In response to an SEC request for public input regarding climate change disclosures, a group of 16 State Attorneys General challenged the SEC's authority to mandate climate-related disclosures where the required disclosures are not material to the economic value of the issuer's securities.
In their letter to SEC Chair Gary Gensler, the Attorneys General disputed the legal theory advanced by SEC Commissioner Lee, among others, that public interest in a topic is sufficient for the SEC to justify compelling issuers to make public statements on a topic unless the subject of the disclosure is otherwise within the scope of the SEC's authority.
Further, the Attorneys General argued that:
- the SEC's authority to require disclosure under the Exchange Act is limited to mandating public reporting that is "necessary or appropriate for the proper protection of investors and to insure fair dealing in the security" under Section 13(a) of the Exchange Act; and
- there is a high First Amendment threshold for forcing issuers to make public statements (compelled speech) so as to determine whether issuers' practices are "consistent with federally encouraged social views."
The Attorneys General urged Chair Gensler to "act mindful" of these "statutory and constitutional guideposts," particularly as to requiring "detailed emission metrics," that the Attorneys General described as not necessary to protect market participants. The Attorneys General urged the SEC to move forward "with a commitment to the rule of law and reasoned administrative decision-making."
Commentary
The legal arguments advanced by the State Attorneys General are substantial. Ultimately, any determination of the legality of mandated disclosures by the SEC will likely depend on both (i) the substance of required disclosures and (ii) the justification that the SEC can demonstrate for mandating those disclosures. Put differently, it is likely not the case that the SEC would be able to mandate disclosures on a topic merely because the topic was of public interest, and without regard to a demonstration that it was of economic consequence to investors.
Current SEC leadership may be hoping to "win" any argument over the materiality of climate disclosures by generating a flood of public comments from retail investors touting the importance of such disclosures. It will be interesting to see if various States attempt to fight fire with fire; that is, whether States will assert that the SEC is pushing a regulatory agenda that hurts State economies and costs jobs. Perhaps those States may seek to generate public comment at the rulemaking stage, and then, perhaps, challenge the SEC before the courts.
Primary Sources
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