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U.S. SEC Climate Disclosure Rules Spark Flurry of Litigation

On March 6, 2024, the United States Securities and Exchange Commission ("SEC") adopted the much anticipated climate-related disclosure rules, two years after publishing the proposed rules. Immediately following the adoption of the rules, multiple parties filed petitions for review in six different appellate courts: the Second, Fifth, Sixth, Eighth, Eleventh, and D.C. Circuits. A total of 25 states filed petitions across four of those circuits (the Fifth, Sixth, Eighth, and Eleventh Circuits). The American Free Exercise Chamber of Commerce joined the state-led suit in the Eighth Circuit. In addition, the U.S. Chamber of Commerce and two affiliated Texas business groups, two energy companies, and two energy producer trade associations filed three additional petitions in the Fifth Circuit. 

Environmental groups also filed suit: the Sierra Club filed in the D.C. Circuit; and the Natural Resources Defense Council filed in the Second Circuit. The latter two petitioners largely support the SEC's authority to issue the rules but will likely argue the SEC should have gone further. These groups appear to have filed their petitions in courts that may be more deferential to the SEC than the circuits chosen by the other petitioners. 

On March 21, 2024, following a lottery process, the Judicial Panel on Multidistrict Litigation selected the Eighth Circuit to hear all challenges to the SEC's rules. Prior to and following the transfer to the Eighth Circuit, multiple petitioners sought a stay of the SEC rules. In light of the continued stay requests, the SEC decided to voluntarily stay the effective date of the rules on April 4, 2024, stating that it hopes to "facilitate the orderly judicial resolution of those challenges" and to "avoid[ ] potential regulatory uncertainty." On April 29, 2024, 18 Democratic-led states (and D.C.) were permitted to intervene in the litigation in support of the SEC rules by the Eighth Circuit, bringing the total number of participating states to 43. Additionally, at least two additional petitions by advocacy organizations have been filed following consolidation; one has already been transferred to the Eighth Circuit, and the other is pending before the Third Circuit and should also be transferred. 

To date, none of the pending petitions specify the basis for their challenges, though two of the state petitions generally state that the SEC rules exceed the SEC's authority and are arbitrary, capricious, and an abuse of discretion. A petition for review of an agency rule can be satisfied by a brief statement that does not spell out detailed legal arguments. Here petitioners will put forward their legal arguments in briefs to be filed in the Eighth Circuit as the lottery-winning court.

For those petitioners adverse to the SEC issuing any rules on climate risk disclosure, we anticipate at least four categories of substantive challenges. First, we expect petitioners will argue that the rule exceeds the SEC's statutory authority to mandate these types of disclosures. Second, petitioners will likely argue that the SEC abused its discretion in its cost-benefit analysis, which it is required to conduct in assessing any proposed rule. Third, petitioners will likely argue that the new rule compels speech in violation of the First Amendment because it requires disclosures that go far beyond what would be necessary to make existing disclosures not misleading. Finally, petitioners will likely argue that the SEC failed to observe proper notice and comment procedures by issuing a final rule that is so different from the original proposal (in its substance and the authorities it cites) that it is not a logical outgrowth of that proposal and therefore should have been submitted for additional notice and comment. 

The environmental organization petitioners are expected to argue that the rules do not go far enough and fail to provide investors with adequate information about a company's potential exposures to climate risk. They will likely argue that the SEC's decision to abandon the proposal to require disclosure of Scope 3 emissions is arbitrary and capricious.

Litigation will proceed while the SEC continues to stay the rules. Once the litigation is resolved, and assuming the rules stand, the SEC will announce a new effective date. The Eighth Circuit recently issued a briefing schedule, requiring petitioners to file an opening brief by June 14, 2024, and respondents to file a consolidated response brief by August 5, 2024. Amici supporting petitioners' brief will be due June 24, 2024, and amici supporting respondents' brief will be due August 15, 2024. 

There has also been Congressional interest in the rule. Most recently, on April 10, 2024, House Republicans introduced a bill seeking to nullify the SEC rules. Republicans' joint resolution, H. J. Res. 127, invokes the Congressional Review Act to disapprove and nullify the SEC rule. The House Financial Services Committee voted along party lines to advance this effort on April 17, 2024. There is no indication that the Senate would take up or pass this resolution.

This article was reprinted by the Harvard Law School Forum on Corporate Governance blog on July 1, 2024.

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