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(Article from Registered Funds Regulatory Update, October 2022)

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The U.S. Supreme Court recently vacated a decision by the D.C. Circuit allowing the Environmental Protection Agency (the “EPA”) to regulate greenhouse gas emissions, holding that the EPA exceeded its congressional authority in adopting rules under the Clean Air Act. This holding extends beyond environmental regulation and has the potential to significantly impact current and future rulemaking for federal agencies. Until this decision, federal agencies, including the SEC, have had wide discretion to interpret ambiguities in statutes they have been charged to enforce pursuant to a legal standard known as “Chevron deference” unless such interpretations are deemed unreasonable. The Supreme Court’s decision establishes a new legal standard known as the “major questions doctrine,” which will require federal agencies to have “clear congressional authorization” to adopt rules on issues of “economic and political significance.” The major questions doctrine has previously been cited by lower courts but this marks its debut in a Supreme Court decision. Notably, the Supreme Court did not define what constitutes a major question with respect to an agency’s authority, leaving many in the industry questioning the validity of the SEC’s recent proposal to standardize public company disclosure of their climate-related risks and greenhouse gas emissions.

The SEC’s proposed rule, published on March 21, 2022, has been specifically cited as a target for potential litigation under the major questions doctrine. Critics of the proposed rule have asserted that it would be wise for the SEC to retract and rethink the proposed rule arguing that it raises a major question under the new doctrine as to whether the SEC has exceeded its regulatory authority beyond the scope of its expertise. At the very least, critics have urged the SEC to reopen the proposal’s comment period. Although the extent to which regulatory actions will be challenged using this new doctrine is unknown, the Supreme Court did note that the doctrine is only to be applied in “extraordinary cases.”

West Virginia v. Environmental Protection Agency, No. 20–1530, 2022, available at: https://www.supremecourt.gov/opinions/21pdf/20-1530_n758.pdf.