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Legal experts take opposing views on SEC’s climate disclosure rule and the First Amendment

Henry Engler  Thomson Reuters Regulatory Intelligence

· 5 minute read

Henry Engler  Thomson Reuters Regulatory Intelligence

· 5 minute read

The SEC’s climate rules, which were released March 6, are out, and the opposition to them through the courts that use the First Amendment as the basis for litigation is still likely

Debate has intensified over whether the U.S. Securities and Exchange Commission’s (SEC) newly released climate disclosure rules might be derailed by First Amendment legal challenges. The focus on the First Amendment comes after industry groups brought a lawsuit against California’s recent climate disclosure laws, arguing that the rules force companies to engage in “compelled speech” that is unconstitutional.

SEC chair Gary Gensler said in February that the regulator is taking account of court decisions over its past rulemaking in crafting its final regulation for climate disclosure. In particular, he noted a recent decision from the U.S. Court of Appeals for the Fifth Circuit that rejected the argument made by industry trade groups that the SEC’s stock buyback rule, established in May 2023, violated the First Amendment. The groups said the agency’s stock buyback rule, which required companies to report day-to-day share repurchase data once per quarter, violated the First Amendment by impermissibly compelling their speech.

Legal experts noted that the First Amendment has become the preferred tool for industry groups in recent cases when objecting to proposed regulations that are deemed “controversial.” In a note to clients, the law firm Cooley wrote: “The First Amendment claim is certainly one that we have seen used successfully in the past and are likely to see again.”

Legal experts noted that the First Amendment has become the preferred tool for industry groups in recent cases when objecting to proposed regulations that are deemed “controversial.”

The suit against California’s recent climate disclosure laws, the U.S. Chamber of Commerce and other industry groups allege that the rules violate constitutional rights by compelling companies to engage in non-factual, costly speech on climate change, a controversial political matter.

“The industry has had some recent success with this concept by arguing that ‘the government is requiring me to make statements about my business that are controversial and because of that you can’t force me to make those statements since they violate my First Amendment rights,'” said Bill Tarantino, a partner with Morrison Foerster in San Franciso. “I think there are judges out there who would adopt that view, including the current Supreme Court.” However, legal scholars differ on whether the First Amendment provides plaintiffs with a solid case to challenge regulations brought by federal agencies such as the SEC.

Proponents of First Amendment argument

Some experts argue that the SEC’s constitutional authority relies upon Supreme Court precedent granting deference to the regulation of commercial speech, which is involved in the purchase or sale of a good or service. Such speech receives less First Amendment scrutiny so that the government can enact laws that protect consumers. The SEC’s mandatory disclosure regime, as it involves the purchase and sale of securities, operates under this paradigm.

“But there is a catch,” explained Sean Griffith, professor at Fordham Law School, in a recent paper. “Regulations compelling commercial speech receive deferential review only when they are purely factual and uncontroversial. The uncontroversial requirement works to ensure that the regulation is motivated solely to protect consumers.” In the case of the SEC’s climate disclosure rule, there is a clear argument that the regulation is “controversial,” Griffith wrote, because the regulation imposes a “political viewpoint.”

Critics of First Amendment argument

Not all share Griffith’s viewpoint, however. What might be critical in any legal challenge that relies on the First Amendment is the U.S. Supreme Court’s 1985 opinion in Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio. In the case, the Supreme Court said the government may compel a commercial disclosure that is “factual and uncontroversial… as long as disclosure requirements are reasonably related to the [government] interest” and are not unduly burdensome on further speech.

Rebecca Tushnet, a professor at Harvard Law School, sees the SEC’s climate disclosure rule requiring “purely factual information about business operations, such as an issuer’s own estimates of its climate-related risks. And because the mandated statements would be purely factual, they are considered uncontroversial when measured against the Supreme Court’s decision in the Zauderer case.

“The disclosures here would not force companies to take a position on the regulation of greenhouse gas emissions, endorse any ideological position on climate change, or make any moral statements. The issue of climate change may provoke disagreement, but climate disclosures reflect objective realities affecting businesses,” Tushnet wrote in a paper with other legal experts.

Other legal scholars share a similar view. In its comment letter to the SEC, the Knight First Amendment Institute at Columbia University also cited the Supreme Court’s decision in the Zauderer case as a guide.

“The [SEC’s] rules satisfy the predicates for Zauderer review because they require the disclosure of factual and uncontroversial information about the risks associated with securities that companies offer to the investing public,” the Institute wrote. “If the proposed rules trigger First Amendment scrutiny at all, they should be evaluated under the deferential standard of review that applies to compelled disclosures of factual information in the commercial context. The proposed rules appear to easily satisfy that standard.”

SEC needs to prepare for battle

Leaving aside the legal arguments on whether using the First Amendment will be an effective tool in the courts, the environment and recent court cases show that there has been momentum behind efforts to limit the rulemaking powers of federal agencies such as the SEC and others, or what some critics refer to as the administrative state.

“No matter what the SEC does, it is likely to face a protracted legal battle when the rule is finally promulgated,” wrote the Sabin Center for Climate Change Law in a recent report. “Indeed, the rule is an appealing target for challengers seeking to limit government action and attempting to push legal boundaries in Administrative Law and under the First Amendment.”

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