Evan Williams
Executive Director, Center for Capital Markets Competitiveness
Published
January 30, 2024
The U.S. Chamber has been a leading voice in the debate around corporate disclosure. Effective, material disclosures are a cornerstone of our capital markets, providing investors with the information they need about public companies so they can make informed investment decisions.
However, as annual and quarterly reports from public companies have grown in both size and complexity, there have been serious questions raised about the utility of some existing disclosures and the Securities and Exchange Commission’s (SEC) role in adding to reporting burdens.
What is materiality?
At the center of corporate disclosure in the United States is the longstanding materiality standard. “Materiality” is an important principle to anyone who invests their savings in the stock market. Put simply, the standard ensures that investors have the information they need to make informed investment decisions while protecting them from “information overload.”
Timeline of Chamber Engagement with Climate Disclosure
The Chamber and its partners will continue to fight back against unlawful and excessive government overreach at the state and federal levels, especially unnecessarily prescriptive regulation that undermines responsible efforts by businesses to address climate risks.
The Chamber has actively engaged with the Securities and Exchange Commission (SEC) since the agency first began to contemplate a climate disclosure rule in 2021. The Chamber is also taking action against California’s climate disclosure laws.
March 14, 2024: U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC) Executive Vice President Tom Quaadman issued the following statement regarding the U.S. Chamber of Commerce's lawsuit against the U.S. Securities and Exchange Commission's (SEC) climate rule:
“While we appreciate Chairman Gensler’s constructive engagement with the business community and many of the modifications made by the SEC to the original proposed rule, the final rule makes substantively harmful changes to 50 years of corporate governance precedent that will have implications well beyond this single rule. Consequently, we are compelled to seek redress in the courts over this flawed rule.”
“Specifically, as part of the final rule, the SEC has seriously eroded the reasonable investor standard of materiality. Further, the agency is attempting to micromanage how companies make key determinations about materiality. These changes will only create more confusion and undermine investor confidence in our public company system.”
“Stopping this government micromanagement of business is the same reason why we successfully sued the SEC over its stock buybacks rule in 2023.”
“The U.S. Chamber supports a framework for disclosure of material climate risks and emissions. The best path forward is for the SEC to propose a new rule.”
March 6, 2024: U.S. Chamber of Commerce CCMC Executive Vice President Tom Quaadman issued the following statement regarding the final SEC climate disclosure rule.
"For two years now, the U.S. Chamber of Commerce has raised significant concerns about the scope, breadth, and legality of the SEC’s climate disclosure efforts. We are carefully reviewing the details of the rule and its legal underpinnings to understand its full impact. While it appears that some of the most onerous provisions of the initial proposed rule have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors. The Chamber will continue to use all the tools at our disposal, including litigation if necessary, to prevent government overreach and preserve a competitive capital market system.”
January 30, 2024: The Chamber, along with the American Farm Bureau Federation, California Chamber of Commerce, Central Valley Business Federation, Los Angeles County Business Federation, and Western Growers Association, filed a lawsuit against the state of California in the U.S. District Court for the Central District of California over its new corporate climate disclosure laws, which were signed by Gov. Gavin Newsom on October 7, 2023.
December 6, 2023: The Chamber filed a supplemental comment to the SEC regarding California’s recently-minted climate disclosure laws.
“In the period since the SEC issued its Proposed Rules, California has adopted climate reporting laws, and the European Union (“EU”) has finalized its European Sustainability Reporting Standards (“ESRS”) as directed by the Corporate Sustainability Reporting Directive (“CSRD”). Some commenters have suggested that these developments either alleviate costs associated with the SEC’s final rule or affirm that the SEC should finalize a rule very similar to its Proposed Rules. Those suggestions make it all the important for the SEC to ensure that the course it takes in this area will appropriately serve U.S. markets and fit within the Commission’s defined legal authorities and obligations.”
November 1, 2023: Tom Quaadman, executive vice president of the Chamber’s Center for Capital Markets Competitiveness testifies before the House Subcommittee on Capital Markets regarding the regulatory agenda at the SEC, particularly related to corporate disclosures.
October 26, 2023: The Chamber welcomed SEC Chair Gary Gensler for a conversation about the SEC’s proposed climate disclosure rule.
July 27, 2023: The Chamber sent a letter to the House Financial Services Committee pertaining to its markup of legislation related to corporate governance topics. The Chamber’s letter calls for increased SEC accountability, noting:
“The SEC has an imperative role to play in the appropriate function of the U.S. capital markets, and a main principle underlying that role is materiality. Since the securities laws were first enacted, materiality has been the standard to determine what information public companies must disclose to investors. In the 1976 TSC Industries, Inc. vs. Northway, Inc. decision, the Supreme Court established a meaningful standard of materiality that was designed to provide investors with the significant information they need to make informed voting and investing decisions. Importantly, the Court provided further guidance but noted that the ‘disclosure policy’ under the federal securities laws ’is not without limit’ because investors should be safeguarded from being overwhelmed with information that runs counter to the goal of better investor decision-making. The Court operationalized this principle in its decision – subsequently affirmed by the Court in Basic, Inc. v. Levinson – by rejecting the notion that information is material if it “might” be important to an investor in favor of the following test: information is material for purposes of federal securities regulation if ’there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote’ or invest. The Court has noted its concern that absent a defined materiality standard, investors could be buried ’in an avalanche of trivial information – a result that is hardly conducive to informed decision-making.’ The materiality standard has served investors well for decades and has been a bedrock of corporate disclosure in the United States.
April 14, 2023: The Chamber sent a letter to members of the House Committee prior to Chair Gensler’s testimony asking for clarification of the SEC’s rulemaking agenda and cost to companies of compliance:
“In the proposed climate disclosure rule, the SEC’s own estimate finds that the proposed disclosures from this one rule would be two-and-a-half times more expensive than all SEC disclosures companies currently make, combined, raising the total cost burden associated with its related forms from a total of $3.9 billion to $10.2 billion. Does the Commission intend to remove unnecessary and immaterial requirements – such as Scope 3 emissions disclosure and Regulation S-X analysis – from the final rule to minimize the burden of any final regulation?”
February 27, 2023: The Chamber submitted its second supplemental to its SEC comments on the agency’s proposed climate disclosure rule:
"The U.S. Chamber of Commerce writes to further supplement its comments on the Commission’s proposed rules regarding climate-related disclosures in light of two recent regulatory developments: the issuance of a final rule by the Department of Labor and the issuance of a notice of proposed rulemaking by the Federal Acquisition Regulatory Council. These regulatory developments conflict with a significant assumption underlying the Commission’s proposal and fundamentally alter the cost-benefit calculation; they must be factored into the Commission’s analysis."
November 1, 2022: The Chamber filed its first supplemental to its SEC comments on the agency’s proposed climate disclosure rule:
“This letter supplements the Chamber’s initial comments in three respects. First, the Chamber submits this supplemental letter to note the unusually widespread concerns expressed about the Proposed Rules to date. Seemingly every segment of the market that will be subject to the Proposed Rules—from the public companies who will be forced to make extensive disclosures, to the auditors who will need to review them—warns that significant aspects of the Commission’s proposal are massively costly and unworkable. Even more noteworthy, however, is the degree to which the investors that the Commission intends to serve—large institutional investors cited throughout the Proposing Release—have vocalized opposition to the rules as proposed and have asserted that the Commission has gone too far. While these investors support aspects of the Proposed Rules and the Commission’s broader policy objectives, it is extraordinary for a proposal’s intended beneficiaries to express concerns about so many aspects of the proposal. This broad range of concerns—from investors and public companies alike—is a powerful indication that the rules as proposed rest on an incomplete understanding of investor needs and market capabilities and are not justified on cost-benefit grounds."
September 29, 2022: The Chamber’s Center for Capital Markets Competitiveness hosted an event with former SEC commissioner Elad Roisman on How the SEC Rulemaking Agenda Is Impacting the Business Community.
September 15, 2022: Tom Quaadman releases the following statement after SEC Chair Gensler testifies before Senate Banking Committee:
“Today’s testimony from Chairman Gensler highlights the fact that the Commission’s proposal on climate disclosures needs significant modification before being issued as a final rule. With thousands of comments filed, it is clear that public companies, investors, and auditors are in agreement that the SEC’s proposed rules are overly complex and fail to provide investors with useful information they can use to make decisions.
“The business community will continue working with the SEC on a practical approach to climate disclosures that are material and fulfill the Commission’s statutory authority. As with any SEC proposal, we will continue to evaluate this proposal’s potential impact and how best to advance competitive capital markets.”
June 16, 2022: The Chamber filed comments with the SEC on its proposed Climate Disclosure Rule:
“When viewed holistically, however, the Chamber is concerned that the SEC’s Proposed Rules may prove counterproductive by mandating that companies produce extensive amounts of information that is not material, thus obscuring for investors what is most important to making informed voting and investment decisions, as well as creating confusion and misimpressions. The Chamber is committed to working constructively with the SEC to develop and ensure an effective, standardized and consistent mandatory disclosure regime under the federal securities laws so that the marketplace has the benefit of material climate-related information that informs investor decision-making as investors seek out financial returns. However, the SEC’s Proposed Rules, as currently crafted, exceed the SEC’s lawful authority and are vast and unprecedented in their scope, complexity, rigidity and prescriptive particularity.”
March 21, 2022: Tom Quaadman released the following statement upon the publication of the SEC’s proposed Climate Disclosure Rule stating, in part:
“The Chamber is concerned that the prescriptive approach taken by the SEC will limit companies’ ability to provide information that shareholders and stakeholders find meaningful while at the same time requiring that companies provide information in securities filings that are not material to investors. The Supreme Court has been clear that any required disclosures under securities laws must meet the test of materiality, and we will advocate against provisions of this proposal that deviate from that standard or are unnecessarily broad.”
June 11, 2021: The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) responded to the SEC’s request for information on a proposed climate emission rule:
“As the SEC considers moving forward on climate disclosure, or more ESG disclosures more broadly, it must do so through its well-defined tripartite mission and statutorily granted powers. The SEC’s mandatory disclosure regime, which is based upon the Supreme Court’s longstanding definition of materiality under the federal securities laws, centers around ensuring that a reasonable investor has the decision-useful information needed to make investment decisions. Not all investors make decisions based on the same priorities; investors are not monolithic. U.S. issuers have contributed to the welfare of investors and the overall success of the U.S. capital markets by meeting investor demand for disclosure of material information, including on topics related to ESG. This has been accomplished through the materiality standard as defined by the Supreme Court. The SEC should continue, as it faithfully has, to adhere to that standard of materiality and the reasonable investor in shaping any new disclosure requirements. Furthermore, the materiality standard has proven to be flexible in addressing the evolving needs of investors.”
The Chamber has been a staunch advocate for the standard of materiality the Court formulated and supports a legislative effort that would codify the standard expressed by the Supreme Court, and prohibit the SEC from mandating disclosure requirements that are outside the scope of the securities laws or are intended to promote objectives that are at odds with the interests of investors. The Chamber’s 2017 report on materiality emphasized that the Supreme Court’s materiality standard helps shield investors from the harms of information overload and appropriately tethers federal securities regulation to the SEC’s and securities laws’ reason for existence. Traditionally, materiality has centered on information that is important for investors focused on understanding the financial and operating performance of companies as investors attempt to gain wealth and earn income.
In other words, investment returns – as compared to other interests that, even when worthwhile, fall outside the SEC’s remit – is the well-established touchstone of materiality Bounding the meaning of materiality with reference to the SEC’s mission keeps the SEC and the federal securities laws from being politicized, injects regulatory certainty and predictability into the U.S. capital markets, avoids placing the SEC in the difficult position of regulating outside its expertise, and protects investors.
Related, the Chamber supports additional efforts to improve SEC disclosure transparency. Despite the issuer community being significantly affected by SEC regulation, companies do not have a meaningful seat at the table in providing input during discourse at the Commission. Creating an advisory committee for this important constituency would allow for better calibration of disclosure requirements. In the same spirit, requiring the SEC to aggregate its immaterial disclosure requirements and report on the need for those disclosures would help the SEC and Congress examine reporting requirements against their costs.”
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