related risks (vaguely defined), but even those of certain third parties. In the words of dissenting SEC Commissioner Mark Uyeda, the new rule “elevates climate above nearly all other issues facing public companies.”
The rule embodies a new and expansive view of the SEC’s disclosure powers. And it imposes such extensive costs – even the SEC’s low-end estimates are in the billions of dollars – that public companies had no choice but to sue to invalidate the rule.
It turns out the SEC’s statutory disclosure powers aren’t nearly as broad as the agency might wish. The relevant statutes tie those vague terms like “public interest” to specific types of information like balance sheet, management data, and profit-and-loss statements.
Under standard rules of statutory interpretation, a court is likely to say the SEC’s seemingly broad disclosure powers actually focus on typical balance-book data – nothing exotic like greenhouse gas emissions or climate risks. Indeed, when Congress wants the SEC to demand disclosures in novel realms, it has passed special statutes, as it did on the topics of “conflict minerals” and executive pay. No such statute exists for climate disclosures.
But now that push has come to shove, a court will have to adjudicate just how far the SEC can go. The SEC risks losing not just its climate rule but also much of its soft power over other disclosures by public companies, who will be able to cite a federal court decision constricting the SEC’s asserted powers.
The SEC should have learned a lesson from other recent examples of “abuse it, and lose it.” Perhaps the highest-profile one was when the Supreme Court ruled that the Department of Education lacked authority to engage in broad student-debt forgiveness despite what seemed at first blush to be broad statutory authority for such measures.
In my view, the most dramatic reversal of fortune involved the Federal Property Act, which presidents have invoked since the days of Lyndon Johnson to impose broad requirements on federal contractors, ranging from anti-discrimination rules to minimum wages. President Biden invoked that Act when he imposed a COVID-19 vaccine mandate for federal contractors, only for a federal appeals court to rule that the government had long been misreading the Act and that it actually gives the president almost no power whatsoever to impose requirements on federal contractors. Abuse it, and lose it.
There’s still time for the SEC to avoid that fate. After Liberty Energy obtained a temporary stay from a federal appeals court, the SEC itself agreed to stay the climate rule pending conclusion of litigation. It should go further and withdraw the rule altogether – and avoid a battle that it is likely to lose far worse than it has anticipated.
Trent McCotter is a partner with Boyden Gray PLLC, Washington, D.C.
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