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It is not surprising that one of the areas of focus in the comment letters submitted to the SEC regarding the climate disclosure proposal is the SEC’s authority to adopt a comprehensive climate change disclosure regime. It is widely expected that, if adopted, the SEC’s rulemaking will be challenged in court, and that litigation is very likely to address the question of whether the SEC has the authority from Congress under the federal securities laws to address this topic in its disclosure rules.

As any student of administrative law will tell you, historically federal agencies have a good deal of latitude in crafting their rules, particularly in light of the “Chevron doctrine” or “Chevron deference.” In 1984, the Supreme Court decided Chevron v. Natural Resources Defense Council, which created the doctrine that courts normally must defer to a government agency’s reasonable interpretation of a law that it administers when that law’s language is ambiguous. The SEC has argued that Chevron deference should be accorded to its actions over the years, often to the agency’s advantage.

As this WSJ Opinion piece notes, the Chevron doctrine is now teetering on the edge thanks to the Supreme Court’s decision in West Virginia v. Environmental Protection Agency. The piece explains:

West Virginia limits Chevron by fleshing out the “major questions doctrine,” a longstanding judicial presumption that when an administrative agency asserts authority over questions of great economic and political significance, it may act only if Congress has clearly authorized it to do so. Or, as the Constitution puts it: “All legislative powers herein granted shall be vested in a Congress of the United States.”

With respect to the SEC, the piece goes on to note:

West Virginia and the major questions doctrine are certain to surface again soon. Take the Securities and Exchange Commission’s proposed climate-change disclosure regulations. The SEC has a statutory directive to protect investors, facilitate capital formation, and maintain the efficient operation of capital markets. It has neither the expertise nor the statutory authority to regulate greenhouse-gas emissions. In light of West Virginia, the SEC ought to withdraw its proposal.

It seems pretty unlikely to me that the SEC would withdraw its climate change disclosure proposal in light of the West Virginia decision, but perhaps the authority considerations in a post-West Virginia world could be taken into account by the agency when it is considering the adoption of final rules.

– Dave Lynn