UCLA’s Stephen Bainbridge recently blogged that, in his view, the 11 pending or adopted state board diversity statutes don’t pass constitutional muster. He points out that “9 of the 11 statutes apply not just to companies incorporated in the adopting state but also to companies headquartered in the state.” New York and Ohio’s legislation goes even further, with New York’s law applying to all companies authorized to do business in the state, and Ohio’s pending legislation extending to all companies “doing business” in the state.
Bainbridge says provisions in these statutes that purport to apply to companies not incorporated in the state in question run afoul of the internal affairs doctrine, which as he discussed in an earlier blog, he views as a constitutional requirement.
As part of last year’s flurry of SEC rulemakings, the Commission adopted amendments to Item 105 of Regulation S-K that were intended to make risk factor disclosure more effective. Those changes included requiring summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages, refining the principles-based approach by requiring disclosure of “material” risk factors, and requiring risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption. As companies implemented these rule changes, one big question we asked ourselves was will companies try to shorten their risk factor disclosure to fit within the 15 page “limit” and thus avoid the summary risk factor disclosure?
In the second edition of Wilson Sonsini’s Silicon Valley 150 Risk Factor Trends Report, we get a sense of what some of the largest companies in Silicon Valley ended up doing with their risk factors, and it appears that risk factor disclosures generally got longer after the SEC’s rule changes. The report reviews the disclosure practices of the Silicon Valley 150, which is comprised of the 150 largest public companies in Silicon Valley, based on annual sales. The observations from this group point toward more disclosure, not less, following the effective date of the SEC’s amendments:
The average total number of pages of risk factors increased from approximately 21 pages last year to 23.7 pages this year, a 13% increase. Similarly, the median total number of pages of risk factors increased from 20 pages last year to 23 pages this year, a 15% increase.
This represents a larger increase than what was observed for S&P 500 companies, for which the average total number of pages of risk factors increased from approximately 16.4 pages last year to 17.4 pages this year, a 6% increase (the median total number of pages of risk factors remained flat at 15 pages). The report also notes that the average number of risk factors increased 3% for the Silicon Valley 150, while going up 1% for the S&P 500. The report indicates that the prevalence of a “General Risk Factors” heading was relatively high, with 61% of the Silicon Valley 150 including such a heading while 55% of the S&P 500 did so. As for the inclusion of a risk factor summary, the report notes that 71% of the Silicon Valley 150 had more than 15 pages of risk factors, while only 39% of S&P 500 companies exceeded 15 pages.
For quite a few companies, the late June SolarWinds enforcement sweep may have been the first time they received a “voluntary” request for information from the SEC’s Division of Enforcement. These requests, which are not necessarily “voluntary,” send companies scrambling for a game plan on how to respond. In this memo, BakerHostetler outlines the process behind these types of requests and how they fit into the larger inquiry or investigation that the SEC’s Division of Enforcement may be pursuing when a company receives this type of request. The memo offers advice on how to approach these requests, noting:
Companies are placed in a more favorable position if they provide to the Staff documents and information sufficient to avoid the possibility of receiving a formal order directed specifically at the company. This is because, as stated above, the Staff is often moved by a company’s willingness to cooperate, which in turn could shape the outcome of the investigation, including its resolution. Furthermore, from an optics perspective, a formal order initiating an investigation against a specific company (as opposed to an MUI or a general sweep) could pose a threat to the company’s reputation and have market consequences because, more often than not, companies tend to disclose the existence of a formal investigation to their shareholders and in public filings.
In my experience, it is best to have a game plan in place before receiving a voluntary request from the SEC, so that everyone knows how to respond and quickly implement appropriate measures, such as preserving documents. Given the current enforcement environment and the SEC’s embrace of big data, we certainly may be seeing more sweep investigations that will generate these sorts of voluntary requests for information.
As the Summer turns the corner here in early August and back-to-school time rapidly approaches (I still have one kid in college, one in high school and I teach a class at Georgetown Law), my thoughts inevitably turn to our Proxy Disclosure/Executive Pay conferences coming up on October 13 – 15. My attention turns to the conferences partly because I now must have to come up with my contribution to our great course materials, but also because I look forward to our conferences the most when the post-Summer speaking circuit ramps up. We have a great lineup of speakers and a quite a few interesting topics to cover, so I encourage you to sign up today!
Last week, SEC Chair Gary Gensler made remarks at the Principles for Responsible Investment “Climate and Global Financial Markets” Webinar which provide the most comprehensive look to date at what the SEC may be considering for its upcoming climate change disclosure rulemaking. Drawing an analogy to the quantitative and qualitative scoring system used in the Olympics, Gensler noted that public company disclosure evolves over time based on areas of interest to investors, and now investors want more disclosure about climate change. He noted that the disclosure should be “consistent and comparable” and “decision-useful,” i.e., not generic text. To this end, Gensler has explained the parameters of what such disclosure could look like:
Qualitative disclosures could answer key questions, such as how the company’s leadership manages climate-related risks and opportunities and how these factors feed into the company’s strategy.
Quantitative disclosures could include metrics related to greenhouse gas emissions, financial impacts of climate change, and progress towards climate-related goals.
For example, some companies currently provide voluntary disclosures related to what’s called Scope 1 and Scope 2 greenhouse gas emissions. These refer, respectively, to the emissions from a company’s operations and use of electricity and similar resources.
Many investors, though, are looking for information beyond Scope 1 and Scope 2, to Scope 3, which measures the greenhouse gas emissions of other companies in an issuer’s value chain.
Thus, I’ve asked staff to make recommendations about how companies might disclose their Scope 1 and Scope 2 emissions, along with whether to disclose Scope 3 emissions — and if so, how and under what circumstances.
I’ve also asked staff to consider whether there should be certain metrics for specific industries, such as banking, insurance, or transportation.
Another question is whether companies might provide scenario analyses on how a business might adapt to the range of possible physical, legal, market, and economic changes that it might contend with in the future. That could mean the physical risks associated with climate change. It also could refer to transition risks associated with stated commitments by companies or requirements from jurisdictions.
In fact, many companies have announced their intentions to reduce their greenhouse gas emissions by a certain date, making “net zero” commitments or other climate pledges. 92 percent of companies in the S&P 100 plan to set emission reduction goals.
Today, though, companies could announce plans to be “net zero” but not provide any information that stands behind that claim. For example, do they mean net zero with respect to Scope 1, Scope 2, or Scope 3 emissions?
Even if they haven’t made such statements themselves, companies often operate in jurisdictions that have made commitments, such as to the Paris Agreement, that could lead to regulatory or economic changes within those locations. I’ve asked staff to consider which data or metrics those companies might use to inform investors about how they are meeting those requirements.
With regard to applicable standards for disclosure, Gensler noted that many commenters referred to the Task Force on Climate-related Financial Disclosures (TCFD) framework, and he has “asked staff to learn from and be inspired by these external standard-setters.”
Gensler went on to address disclosure by funds that market themselves as “green,” “sustainable,” “low-carbon.”
While Gensler did not address the timing for climate risk disclosure proposals, all of the tea leaves point to proposed rules being considered before the end of 2021.
In his remarks last week, SEC Chair Gary Gensler noted that more than 550 unique comment letters were submitted in response to Commissioner Allison Herren Lee’s statement on climate disclosures in March, and three out of every four of these responses supported mandatory climate disclosure rules. Over on PracticalESG.com, Lawrence Heim recently blogged about the most hotly debated issues in the comments based a sample of 20 submissions from large public companies and asset managers. The hot topics include the reporting framework, timing, furnished vs. filed and the location of the disclosure, content and various other matters such as safe harbors and internal controls. Be sure to check out PracticalESG.com to keep up with all of the latest ESG developments!
My own perspectives on climate risk and the importance of climate risk disclosure have evolved considerably since the SEC issued its 2010 interpretive release on climate change disclosure, and I think one key contributor to that is a hobby that many do not know that I have: gardening. While it may not be something that got talked about much on the Dave & Marty Radio Show, I have had an avid interest in gardening and landscape design for many years. While we can all get some sense of how dire the climate situation is by following the news, working a garden and tending to a forest can be a real eye-opener in terms of the risks from climate change. In just a few short years, I have observed considerable changes in the ability to grow certain plants and the overall health of the forests and waterways in my area. Talk about a wake-up call. Disclosure of climate change risk by public companies is not going to reverse these trends, but it is an important step toward focusing everyone on the issues, and we can only hope that awareness will continue to drive change.
A perennial topic of discussion and speculation has been the role that the SEC should play in regulating the ever-expanding world of digital assets. What to some appears to be a regulatory void that has evolved in recent years presents a fascinating case study about the intersection of innovation and regulation. One side argues that too much regulation would stifle innovation in digital assets, while the other side argues that not enough regulation will inevitably lead to fraud and abuse that erodes investor confidence in digital assets to the point that no one will want to risk their capital in the asset class going forward.
As this Bloomberg article notes, it has been a parlor game in Washington to try to divine which side of this debate SEC Chair Gary Gensler is on. Gensler is uniquely qualified to weigh in on this debate given that, in his most recent job at MIT, he studied and taught about all things crypto. The Bloomberg piece indicates that, at a speech yesterday at the Aspen Security Forum, Gensler said:
“While I’m neutral on the technology, even intrigued—I spent three years teaching it, leaning into it—I’m not neutral about investor protection. If somebody wants to speculate, that’s their choice, but we have a role as a nation to protect those investors against fraud.”
While Gensler has recently requested that Congress pass a law giving the SEC authority to oversee digital asset exchanges, he acknowledges that the SEC’s already has broad powers in this area. In support of the need for more regulation over crypto assets, Gensler drew an analogy to the automobile industry, stating that sales of automobiles did not fully take off until the government imposed rules on driving, like speed limits and traffic lights. While we don’t know exactly how and when digital asset regulations will evolve during Gensler’s tenure, it is now clear that some rules of the road can be expected.
In the same Aspen Security Forum speech where he discussed the SEC’s regulatory approach to crypto assets, Gensler noted that he was open to considering an ETF product focused on Bitcoin futures that would be subject to the SEC’s existing mutual fund rules. As Liz has discussed, a Bitcoin ETF has been the subject of prolonged debate at the SEC, and was the subject of a strongly-worded Staff statement from the Division of Investment Management back in May. While considering the Bitcoin ETF is just one of at least seven crypto issues that the SEC Staff is currently addressing, perhaps it is one that could see action sooner rather than later given the Chair’s openness to considering the approach.
I, like some securities practitioners, went through the crazy ICO fervor of a few years ago feeling like the most unpopular guy at the party, because I kept saying “these sure look like securities to me” and spouting off about a seven decades-old Supreme Court case that dealt with the sale of orange groves. On top of all that, I did not look very convincing in a hoodie. As any unpopular partygoer would do, I retired to the sidelines and became more of a wallflower amidst the ICO rager that ultimately got broken up by the SEC when the Staff made clear that selling tokens often did involve the offer and sale of a security.
But rather than just saying “I told you so,” I recognized that just because something is novel does not mean that we have to fear it, rather we should embrace the challenge of determining how to make it work within the framework of the laws and regulations that exist to protect investors. When I served as Chief Counsel of Corp Fin, we received many no-action requests on the topic of whether something was a security, and the Staff always considers those with an open mind. Sometimes, the answer is “this is a security,” but other times it is the opposite result. What the requesters always wanted was some certainty about the subject transaction before it occurred, and that is what more SEC regulation in the crypto space could bring – the certainty to operate in an area that is constantly evolving.