SEC chief grabs control

The Securities and Exchange Commission has embarked on a major policy initiative to develop new rules to require publicly reporting companies to disclose more information about climate change. Whatever the merits of the initiative, the agency has pursued it in the wrong way.

The recently designated acting chair of the SEC, Allison Herren Lee, appears to have acted alone to launch this rule making initiative. The chair did not secure a vote of the other commissioners, and the extent of consultation with them is not evident on the public record. This approach will add to concerns about unelected regulators who pursue their own personal policy goals without proper authorization from Congress.

Shortly after taking office in January 2021, the new acting chair began to divert the resources of the SEC to integrate climate, environmental, and social considerations, usually called ESG, into the agency’s broader regulatory framework. The acting chair directed the division responsible for corporate disclosures “to enhance its focus on climate-related disclosure in public company filings.” Other divisions also shifted attention to climate and ESG-related areas.

The most aggressive move, so far, was the unilateral commencement of a rule making process. On March 15, the acting chair issued a statement requesting comment from the public on how the SEC could best regulate climate change disclosures. She included a list of 15 areas with specific questions. The format corresponded to a notice of proposed rule making or a concept release, both of which require a commission vote, but the acting chair’s remarks did not refer to a vote or the views of the other commissioners.

The two Republican commissioners were bewildered by the flurry of activity. They took the unusual step of issuing a public statement confessing that they did not know what the enhanced focus on climate-related matters meant. They had not voted on the new developments and did not say they had been consulted on them, although they did welcome the public’s views.

The acting chair almost certainly avoided a formal vote by all the commissioners on any of the climate-related measures because of the likelihood that a proposal would not prevail. The SEC is evenly split at the moment, with two Democratic and two Republican commissioners. The public statement by the two Republican commissioners signaled that they were not yet ready to vote in favor of the measures. Less understandable is why the acting chair did not wait for the confirmation of a new permanent chair to provide a tie-breaking vote.

The events at the SEC are reminders of the need to be vigilant about the proper role of administrative agencies in the governance of the country. First, a federal agency has only the authority that Congress confers. Questions about climate change and specifically climate-change disclosures by public companies are contentious policy areas that Congress has not resolved with legislation. 

In an area as important and contested as required climate-change disclosures, the SEC should wait for statutory direction from Congress rather than get out ahead of the country. A federal agency is not free to pursue its own preferred policy goals.

Second, even if Congress had made the hard legislative choices to authorize corporate climate disclosures, no single SEC commissioner — including an acting or permanent chair — may dictate the way the agency proceeds. The SEC is a commission headed by several members who engage in group deliberations and decision making on matters of significance. That structure provides different perspectives and experience, promotes compromise, and improves the decision making process.

As then Judge Kavanaugh observed in a 2018 dissent: “Multi-member independent agencies do not concentrate all power in one unaccountable individual, but instead divide and disperse power across multiple commissioners or board members. The multi-member structure thereby reduces the risk of arbitrary decision making and abuse of power, and helps protect individual liberty.”

The SEC has a long history of collegial and consensus decision making. Past chairs have submitted the most important decisions, such as the need for new rules, to a group process and a vote. The chair has certain prerogatives in administering the operations of the agency, but they are limited and do not extend to major matters.

The acting chair has broken with this tradition and is pursuing personal policy preferences without appropriate direction from Congress. When confirmed, a permanent chair should obtain legislative direction and the guidance of the other commissioners on required climate disclosures.

Andrew N. Vollmer is a senior affiliated scholar with the Mercatus Center at George Mason University; former professor of law, general faculty, University of Virginia School of Law; former deputy general counsel of the Securities and Exchange Commission; and former partner in the securities enforcement practice of Wilmer Cutler Pickering Hale and Dorr LLP.