Audio Interview: How Far Can the SEC Go?

Skadden Publication / The Informed Board

Ann Beth Stebbins

Opponents of mandatory disclosures about climate risk and diversity will argue that they exceed the agency’s authority — a six-minute chat with Robert Stebbins, the SEC's general counsel until January.


Ann Beth Stebbins: This is Ann Beth Stebbins. I’m a partner in Skadden’s M&A Group, and I’m joined here this morning by Bob Stebbins. Bob was until January the general counsel of the Securities and Exchange Commission, and he also happens to be my husband. We’re going to discuss what direction the SEC might take under Gary Gensler, President Biden’s nominee for chairman. There’s been a lot of speculation that a Democratic-controlled SEC may implement rules requiring corporate disclosures on ESG issues — everything from climate risks to diversity in the workplace. What I want to discuss today is the SEC’s authority to require ESG disclosures across the board even when these disclosures are not necessarily material to an investor’s understanding of a company’s business.

Bob, to start off, many people expect more rulemaking generally from the commission once Gensler is in place. Is that what you foresee?

Bob Stebbins: I do. Then at that point there will be a 3-2 majority for the Democratic commissioners, Democratically appointed commissioners. And I do think you’ll see rulemaking obviously and at the focus, he hasn’t really foreshadowed what his theories of emphasis are going to be yet, but I think one could expect given what we’ve been reading about for a good while now that ESG and specific climate issues could be something, prescriptive requirements relating thereto could be something that they focus on.

Ann Beth Stebbins: Right now the SEC does require under its current rules companies to disclose information about climate. How are we going to see a shift from what’s currently required to what we might expect to see required of companies?

Bob Stebbins: The big picture, the way we view disclosure is we think it’s important to a company to disclose everything that’s material about their business and take a look at, think about when they think about their business, what’s material to them and make sure that’s getting disclosed somewhere in their public filings. What they’re talking about is something more prescriptive. So let’s say climate wasn’t a material risk to you under a materiality-based standard, then at that point there’s nothing to disclose. But, if you’re Exxon, obviously it is material, and so we would expect to see a fair amount of disclosure. What they’re talking about is having prescriptive disclosures that would require everyone to make certain disclosures regardless of how material or immaterial the risks are to the company. Well, that’s the tricky part, right? So when you do prescriptive requirements, you’re inserting your judgment about what’s important to investors, and the SEC doesn’t really have expertise to do that. That’s where it gets tricky, and that’s always where it gets tricky on prescriptive requirements.

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Ann Beth Stebbins: The other thing I’ve been thinking about is “how far can the SEC go in its rulemaking?” Clearly climate — and let’s just take that for example, since we’ve been talking about it — is important to President Biden, and he will have legislative initiatives. He has already rejoined the Paris climate accord. So you can expect executive-level actions, which we’ve seen. You can expect bills to be introduced in the legislature. But, how does the SEC’s rulemaking work alongside the legislative and executive actions that we may see in this area?

Bob Stebbins: Big picture of the SEC, we always expect when we’re drafting rules that everything that we’re going to do is going to be challenged in court. And there have been instances, of course, where rules are struck down. It doesn’t happen a lot, but it happens. So when the SEC gets away from its mission — it is a tripartite mission, including investor protection and taking care of the markets, and capital formation is the third part — it’s tricky. And then things are going to be judged certainly more closely by the courts. So the SEC always needs to be cognizant of making sure that what it’s doing in rulemaking can be defended as something that the reasonable investor it’s material to and something they’re interested in. And if it’s information that might be a very nice thing to do for a lot of reasons but it’s unrelated to the SEC’s mission, that gets much trickier for the SEC and the courts.

Ann Beth Stebbins: Some of these areas we are talking about are a little gray. I mean investors obviously are very interested in climate from a big picture macro perspective. And you have the BlackRocks, Vanguard, State Street all putting out white papers on climate and the importance of climate. You have the big institutional investors taking a stand on board diversity. So it’s clearly important to big institutional investors, but I guess what you’re thinking is “is that material to an investment decision of Joe consumer, Mr. and Mrs. Main Street?” as Jay would’ve called them under the Clayton SEC.

Bob Stebbins: Well I would say that, I think that the rules you are talking about, at least in the examples you gave, have a better chance of surviving than some of the other rules. You can tie it to investors caring. To the extent that it’s defensible and there is support that investors care about it, I think there’s great chance these rules are going to survive, right?

Ann Beth Stebbins: Right. Thanks a lot.

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