July 22, 2022

Climate Disclosure: Will West Virginia v. EPA Put the Kibosh on SEC Rules?

Dave recently blogged about some of the potential implications of the SCOTUS’s decision in West Virginia v. EPA for the SEC’s proposed climate disclosure rules.  This Freshfields blog also addresses that issue, and suggests that the decision make create some significant challenges to the SEC moving forward:

The Court’s ruling may complicate the finalization, enactment and enforcement of the SEC’s proposed rule, which is contemplated to be adopted later this year. If the SEC’s proposed rule is adopted in its current or similar form, critics may challenge it under the major questions doctrine by citing the Supreme Court’s reasoning in West Virginia v. EPA, and, in doing so, arguing that the SEC is relying on ambiguous statutory text to claim a significant expansion of power in a subject matter in which it lacks expertise.

Some have argued that the SEC’s statutory authority is “relatively clear,” and draw a distinction between the EPA’s direct regulation of emissions from coal plants and the SEC’s efforts to enhance disclosure. A former SEC attorney speculated that, if a claim is brought, the SEC could argue that the applicable court rely on the “Chevron doctrine” rather than the major questions doctrine. The Chevron doctrine requires courts to accept an agency’s interpretation of an ambiguous law if it is “rational” and “reasonable.” Notably, there is no discussion of the Chevron doctrine in the Court’s opinion in West Virginia v. EPA; however, the dissent noted that courts can “circumvent a Chevron deference analysis altogether” by interpreting a statute as negating an agency’s claimed authority.

It isn’t just the SEC’s proposed climate change disclosure rules that may face a challenge based on West Virginia v. EPA. As this Dechert memo points out, the major questions doctrine may also come into play when “the SEC or other financial regulators seeking to regulate markets involving cryptocurrencies and other blockchain products,” or when agencies like the FTC seek to alter traditional understandings of antitrust and competition law.

Some very heavy hitters have argued that the SEC’s authority to promulgate these rules is pretty clear. Having read some arguments to the contrary, I’m less sanguine about the SEC’s chances in federal court if it adopts rules along the lines it has proposed. Regardless of the legal merits of their arguments, I think the proponents may have failed to “read the room”.  The arguments advanced for the SEC’s authority to require climate disclosure appear to be premised on the view that this authority is virtually limitless, and that’s just not where the federal courts are right now when it comes to agency power.

John Jenkins