While litigation over the SEC’s climate disclosure rules proliferates (as we have covered in this blog and on PracticalESG.com over the course of the past week and a half), some in Congress have been maneuvering to invoke the rarely used Congressional Review Act to overturn the SEC’s rulemaking action. This Kramer Levin memo notes:
House Republicans began drafting a CRA resolution to repeal the final rule before it was published. Senate Republicans are working on a similar proposal. If both houses of Congress pass and the president signs a joint CRA resolution or if Congress successfully overrides a presidential veto, then not only would the final rule be rescinded but the SEC would be prevented from re-promulgating the rule or any substantially similar rule without specific authorization in a law enacted after approval of the joint resolution.
The machinations of the Congressional Review Act are very complicated, and the Congressional Research Service has provided some helpful FAQs to explain Congress’s authority to overturn rules that have been newly issued by federal agencies. The Congressional Research Service FAQs provide this helpful overview:
The Congressional Review Act (CRA) is a tool that Congress may use to overturn rules issued by federal agencies. The CRA was included as part of the Small Business Regulatory Enforcement Fairness Act (SBREFA), which was signed into law on March 29, 1996. The CRA requires agencies to report on their rulemaking activities to Congress and provides Congress with a special set of procedures under which to consider legislation to overturn those rules.
Under the CRA, before a rule can take effect, an agency must submit a report to each house of Congress and the comptroller general containing a copy of the rule; a concise general statement describing the rule, including whether it is a major rule; and the proposed effective date of the rule. After receiving the report, Members of Congress have specified time periods during which they must submit and act on a joint resolution of disapproval to take advantage of the CRA’s special “fast track” procedures. If both houses pass the resolution, it is sent to the President for signature or veto. If the President were to veto the resolution, Congress could vote to override the veto.
If a joint resolution of disapproval is submitted within the CRA-specified deadline, passed by Congress, and signed by the President, the CRA states that the disapproved rule “shall not take effect (or continue).” The rule would be deemed not to have had any effect at any time, and even provisions that had become effective would be retroactively negated.
Furthermore, if a joint resolution of disapproval is enacted, the CRA provides that a rule may not be issued in “substantially the same form” as the disapproved rule unless it is specifically authorized by a subsequent law. The CRA does not define what would constitute a rule that is “substantially the same” as a nullified rule. Additionally, the statute prohibits judicial review of any “determination, finding, action, or omission under” the CRA.
Since its enactment, the CRA has been used to overturn a total of 20 rules: 1 in the 107th Congress (2001-2002), 16 in the 115th Congress (2017-2018), and 3 in the 117th Congress (2021-2022).
I am certainly no politico, but it seems to me that a successful CRA challenge to the SEC’s climate disclosure rules is a long shot, given that Republicans would need to not only garner support of a joint resolution of Congress, but also override an inevitable Presidential veto. Then again, I never thought the CRA would be used as successfully as it was in the beginning of the Trump administration, when the SEC’s resource extraction issuer rule was successfully overturned (only to reemerge yet again at the very end of the Trump administration).
While on the topic of the resource extraction issuer disclosure rules, following Congress’s action to undo an earlier iteration of the rule, the SEC adopted new requirements in the waning days of the Trump administration. The rule requires a resource extraction issuer to provide information about the type and total amount of such payments made for each project related to the commercial development of oil, natural gas, or minerals, and the type and total amount of payments made to each government.
During Gensler’s term as SEC Chair, the topic of revisiting the resource extraction issuer disclosure requirements has been on the agenda, but that effort has not yet come to pass. Absent further Commission action, 2024 will be the first year when resource extraction issuers must provide the required disclosures. Following the two-year transition period contemplated by the rules adopted in December 2020, a Form SD reporting the required payment information must be furnished within 270 days after the end of the resource extraction issuer’s fiscal year. For a calendar-year end resource extraction issuer, that would mean filing the first Form SD in September 2024. Smaller reporting companies and emerging growth companies are exempt from these reporting requirements, unless subject to similar requirements under an alternative reporting regime. Companies that complete an IPO are not required to comply until the fiscal year following the year in which the IPO is completed.
For more information, be sure to check out our “Resource Extraction” Practice Area.
I learned a new term today, and that is “AI washing.” As for its definition and usage, think “greenwashing,” but instead in the context of artificial intelligence. In one of his recent YouTube videos that I can never seem to get used to, SEC Chair Gary Gensler tackles the problem of investment advisers, broker dealers and public companies improperly touting the benefits of AI for the purpose of misleading investors. In the video, he notes:
I get why so many people are talking about artificial intelligence. AI is the most transformative technology of our time, fully on par with the internet.
It’s already being used in finance, where it has the potential benefits of greater inclusion, efficiency, and user experience.
But let’s face it, when new technologies come along, we’ve also seen time and again false claims to investors by those purporting to use those new technologies.
Think about it. Investment advisers or broker dealers might want to tap into the excitement about AI by telling you that they’re using this new technology to help you get a better return. Public company execs, they might think that they will enhance their stock price by talking about their use of AI.
Well, here at the SEC, we want to make sure that these folks are telling the truth. In essence, they should say what they’re doing, and do what they’re saying. Investment advisers or broker dealers should not mislead the public by saying they are using an AI model when they’re not, nor say that they’re using an AI model in a particular way, but not do so.
Public companies should make sure they have a reasonable basis for the claims they make and yes, the particular risks they face about their AI use, and investors should be told that basis.
AI washing, whether it’s by financial intermediaries such as investment advisers and broker dealers, or by companies raising money from the public, that AI washing may violate the securities laws.
So, everyone may be talking about AI, but when it comes to investment advisers, broker dealers, and public companies, they should make sure that what they say to investors is true.
This is of course a problem that reliably repeats itself whenever significant innovation or some other business or market developments make a particular area the “hot” investing topic. I can distinctly recall this phenomenon back in the 1990s, when it seemed that every company wanted to claim some connection to the nascent Internet, and more recently we observed the frenzy when terms like “crypto” and “ESG” became the buzzwords du jour. As the old adage goes, “securities are sold, not bought,” so it is inevitable that the latest area of investor focus is worked into the sales pitch in some way, shape or form.
For public companies in particular, these days AI developments often need to be addressed in public disclosures, because AI is rapidly changing the landscape in many industries and is likely to continue to have an outsized impact going forward. I don’t see Chair Gensler’s statements as intended to discourage full and fair disclosure about AI developments, rather I think that companies need to be very balanced in describing both the benefits and risks arising from AI, and accurately convey the uncertainty associated with the evolving technology. When addressing AI developments, the relevant context is always important, so that it is clear that the company is not discussing AI just because it is the hot topic today. Further, once companies address AI in their disclosures, it is important keep that disclosure updated as this fast-moving technology evolves. And finally, if your company is in the business of manufacturing widgets, please do not change the name of the company to “AI Land, Inc.” or something like that, which seems like an inevitable outcome whenever these “fad” investment terms emerge.
As we have chronicled in this blog and on PracticalESG.com, a number of lawsuits seeking to challenge the SEC’s climate disclosure rules have been filed in the week and half since the SEC adopted the rules on March 6. To date, litigation challenging the rules has been filed in four federal courts of appeals, including the U.S. Court of Appeals for the Fifth, Sixth, Eight and Eleventh Circuits. There is no doubt that additional lawsuits will continue to be filed.
In the Fifth Circuit, the petitioners Liberty Energy Inc. and Nomad Proppant Services LLC filed a motion seeking an administrative stay and stay pending judicial review. The petitioners indicated that they would be “irreparably harmed” by the failure to grant a stay because the disclosures that will be first required in 2026 must include data collected in 2025 and companies are implementing systems to prepare the required disclosure. The SEC opposed this motion, but on Friday, March 15, the three judge panel in the Fifth Circuit granted the petitioners’ motion and imposed a temporary stay.
Given that litigation is pending in multiple courts of appeals, ultimately the Judicial Panel on Multidistrict Litigation will consolidate the challenges in a single court of appeals and that court will ultimately determine whether the Fifth Circuit stay will remain in place.
For more details on these developments, be sure to check out our coverage on PracticalESG.com. If you’re not yet a member of PracticalESG.com, subscribe online, email sales@ccrcorp.com or call 800.737.1271.
Those who follow the ups and downs of SEC rulemaking will no doubt note that it was the Fifth Circuit Court of Appeals which vacated the SEC’s share repurchase disclosure rules late last year, based on a determination that the SEC acted arbitrarily and capriciously, in violation of the Administrative Procedure Act, when the SEC failed to respond to petitioners’ comments and failed to conduct a proper cost-benefit analysis. As you may recall, that litigation in the Fifth Circuit moved very quickly from adoption of the final rules in May 2023 to an order by the court directing the SEC to address the petitioners’ claims by October 2023, ultimately resulting in vacatur when the agency failed to timely respond to the court’s October order. I think everyone was surprised by the sheer speed with which the court acted in the case of the share repurchase rules, having observed litigation over SEC rulemaking plod through the courts for years in many cases (for example, consider the conflict minerals disclosure requirements).
One interesting thing for me about this whole situation is that I can distinctly remember the days when the US Court of Appeals for the District of Columbia Circuit was the court that often determined the outcome of challenges to SEC rules. That court has historically heard the most challenges to administrative agency actions. Given its unique position as the court with jurisdiction over the district where the bulk of federal law is created, the Court of Appeals for the DC Circuit was often seen as the go-to arbiter of the administrative state. I am certainly no appellate law scholar, but I suspect those days may be either waning or gone, because in recent years we have observed a certain element of “forum shopping” activity on the part of petitioners, who appear to be seeking what they believe to be more “friendly” jurisdictions that could potentially be more amenable to vacating the SEC’s rulemaking actions.
While a lot of ink has been spilled and oxygen expended by talking heads in the week and a half since the climate disclosure rules were adopted, I don’t believe that too many companies were already rushing out to the begin their compliance efforts with respect to the new rules. In many respects, I do not think that the Fifth Circuit’s stay will change much in terms of anticipated compliance efforts, because we still do not have any clarity as to how all of this litigation will play out. In this regard, I often point out the example of the challenge to the SEC’s conflict minerals disclosure rule, which was litigated for years with an ultimate result of a very much gutted, but still in effect, disclosure requirement. So, for now at least, I advise that you keep your “pencils up” in mapping out how to comply with the new climate disclosure requirements!
We will have much more to say on this topic next week during our webcast “The SEC’s Climate Disclosure Rules: Preparing for the New Regime.” The webcast takes place on Wednesday, March 27 at 2:00 pm Eastern and I will be joined by J. T. Ho from Orrick, Rose Pierson from Chevron and Kristina Wyatt from Persefoni to provide insight into the new disclosure requirements and practical advice on how to build the disclosure infrastructure required to comply with the new rules. Note that members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
All of this talk about climate this morning has got me thinking about Spring, which begins tomorrow with the advent of the vernal equinox. While I have always been pretty much an Autumn kind of guy, over the years I have come to really appreciate Spring, particularly as my tolerance for Winter has significantly waned. I was away from home dealing with a family emergency since Thursday of last week, and I was pleasantly surprised to come home yesterday and see how many plants in my yard had bloomed over just those few days that I was away. So on the first day of Spring tomorrow, I encourage you to get out and enjoy the climate, without worrying about what you may have to disclose about it in your SEC reports!
Last week, Meredith discussed the lawsuits filed by various Red State AGs seeking to invalidate the SEC’s climate disclosure rules. She also said that environmental groups like the Sierra Club were planning to launch challenges of their own, and sure enough, the Sierra Club filed a petition for review with the DC Circuit yesterday. As this excerpt from the Sierra Club’s press release announcing the filing explains, their problem with the rule is that it doesn’t go far enough:
The Sierra Club and the Sierra Club Foundation manage millions of dollars in investments for their respective organizations, including employee 401Ks. In addition, the Sierra Club represents millions of members and supporters, many of whom have significant investments of their own. These investors cannot adequately manage their investments without complete information on publicly-traded companies’ vulnerability to climate-related risks, including greenhouse gas emissions profiles. By allowing companies to selectively report their emissions, the SEC has fallen short of its statutory mandate to protect investors, maintain fair, orderly, and efficient markets, and promote capital formation.
The Sierra Club and Sierra Club Foundation affirm the SEC’s fundamental legal authority to require climate-based disclosures and call on the agency to fulfill its obligation to protect investors.
That last paragraph appeared in bold face in the original as well, and I think it’s interesting that the petitioners chose to emphasize that language. Perhaps they were trying to convince people (or even themselves) that a lawsuit like this doesn’t necessarily invite the DC Circuit to join some of its more conservative siblings in chipping away at the SEC’s authority.
On the other hand, maybe the Sierra Club’s action is a little more strategic – and shrewd – than it first appears. As this Vinson & Elkins memo points out, all of the various lawsuits challenging the rule will be consolidated into a single circuit court challenge based on a lottery system. So, while I’m sure the Sierra Club sincerely wants more demanding disclosure rules, one of its main objectives in filing may be to buy the regulator-friendly DC Circuit a ticket to that lottery.
Last November, Liz blogged about an attempt by a hacker group to exploit the SEC’s new Form 8-K cybersecurity disclosure rules to extort money from a company by threatening to go to the SEC and tell the agency that the company failed to disclose a material hack. The same group apparently tried that tactic again in December and again last month. This recent Woodruff Sawyer blog highlights how this new threat puts public companies in a tough spot:
Companies were already very concerned that the four-day disclosure rule would cause chaos. The idea that the hackers themselves would weaponize the rule, however, is an entirely new twist on what is already a fraught situation. Any hacker worth the name will take the position that their hack is material—but that doesn’t necessarily make it so.
However, in a world where attackers themselves are alerting the SEC, it becomes increasingly challenging to dismiss any cyberattack as inconsequential. We all understand that hackers are using the whistleblower tactic to throw companies back on their heels and pressure them into paying the requested ransom as soon as possible.
It’s a cliché for a reason: the question is not whether you will be hacked, but when. With this in mind, it’s best to be proactive about putting in place the resources you will need to defend yourself.
The blog offers a list of 10 steps a company should take to reduce cyber liability risk and says that companies that take an active approach to managing cyber risk will be in the best position to respond swiftly to a breach and minimize the disruption to their business & the risk of subsequent litigation.
Our friends at Weil let us know the sad news that corporate governance legend Ira Millstein passed away on Wednesday. Here’s an excerpt from the firm’s announcement of his passing:
International law firm Weil Gotshal & Manges, LLP is saddened to announce today that our partner Ira M. Millstein died yesterday evening. He was 97 years old.
Mr. Millstein joined Weil in 1951, after spending two years at the Antitrust Division of the Justice Department in Washington, D.C. He was the Firm’s 11th partner. He played a key role in developing Weil into the full-service international corporate law firm it is today, and we credit him with helping to instill Weil with its unique culture of entrepreneurship, teamwork, camaraderie and the commitment to the greater community that remains today.
“The legal community has lost a true visionary,” said Weil Executive Partner Barry Wolf. “We mourn the loss of our partner and friend, and celebrate his achievements and his role in shaping Weil into the Firm it is today.”
If you take a moment to click on the link to the bio included in Weil’s announcement, you’ll begin to get a sense of just how towering a figure Ira Millstein was. In addition to his many accomplishments as a practitioner, Mr. Millstein was noted for his philanthropy and community service. He was also a formidable intellect who authored numerous books and articles on corporate governance topics, and he founded the Ira Millstein Center for Global Markets and Corporate Ownership at Columbia Law School. Here’s a video in which he reflects on his life, career, and the Millstein Center.
All of us here at TheCorporateCounsel.net extend our sincere condolences to Ira Millstein’s friends and family, as well as to all of his colleagues at Weil. He will most assuredly be missed by everyone in the legal and corporate governance community.
The Delaware Chancery Court has made it clear that officers as well as directors are subject to oversight responsibilities under Caremark, but while a lot of ink has been spilled providing advice to boards about their oversight responsibilities, I haven’t seen much guidance for officers on their oversight responsibilities. This excerpt from a recent Seyfarth memo on avoiding oversight claims helps to fill that gap:
Officers are generally most at risk concerning oversight claims by failing to monitor issues and risks in those areas which are within the officer’s scope of authority. Officers (including senior officers) should ensure that they are well-apprised of the risks that the company faces within the scope of their duties and have systems in place to monitor information concerning such issues and risks. Some action items that officers can take to mitigate the risk of an oversight claim include:
1. Identify Business Risks Within their Scope of Authority. Officers should identify “mission critical” issues and risks within their scope of responsibility and implement procedures for reporting any significant ones. Officers should also ensure proper controls are in place to help identify any significant problems within their scope of authority.
2. Get Regular Reports on Material Issues and Risks. Just as directors should have systems in place to regularly receive reports concerning material issues and risks, so too should officers see to that they are appropriately informed.
3. Consider with Legal Advice What Records Should be Kept of Oversight and Compliance Issues. Just as with directors, officers should have a system in place to address important issues and risks and actively monitor and utilize that system. This can include, where pros and cons are carefully considered, memorializing the subject of certain meetings that report on such items as well as memorializing in written reports made to a CEO. We also recommend an attorney review any officer’s reports to the board to help avoid unhelpful or inaccurate memorialization.
The memo reminds readers that Delaware case law indicates that “barring extreme facts,” oversight claims only extend to matters within the scope of the officer’s responsibilities and that the standard for oversight claims against officers is the same as it is for directors. It also points out the need for companies to ensure that they have they have adequate D&O insurance to protect directors and senior officers against potential oversight claims.