The SEC’s climate change disclosure rules are in double constitutional trouble. Two separate but recently blurred administrative law doctrines threaten to challenge the constitutionality of the Security and Exchange Commission (SEC) Climate Change Advance Disclosure Rules. Policymakers and the courts should better understand the independence of these two doctrines and their ability to defeat the SEC’s takeover.
In a March 2022 rule that is still pending, the SEC proposed a sweeping and onerous set of rules that would require “registrants to provide certain climate-related information in their registration statements and annual reports” as well as “require information on the status of a registrant”. climate-related risks that are reasonably likely to have a material impact on its business, results of operations or financial condition. It also proposed to require disclosure not only of a reporter’s direct or scope 1 greenhouse gas emissions, but also of the scope 2 greenhouse gas emissions from its electricity purchases and to investigate and report on Scope 3 emissions from all of its supply partners. chain. Additionally, “certain climate-related financial measures” must be provided in the audited financial statements if the rule is finalized as proposed. This is an extraordinary regulatory burden designed to regulate corporate environmental behavior under the guise of “disclosure”.
The first administrative and constitutional law infirmity in the SEC’s proposed climate disclosure rule rests on an application of the “major issues doctrine,” which the U.S. Supreme Court recently granted heightened recognition in its 2022 ruling. In West Virginia vs. EPA.
Here’s the crux of the major issues doctrine and how it applies to the SEC rule. When Congress wants to give an agency the power to regulate on big issues – so-called “big issues” like climate change – the US Supreme Court has now ruled that Congress must do so through a clear legislative directive. If the language of an agency’s authorizing statute does not, the agency cannot presume that Congress has granted broad authority over a major issue. Certainly, if Congress had intended to confer regulatory power on major matters, it would have been apparent in the statutory language and not hidden.
The SEC’s mandate, as detailed in its authorizing articles of association, is to protect the financial integrity of stock exchanges and to protect investors from financial fraud. There is no mandate to become the global environmental watchdog through the backdoor of securities regulation for trading stability and investor protection. Therefore, applying the major issues doctrine, courts should find that the SEC’s climate disclosure rules are ultra vires.
The second infirmity of administrative and constitutional law stems from an application of the doctrine of non-delegation. For SEC rules, this doctrine has received little attention. Indeed, the inattention probably results from the emergence of a stronger major issues doctrine. Many seem to believe confusedly that the major issues doctrine is either the same as the non-delegation doctrine or supersedes it. Neither is true. Seeing how each operates independently in a legal challenge to the SEC’s expected climate disclosure rule is a perfect way to correct those misperceptions.
The major issues doctrine and the non-delegation doctrine operate in complement and in sequence. If an agency rule survives a doctrinal challenge on major issues—that is, it is determined that congressional language sufficiently indicated a clear intent to allow the SEC to enact rules that affect to the major issues of climate change – we must then consider separately whether the words Congress used for this purpose nevertheless unconstitutionally delegated legislative power to the SEC.
The major issues doctrine answers the question of whether there has been delegation to the agency to deal with a major issue. The doctrine of non-delegation tests whether, when Congress did so, it went too far in giving up its authority.
In other words, even though the wording of the statute purports to indicate that Congress wanted to give the SEC the power to use its regulatory power to include climate change standard setting in its mandate, Congress could still have delegated his authority unconstitutionally when he did. To make this decision, we must examine the language used by Congress and apply the tests provided by the doctrine of non-delegation.
Article I of the United States Constitution states that “All legislative powers hereby granted shall be vested in a Congress of the United States”. Since all legislative powers are vested in the legislature, legislative powers cannot be exercised by agencies (or any other branch or entity).
As the United States Supreme Court explained in its 1928 opinion in JW Hampton, Jr. v. UNITED STATES, “If Congress by legislative act establishes an intelligible principle with which the person or body authorized to set such rates is bound to conform, such legislative action is not a prohibited delegation of legislative power.” The idea is that the intelligible principle prevents the agency from acting as a legislative body. This shows that Congress legislated when it established the intelligible principle, with the agency just later filling in the gaps to give effect to Congress’s wishes.
An analysis of the doctrine of non-delegation then requires an in-depth analysis of the statutory grant of regulatory power upon which an agency relies to promulgate rules in order to consider whether or not that grant establishes an intelligible principle. In its proposed rule, the SEC claims to derive its authority primarily from a piece of legislation which, if it does include climate change, means it could include anything – suggesting that it lacks limiting contours and does not cannot be an intelligible principle.
For example, the SEC relies on Section 7 of the Securities Act regarding “disclosure requirements,” as the authority for its climate proposal, which states that “the Commission will make regulations under the this subsection requiring each issuer of an asset-backed security to disclose, for each tranche or class of security, information about the assets backed by that security. The law then proceeds to prescribe the “content of regulations,” helping us to better understand the intended scope of authority granted by Congress. The content section explains what types of disclosures the SEC is authorized to mandate by regulation, stating that the SEC may “require issuers of asset-backed securities, at a minimum, to disclose data at the asset or loans, if such data is necessary to enable investors to carry out independent due diligence, including— (i) data having unique identifiers relating to loan brokers or originators; (ii) the nature and extent the remuneration of the broker or the originator of the assets backing the security; and (iii) the amount of risk retention by the originator and the securitizer of these assets.
Arguably, these statutory commandments could establish an intelligible principle if read closely, including focusing on giving words a meaning limited to what would make sense in light of the SEC’s goal of serve as a financial watchdog that monitors fraud and protects investors from unscrupulous financial practices. But once you try to expand them to include climate change, it all falls apart.
At best, if the SEC is gullible, it could try to claim that climate change risk could be embedded at the “asset level.” . . data, if such data is necessary for investors to carry out independent due diligence” with respect to “risk retention”. Then let’s assume for a moment, asserting that climate change fits those words, that the SEC is able to survive the investigation of the major threshold issues doctrine – that is, we decide that those words are broad enough to signify that Congress did indeed intend to include major climate change issues. If that happens, then those words in the Securities Act are broad enough to drive a truck through and therefore lack any intelligible principle. The absurdity of this conclusion reinforces a doctrinal challenge of major issues while supporting a doctrinal challenge of non-delegation.
Similar issues arise if the SEC relies on a separate portion of Section 7 of the Securities Act dealing with what the SEC may require in registration statements. There, the Act provides that “Any registration statement shall contain such other information and be accompanied by such other documents as the Commission may, by rules or regulations, require as being necessary or appropriate in the public interest or for the protection investors. “Again, this part of the Act might or might not state an intelligible principle if it were conditioned by the purpose of the SEC. But it is certainly not tied to any intelligible principle whether information on a subject such as climate change can fit into the language of “in the public interest”.
While this section or any similar section of the Securities Act or the Exchange Act to which the SEC might refer may indeed include climate change, it is difficult to see a limiting principle in determining what it would not include. Therefore, if the language of the SEC authorizing legislation includes climate change, it is difficult to see how that language includes an “intelligible principle.” And where that is absent, an application of the doctrine of non-delegation nullifies the grant of authority as violating the vesting clause of the US Constitution.
Certainly, in decades of toleration for a growing administrative state, the doctrine of non-delegation has not been applied to invalidate an agency rule since the 1930s. But it has never been killed in court. neither. Additionally, several US Supreme Court justices have hinted at the need to revive it as a more robust constitutional test. So the climate is ripe to find good cases it can be applied to, and the SEC’s climate disclosure rules might be a perfect fit. And, these crippled rules would be a great vehicle for describing how these two doctrines – major issues and non-delegation – work together.