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[author: Kristy Grant-Hart]
Shockwaves hit publicly traded companies in March 2022 when the SEC announced its proposed rule that would require public companies to include certain weather-related disclosures in their annual reports and registration statements. But now, thanks to the Supreme Court decision in West Virginia v. EPAthose new rules, and many others, are seriously in question.
Recently, the Supreme Court has played an increasingly important role in shaping regulatory and compliance outcomes. Since 2018, when the Court unanimously decided in Digital Realty Trust, Inc. v. Somers Since the internal complaint did not qualify individuals for Dodd-Frank protections against retaliation, the Court’s scope has become broader.
During three presidential administrations, the EPA went back and forth with its Clean Power Plan, which was created to limit greenhouse gas emissions from power plants. The Plan called for increasing the use of cleaner energy such as solar and wind and reducing the use of coal. The state of West Virginia and several other parties sued to block the regulations.
The Supreme Court took up the case, ruling in June 2022 that the EPA had exceeded its mandate by enacting a sweeping regulatory scheme beyond that authorized by Congress. They focused on the “principal questions doctrine,” which, in a nutshell, says that when there is a question of “great economic and political importance,” an administrative agency must identify a clear legislative statement made by Congress that gives the agency the authority to Use the regulation to answer the question. Since Congress had not provided such a grant to the EPA to regulate the specific use of various types of energy, the Clean Power Plan was unenforceable.
Although this is the first time the core questions doctrine has been specifically relied upon, a long list of cases on which the core principle is based follows. This includes, particularly for compliance professionals, decisions related to the Occupational Safety and Health Administration (OSHA) COVID-19 vaccine mandate attempt.
The leading questions doctrine can, and likely will, undermine many proposed or contemplated regulatory schemes. He West Virginia The ruling sets the stage for the court fights that can reign in the power of administrative agencies, especially when the agency’s mandate traditionally does not cover the area of regulation. The ruling goes well beyond the EPA. It affects all federal agencies and provides a powerful tool for petitioners to argue against administrative actions.
These cases will leave companies and compliance programs stuck in limbo awaiting final answers from the court. What’s worse? Some judges may suspend regulations while cases move through the courts. Others may not, which means that regulations may be in place for some time, while ESG and compliance professionals wait to see if the regulations will stick in the long term.
Critics argue that the SEC’s job is to (1) protect investors, (2) maintain fair, orderly, and efficient markets, and (3) facilitate capital formation, not regulate climate change disclosures. Of the rules proposed by the SEC, a Wall Street Journal opinion piece stated that “the proposal would turn the federal securities regulator into a greenhouse gas enforcer looking over the shoulders of the directors of publicly traded companies.” These critics assert that the SEC’s mandate only focuses on regulating the materiality of financial disclosures, not climate change. The SEC’s position may be that, because so many investors care deeply about climate change, such disclosures are material for financial decisions.
Regardless, the lead questions doctrine will likely be used to challenge the SEC’s final set of rules governing climate change disclosure. the courts West Virginia The opinion establishes that authorization from Congress is required for an agency to regulate matters of great political or economic importance. Climate change is undoubtedly a matter of great political importance, and companies have publicly denounced the cost of implementing the proposed disclosure rules since they came out.
In the absence of a specific grant of power to the SEC to regulate weather disclosures, the petitioners may succeed in their challenge. Congress has, thus far, not He tasked the SEC with regulating climate change disclosures, and the divided House and Senate are unlikely to do so in the coming term.
Because the lead questions doctrine applies to all federal agencies, other potential regulatory schemes may be called into question. After the recent collapse of the FTX Cryptocurrency Exchange and the resulting loss of over a billion dollars in client funds, calls for regulation of the cryptocurrency industry have become louder. However, Congress has not assigned any administrative agency the task of addressing the problem, and therefore, under the leading questions doctrine, until that happens, it can be argued that no agency has the ability to enforce the law. .
Other rules may also be questioned. A law firm wrote that, in addition to cryptocurrency supervision, “other blockchain products, capital market regulations, FTC supervision, and antitrust and competition laws” can be challenged in court using the lead questions doctrine.
Congress may need to address how digital assets should be regulated, giving authority to the SEC or some other agency. If not, arguments will continue to arise as to whether the SEC or another agency would be overreaching their mandate if they create new schemes or laws to regulate that market.
He West Virginia decision calls into question new schemes intended to regulate new technologies or emerging threats. For example, if the next generation of technology invades privacy in a way that is not currently within the FTC’s mandate, does that mean that Congress will have to grant authority specifically over the technology to regulate it? Quite possibly.
American regulations aren’t the only game in town, of course. The SEC’s rules on climate change disclosure have pushed many US companies to increase their ESG efforts. However, the slowdown in those efforts due to the Supreme Court action will not stop the ESG disclosure momentum from other parts of the world. According to the Harvard Law School Forum on Corporate Governance“Those wondering what the ESG regulation of tomorrow will look like should turn to the EU, which has been undertaking significant reforms in this area for several years, most often based on the French model.”
The same is true for the cryptocurrency market. In October 2022, the European Union took an important step towards the regulation of cryptocurrencies when the European Council approved the comprehensive regulation of Markets in Crypto Assets. While a vote in the European Parliament is not expected until February 2023, the regulation, dubbed MiCA, is expected to pass. In its current form, it would require crypto companies such as wallet providers and exchanges to seek clearance from national regulators within the EU.
All this uncertainty puts compliance officers in a difficult place. To manage this challenge:
- Identify regulatory schemes that are likely to be challenged: The first thing to do is identify the regulatory schemes that are likely to be challenged, and then determine if they affect your business. If they do, then…
- make a tentative plan: Look at the proposed regulation and make a plan to comply with it. See if you can find synergies between other laws that apply to your business in other parts of the world. Let them guide your planning.
- look carefully: Many law firms issue alerts when the courts rule on important regulatory issues or Congress passes important regulations that affect businesses. Ask to be added to these companies’ lists so that you are aware of these changes.
- Pay attention to the rest of the world.: When it comes to ESG, climate change or privacy, look to Europe to guide your actions. Many European laws are, by design, meant to catch a company selling in the European Union, even if the company has no physical presence in the bloc. By following European laws, you will likely comply with many US laws when they take effect.
The US regulatory landscape is likely to change in the wake of the West Virginia decision, but that does not mean that the rest of the world will follow suit. We predict that if the SEC rules are finalized as previously published, they may be challenged in court under the lead questions doctrine, which could prevent them from being implemented or require revision. Other regulatory schemes can be challenged using the same grounds, which will create uncertainty in the compliance and ESG world as the courts decide which regulatory schemes can remain in force or be implemented. Pay attention, plan and always follow the path of ethics and integrity to have a strong, defensible and sustainable compliance program.
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