On Friday, March 15, 2024, the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) stayed the Securities and Exchange Commission’s (“SEC”) final rules on climate-related disclosures (the “Final Rules”) in an unpublished per curiam order.
As discussed in our March blog post, the Final Rules amend Regulations S-K and S-X to set forth the climate-related information that US domestic companies and foreign private issuers will be required to disclose in their filings with the SEC.
The petitioners, Liberty Energy, Inc. (“Liberty”) and Nomad Proppant Services, LLC (“Nomad”, together with Liberty, the “Petitioners”) allege that the stay was warranted because (i) the Final Rules violate the major questions doctrine, (ii) the SEC does not have the authority to mandate climate-related disclosures, (iii) the Final Rules are arbitrary and capricious, (iv) the Final Rules violate the First Amendment because they compel disclosure of political issues and (v) the Petitioners will suffer irreparable injury due to the compliance burden and the impairment of the Petitioners’ First Amendment rights. In response to the Petitioners’ motion, the SEC disputed the Petitioners’ claims, arguing that (i) the request for relief is premature and should have first been brought before the SEC unless it would be impracticable or the agency denied the motion, (ii) the Petitioners do not face imminent irreparable harm, (iii) the SEC has the statutory authority to enact the Final Rules and (iv) the Final Rules are tailored to serve investors’ interests and therefore do not implicate First Amendment concerns.
The Fifth Circuit’s order grants the Petitioners’ emergency motion for an administrative stay and stay pending judicial review, without any elaboration. The order is one sentence, stating only that “[i]t is ordered that Petitioners Liberty Energy, Inc. and Nomad Proppant Services, L.L.C.’s motion for an administrative stay is granted.”
In addition to the motion to stay the Final Rules brought by the Petitioners, 24 states have brought petitions for review challenging the Final Rules. Environmental groups including the Sierra Club, the Sierra Club Foundation, and the Natural Resources Defense Council have also brought challenges to the Final Rules. The Sierra Club and the Sierra Club Foundation’s challenge argues that the Final Rules do not include important disclosure requirements and will not provide investors with enough information about companies’ potential exposure to climate-related risks.
This is a setback to the SEC’s goal of eliciting more consistent, comparable and reliable climate-related information for investors. Although some may view the Fifth Circuit’s opinion as a sign that the Final Rules may be destined to the same fate as the SEC’s share repurchase rules (as discussed in our January update), the Fifth Circuit’s administrative stay is not the final decision on whether the Final Rules will be vacated - the stay only prevents the Final Rules from taking effect while the Fifth Circuit considers the Petitioners’ challenge. In the meantime, our recommendation to US domestic companies and foreign private issuers is to continue to prepare to comply with the Final Rules by the phase in dates (outlined in our March blog post) until further development. Further challenges that could affect the ultimate implementation of the Final Rules are likely to follow.
March Update:
On Thursday, March 21, 2024, the Judicial Panel on Multidistrict Litigation lottery selected the United States Court of Appeals for the Eighth Circuit (the “Eighth Circuit”) as the venue for hearing the consolidated petitions against the Final Rules. Subsequently, on Friday, March 22, 2024, the Fifth Circuit dissolved its administrative stay.
April Update:
On Thursday, April 4, 2024, the SEC exercised its discretion under Section 25(c)(2) of the Securities Exchange Act of 1934, as amended, and Section 705 of the Administrative Procedure Act, as amended, and stayed the Final Rules pending the completion of judicial review of the consolidated petitions in the Eighth Circuit. In its order issuing the stay, the SEC stated that it would continue to vigorously defend the validity of the Final Rules in court and explained that the stay of the Final Rules avoids potential regulatory uncertainty if companies were required to comply with Final Rules’ requirements while challenges to the Final Rules were still pending.
