The Securities and Exchange Commission’s (SEC) rule proposal to enhance and standardize climate-related disclosures for investors, issued on March 21, 2022, has been greeted with everything from scathing criticism to rapturous delight. Per press reports, the rulemaking has even occasioned some impassioned debates among the Commission’s Democratic majority. The proposal—which runs to some 140 pages of minuscule, tri-columned text as published in the Federal Register—calls to mind Voltaire’s quip that the Holy Roman Empire was neither “holy,” “Roman,” nor an “empire.” To wit, the proposal seems to have little to do with “enhancing” or “standardizing,” let alone doing anything “for” retail investors.
Over the course of this week, I would like to pose a few impromptu questions that occurred to me in reviewing the release, namely:
- Did anyone ask Congress?
- Did anyone ask retail investors?
- Did anyone ask plaintiffs’ attorneys?
- Did anyone ask environmentalists?
- Did anyone ask other political activists?
* * *
Did anyone ask Congress?
Not that Congress is immune to questionable public company disclosure proposals—even bipartisan ones!—but the least one can say for the SEC’s Congo conflict minerals, pay ratio, and resource extraction rules is that the agency was obliged by law to draft them. These Dodd-Frank mandates may well have pushed the agency into ideological and policy realms far beyond its historical role, but SEC staff could take comfort in the fact that they had no choice in promulgating these rules. They were mandated. By contrast, the SEC’s cited authority for the present rule is non-specific: the Commission has simply deemed by 3‑to‑1 ukase that “enhanced” disclosures are “necessary or appropriate in the public interest or for the protection of investors.”
Prediction: the proposed rulemaking, if adopted, may well prove to have feet of clay. The SEC’s legal authority to stray so far from its prior understandings of economic materiality—including as reflected as recently as the agency’s 2010 interpretive guidance on this very same subject—will surely be scrutinized by courts in the inevitable rounds of litigation under the Administrative Procedure Act. Indeed, note that GOP elected officials have already started to raise this question in letters directed to Chairman Gensler (see, e.g., here and here). Questions as to the SEC’s rulemaking authority cannot simply be dismissed as partisan sniping; the D.C. Circuit (or another federal appellate court) will almost certainly be seeing these rules again soon, if adopted.
