January 28, 2010

SEC Adopts Climate Change Disclosure Guidance (By 3-2 Vote)

Yesterday, the SEC adopted by a 3-2 vote (Commissioners Casey and Paredes voted against adoption) an interpretive release to provide guidance to companies about how they should make climate change disclosures (the release is not out yet; here is the press release). There was heated discussion during the meeting - particularly from Commissioner Casey - as to whether the SEC was getting into the tricky intersection of climate change and politics.

Although not discussed during the meeting or in the press release, since the guidance is in the form of an interpretive release, many are presuming it is immediately effective - meaning that it applies to the Form 10-Ks that will be filed fairly shortly by calendar-end companies.

Below is an excerpt from a memo from Troutman Sanders:

The SEC stated that its release does not create a new legal requirement or modify existing disclosure rules, regulations or interpretations, which the SEC remarked included the framework and flexibility necessary for meaningful disclosure. Instead, the release provides "guidance that can help public companies in determining what does and does not need to be disclosed" according to Chairman Mary Schapiro. The release was adopted by a vote of 3 to 2.

In presenting the release, the SEC reiterated the existing provisions requiring disclosure of climate change risks and implications when material to a public company:

- Item 101 of Regulation S-K: Item 101 provides for a general description of a company's business and requires disclosure as to "the material effects that compliance with federal, state and local provisions... regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the company." This item also may require disclosure as to the anticipated impact of future environmental regulation.

- Item 103 of Regulation S-K: Item 103 requires disclosure as to "any material pending legal proceedings, other than ordinary routine litigation incidental to the business." The instructions to Item 103 state that disclosure is required regarding "an administrative or judicial proceeding ... arising under any federal, state or local provisions... regulating the discharge of materials into the environment... for the purpose of protecting the environment."

- Item 303 of Regulation S-K: Item 303 provides for management's discussion and analysis of the company's financial condition and requires disclosure of "known trends or uncertainties" that a company believes will result, or are reasonably likely to result, in material changes in the company's liquidity, net sales, revenues or income from continuing operations.

- Item 503(c) of Regulation S-K: Item 503(c) provides for the disclosure of risk factors that make investments in the company speculative or risky to the extent that they are not generally applicable to any issuer.

The SEC stated that meaningful disclosure might address these four topics:

1. The impact of state and federal legislation and regulation, including potential legislation
2. The effects of international accords and treaties
3. The actual and potential indirect impacts and consequences, including reputational harm and lost opportunities
4. The actual and potential impact of physical effects of climate change

While the current rules and regulation require companies to disclose things that are material to investors, and the Staff noted that the SEC is not changing the traditional standard for materiality, which is a substantial likelihood that disclosure would be viewed by the reasonable investor as having significantly altered the total mix of information made available. But the Staff also emphasized that if there is any doubt to whether something is material or not, it should be resolved in favor of the investor and, thus, disclosed.

We are particularly concerned that the interpretive guidance, as described by Chairman Schapiro, might require a company to speculate on what legislation will pass and what its consequences will be. This is an unprecedented disclosure requirement and one that is frought with the risk of evaluation in hindsight. Those opposing the adoption of the release noted the great flux of the state of science, law and policy addressing climate change and suggested that the release was being adopted because of political pressures. They noted that disclosure on the four topics noted above would include much speculation and lead to greater investor confusion.

While the SEC did not issue new rules today, the discussion at the SEC's meeting indicates that the Staff believes that public companies need to revisit their disclosure practices. We believe that if the SEC does not see improvements in the amount and detail of discussion, we will see a responsive flow of comment letters that could by their nature impose standards on all reporting companies.

We also believe that there is the potential that the SEC may resort to a formal rulemaking requiring specific disclosure, including discussion of carbon footprints and quantitative measurements. Companies wishing to avoid a "one size fits all" approach in the future should carefully draft their 2010 disclosure under the current framework to provide investors with useful information about the potential risks and implications of climate change.

ESG Disclosures: Environmental, Climate Change, Social Responsibilities

We have posted the transcript for our recent - and timely - webcast: "ESG Disclosures: Environmental, Climate Change, Social Responsibilities." Even though this webcast was held before the SEC adopted its new interpretive guidance, the panelists covered many topics that can help you meet your new disclosure obligations.

More on "The Mentor Blog"

We continue to post new items daily on our new blog - "The Mentor Blog" - for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

- Obama's 10th Justice Gives Supreme Court a Business Tilt
- Russ Ryan on the State of SEC's Enforcement Division
- Becoming an "Outlier": Leveraging Social Media
- What Level of Due Diligence Should a Placement Agent Conduct?
- Where the Action Is: CEO Searches
- Legal Implications of Cloud Computing
- More on "Collectively Stupid: A Way of Life?"

- Broc Romanek