SEC Climate Rule Pause Creates Path for Faster Court Decision

The Securities and Exchange Commission’s decision to unilaterally pause the implementation of its climate reporting rules places the agency on a faster track for a decision on the rules’ legality.

The SEC on April 4 told the US Court of Appeals for the Eighth Circuit it would stay the requirements for public companies to report their greenhouse gas emissions and disclose climate-related risks to their business, pending the court’s review.

The climate rules have been a lightening rod, drawing legal challenges from business and conservative interests, as well as 25 Republican attorneys general. Environmental groups have filed their own suits arguing the regulations are too weak.

By issuing the stay on its own, the SEC is eliminating back-and-forth over various requests from plaintiffs to pause the rule, attorneys said.

“The SEC’s agreement to a voluntary stay means that the litigation will proceed much more speedily and efficiently on the merits of the challenges,” said Jacob Hupart, co-chair of the ESG practice group at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

‘On the Merits’

Challengers argue the agency overstepped its authority with the long-awaited climate disclosure rules.

The Fifth Circuit paused the rules, over opposition from the SEC, before the litigation moved to the Eighth Circuit. That pause was lifted when the cases were consolidated. Companies and trade groups asked the Eighth Circuit for a similar order, arguing they face “immediate, irreparable harm” from the regulations.

The SEC’s decision to pause implementation of the rule has been cheered by business interests and right-leaning challengers.

Iowa Attorney General Brenna Bird (R) painted the decision as a win that protects businesses “from costly red tape.” Rep. Bill Huizenga (R-Mich.) said Friday that “Gary Gensler and the SEC know their climate disclosure rule is unworkable.”

Others described the move as smart litigation strategy by the agency.

The SEC is saying “let’s have a discussion about this on the merits, not in the context of people pleading irreparable harm,” said Dan Crowley, a K&L Gates LLP partner focused on financial services.

The SEC in its stay order said it continues to believe the rules “are consistent with applicable law and within the Commission’s long-standing authority.” The agency said it “will continue vigorously defending the Final Rules’ validity in court.”

The SEC also noted “potential regulatory uncertainty” if companies were subject to the rules’ requirements while the legal challenges were still pending.

“Getting ready to comply with these rules could be a significant lift while the judicial review is pending,” Arnold & Porter Kaye Scholer LLP partner and former SEC attorney Christian Schultz said. “This alleviates that obligation” during that period.

Previous Pauses

The SEC has taken similar actions before when its rules faced legal challenges, as the agency noted in its stay order. Both examples it cited ended with the agency on the losing end.

The SEC in 2010 paused a rule related to the election of company directors amid a court challenge. The D.C. Circuit the following year vacated the rule because the court said the SEC’s rulemaking was arbitrary and capricious.

In 2019, the SEC paused aspects of a pilot program designed to test the effects of reduced stock exchange fees. The D.C. Circuit struck down the program in a ruling the following year.

The Eighth Circuit will have its hands full sorting through arguments from the host of groups challenging the climate rules. It’s expected to take some time deciding whether to uphold or scrap the rules, with the eventual loser likely to ask for US Supreme Court review.

“This will take a while to resolve,” Hupart said. “It’s hard to conceive of a circumstance where judicial review will be completed before at least a year has passed, and it could be significantly more.”

— With assistance from Andrew Ramonas.