Climategate: The SEC Takes On ... Climate Change

The Securities and Exchange Commission (SEC) is a venerable agency. It was established in 1934, and Joe Kennedy was the first chairman. In the interest of full disclosure, my dad as a young lawyer worked for him and occasionally took the Kennedy kids for walks. I worked there one summer as an intern. I suppose there may be a soft spot in my heart for the SEC.

The function of the SEC "is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation":

The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: All investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.

On January 27, the SEC announced new interpretative guidance requiring publicly traded companies to provide information about the impact on their businesses of "risks and potential impacts of climate change legislation, environmental regulation, and international climate treaties" in their periodic "10K" filings.

A February 27 press release by Elisse B. Walter, the commissioner of the SEC, which earlier appeared at the link cited immediately above, seems to have been replaced by a statement by SEC Chairman Mary Schapiro.

Commissioner Walter's statement noted, among other things, that the possible impact or lack thereof of actual climate change did not have to be reported; instead, only the anticipated governmental response to it had to be reported. The text of the guidance is provided here. It does note reporting requirements as to "physical impacts of climate change," so perhaps  Walter misspoke.

Courts generally give substantial deference to agency interpretations of the laws such agencies enforce. While it continues to be up to the companies involved to decide upon the materiality of any impact, Walter noted (in her apparently no longer available statement):

The Supreme Court has already provided guidance to publicly held companies in TSC Industries when it said that “it is appropriate that these doubts be resolved in favor of those the statute is designed to protect.”

Here is the crux of what the Supreme Court said in TSC Industries:

An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. ... It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.

It is perhaps significant that  Schapiro said:

We are not opining on whether the world's climate is changing, at what pace it might be changing, or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics.

It is also perhaps significant that since the Court in TSC Industries spoke in the context of proxy materials, the guidance offered by the SEC presumably applies to proxy materials, registration statements, quarterly reports, annual reports to stockholders, and the like as well.