In Washington – ACMA Insider – March 21, 2024

Federal Court Blocks SEC Rule As Legal Challenges Mount

The 5th Circuit Court has issued a stay preventing the SEC climate disclosure rule from entering into force while legal challenges proceed. The court released the 1 page order on March 15th. The courts acted after multiple groups filed suit against the scaled back rule, with business groups arguing that while the final rule was an improvement, it remains an overreach of SEC authority, while an environmental group argues the final rule does not go far enough.

Legal challenges were expected when the SEC released the draft rule in 2022, however, the agency took steps to respond to criticism from business groups.  The SEC revised the proposed rule, narrowing the scope by eliminating emissions from suppliers, known as Scope 3 emissions.  It also stated that emissions from publicly traded companies only needed to be disclosed if the information was “material” or relevant, to investors.  

These changes were not enough to prevent legal challenges, however.  Attorneys General of West Virginia, Georgia, Alabama, Alaska Indiana, New Hampshire, Oklahoma, South Carolina, Wyoming, and Virginia called the rule “a back door move to undermine the energy industry.” Despite noting a number of changes from the proposed rule, the group of state officials called the final rule “wildly in defect and illegal and unconstitutional.”  This group filed a legal challenge the day the SEC released the final rule.  

On March 14, the U.S. Chamber of Commerce, which had previously suggested it would do so, filed a federal suit against the final rule.  

“While we appreciate Chairman Gensler’s constructive engagement with the business community and many of the modifications made by the SEC to the original proposed rule, the final rule makes substantively harmful changes to 50 years of corporate governance precedent that will have implications well beyond this single rule,” said Tom Quaadman, executive vice president for the Chamber’s Center for Capital Markets Competitiveness. 

Attorneys General for Texas and Louisiana have also filed separate suits against the proposed rule, as has an energy industry group in Texas.  

While these challenges argue the SEC has overreached their authority, the Sierra Club and its foundation argue the SEC has not gone far enough.  In a separate suit, the Sierra Club argued investors need more information than required by the SEC.  

“We are saying not only does the SEC have the authority to require these types of disclosures, in fact they made a mistake by dropping some very crucial disclosure requirements that were in the proposal — and a mistake that just is fundamentally wrong,” said Hana Vizcarra, senior attorney at Earthjustice to Politico

The SEC will defend the regulation in all these cases, according to statements released by the SEC. Further lawsuits are possible.  

Contact Dan Neumann with any questions.