Significant new rules issued by federal agencies are routinely challenged in court, but it is far from easy to get an agency decision overturned, due to the deference given the agency’s presumptive expertise and latitude to interpret ambiguous statutory language. However, the Supreme Court put a new arrow in challengers’ quivers in June of 2022 by applying the “major questions doctrine” to overturn EPA rules in West Virginia v. EPA, the first time a majority opinion expressly relied on the doctrine by name.
Under the major questions doctrine, an agency may not assert “highly consequential power beyond what Congress could reasonably be understood to have granted.” Thus, as explained in Util. Air. Reg. Group (UARG) v. EPA, courts can reject an agency’s claim of authority when the claim of authority concerns an issue of vast economic and political significance and Congress has not clearly empowered the agency with authority over the issue.
Regulated companies are likely to rely on the major questions doctrine often in challenging significant agency actions, to find out exactly how far the doctrine goes.
Indeed, the major questions doctrine is already being raised in the context of controversial rules proposed by the SEC in March of 2022. The rules would require companies to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that could impact on their business, and certain climate-related financial statement metrics. Companies would also include disclosure of a registrant’s greenhouse gas emissions as a metric to assess a company’s exposure to such risks.
The SEC views the rules as a follow-up to past requirements to disclose environmental risks, and it insists investors are seeking more information about the effects of climate-related risks on a company’s business to inform their investment decisions.
But some commenters question the SEC’s statutory authority to wade into what they see as climate-based policymaking or regulation. As they see it, even if the proposed rules are nominally just “disclosure” obligations, they would entail significant compliance costs and have the foreseeable effect of changing companies’ conduct of their business. Faced with climate-based reporting duties, companies might alter their policies to improve their showing on climate metrics, even if that might not make the most overall sense for the company and its investors.
Such commenters also fear the proposed disclosure duties will not really benefit investors (for many reasons, including the breadth and complexity of the reported data), but rather will serve a primary purpose of providing fodder for climate activists seeking to force changes to corporate policy. Commenters say these reporting duties would give rise to a transformative expansion of the SEC’s authority into areas of climate policy, which is outside its normal bailiwick and well beyond protecting investors and ensuring the fair functioning of financial markets. What’s more, such a transformative expansion without clear authorization from Congress, they argue, would run afoul of the major questions doctrine.
While the SEC has “broad authority” to issue “disclosure requirements that are ‘necessary or appropriate in the public interest or for the protection of investors,’” its power is not unlimited. As the Supreme Court wrote in NAACP v. Fed. Power Comm’n, a statutory directive that an agency consider the “public interest” does not grant the agency “broad license to promote the general public welfare” for any and all purposes. Rather, the term “public interest” must “take meaning from the purposes of the regulatory legislation.” The SEC’s website states that its core mission under the Securities Exchange Act “is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.”
That role clearly does not include unlimited power to require reporting of any information whatsoever, and the SEC has acknowledged its historical position that it lacks power to require disclosures on “environmental and other matters of social concern” absent a specific congressional mandate or unique circumstances (81 Fed. Reg. 23,916, 23,970).
Criticism has grown in recent months regarding the SEC’s mission creep of evolving itself to become a climate regulator with this proposed rule. A recent Wall Street Journal op-ed by George Mason Law Professor Donald Kochan concluded, “West Virginia v. EPA should serve as a clear warning to the SEC and other federal agencies—including the National Aeronautics and Space Administration, the Defense Department and the General Services Administration—not to act outside their purviews. If Congress had wanted them to have such broad power, it would have given it to them.”
It remains to be seen whether courts will view the SEC’s proposed rules, if adopted, as a tool for protecting investors and markets or as an overreach into critical areas of climate policy and regulation where the SEC has no clear Congressionally-delegated power. But it is virtually certain there will be challenges and a major question over the scope of the major questions doctrine, meaning the SEC will need to think carefully in seeking statutory authority for what looks to many like a form of climate-based regulation.
