It is not surprising that one of the areas of focus in the comment letters submitted to the SEC regarding the climate disclosure proposal is the SEC’s authority to adopt a comprehensive climate change disclosure regime. It is widely expected that, if adopted, the SEC’s rulemaking will be challenged in court, and that litigation is very likely to address the question of whether the SEC has the authority from Congress under the federal securities laws to address this topic in its disclosure rules.
As any student of administrative law will tell you, historically federal agencies have a good deal of latitude in crafting their rules, particularly in light of the “Chevron doctrine” or “Chevron deference.” In 1984, the Supreme Court decided Chevron v. Natural Resources Defense Council, which created the doctrine that courts normally must defer to a government agency’s reasonable interpretation of a law that it administers when that law’s language is ambiguous. The SEC has argued that Chevron deference should be accorded to its actions over the years, often to the agency’s advantage.
West Virginia limits Chevron by fleshing out the “major questions doctrine,” a longstanding judicial presumption that when an administrative agency asserts authority over questions of great economic and political significance, it may act only if Congress has clearly authorized it to do so. Or, as the Constitution puts it: “All legislative powers herein granted shall be vested in a Congress of the United States.”
With respect to the SEC, the piece goes on to note:
West Virginia and the major questions doctrine are certain to surface again soon. Take the Securities and Exchange Commission’s proposed climate-change disclosure regulations. The SEC has a statutory directive to protect investors, facilitate capital formation, and maintain the efficient operation of capital markets. It has neither the expertise nor the statutory authority to regulate greenhouse-gas emissions. In light of West Virginia, the SEC ought to withdraw its proposal.
It seems pretty unlikely to me that the SEC would withdraw its climate change disclosure proposal in light of the West Virginia decision, but perhaps the authority considerations in a post-West Virginia world could be taken into account by the agency when it is considering the adoption of final rules.
Last week, the SEC announced the filing of an insider trading enforcement proceeding with allegations that sounded very familiar:
The SEC’s complaint, filed in federal district court in the District of Columbia, alleges that in January 2020, NTRP invited Haywood to participate in a registered direct offering of shares. Before being told about the offering, Haywood expressly agreed not to trade on the material, nonpublic information he was about to receive. Notwithstanding this agreement, after receiving information about the offering, Haywood immediately sold more than 100,000 shares of NTRP stock. As alleged in the complaint, NTRP’s stock price dropped nearly 50 percent after the offering was announced. The complaint alleges that Haywood avoid losses of approximately $179,297.
Those allegations – trading after agreeing to keep information about a pending offering confidential – are exactly the same as those brought in the SEC’s complaint against Mark Cuban. That one didn’t go so well for the agency & it will be interesting to see if it fares better in this case.
Rule 14a-8(l) allows companies to decide whether or not to include information in its proxy statement about a proponent (name, address, and number of shares held), but should they? This Perkins Coie blog suggests a couple of reasons why companies should consider disclosing that information:
There is a growing trend of proposals that appear to try to drive votes through using buzzwords that are of interest to certain types of investors, such as greenwashing or diversity – but in fact may espouse views that are the opposite of what a casual reader might think the proposal says. Knowing the identity of the proponent may help investors to better understand the context of the proposal.
There can be other benefits to providing information about proponents as well. Investors might read a proposal from a proponent with 200 shares differently than one from a proponent with 20,000. They might also be interested to know when a proposal has been made by a representative that is in the business of submitting these proposals, and not by the shareholder themselves.
This Goodwin blog reminds everybody that it’s time to conduct the public float calculation that you’ll need to determine your filer status for next year:
For public companies with a calendar year-end, now is the time of year for a company to conduct its public float calculation that will determine its Exchange Act reporting status as an accelerated filer, large accelerated filer, non-accelerated filer, smaller reporting company (SRC), and/or emerging growth company (EGC). The following is a very brief summary of the complex rules that govern filer status and qualification as an SRC or EGC.
For calendar year-end companies, a company’s filing status for Exchange Act reporting purposes is determined based in part on the company’s public float as of the end of the second fiscal quarter. As such, public companies with a calendar-year end should perform their public float calculations as of June 30, 2022 to determine what their filing status will be as of December 31, 2022 so that they can plan their SEC filing calendar accordingly. The filing status will determine the due date for the Form 10-K for the fiscal year ended December 31, 2022, as well as the due dates for the three 10-Qs filed in 2023.
The blog also notes that while public float doesn’t affect eligibility for EGC status, it can indirectly affect termination of EGC status. That’s because if an EGC becomes a large accelerated filer, its EGC status will terminate as of the last day of the current fiscal year.
Early last year, I blogged that business had emerged as a beacon of trust in stormy times. Eighteen months later, we’re stuck in disinformation quicksand – and we’ve now reached record-low average confidence across all institutions. That’s according to the latest edition of a Gallup poll that’s been measuring sentiment for over four decades. Here’s more detail on business-related institutions (ranked from highest to lowest confidence):
– Organized Labor: Unions held steady with 28% of participants having a “great deal” or “quite a lot” of confidence in organized labor both this year and last year.
– Banks: Banks garnered confidence from 27% of participants – down from 33% last year. Republicans have lost more confidence in banks than the other party groups have.
– Big Tech: 26% of participants have confidence in large technology companies. This is also a low point, but Gallup has only measured confidence in this category for the past 3 years.
– Newspapers: Newspapers dropped by 5 points, to 16%.
– Big Business: Only 14% of survey participants have a “great deal” or “quite a lot” of confidence in “big business” – down from 18% last year. This is the lowest level since at least 1979.
– TV News: Televised news also dropped by 5 points, to 11%.
The poll doesn’t analyze what’s driving the decline in confidence for each specific institution. For big business, sentiment is lowest among Democrats and Independents (both at 13%), whereas confidence among Republicans is hovering at 19% (just 1 point lower than last year). And although “big business” is bottoming out, 68% of Americans have a lot of confidence in “small business” – more than any other institution. It sure would be nice if we could bottle up that confidence and sprinkle it everywhere else.
What gives? Why is confidence in “big business” dropping while “small business” continues to win friends & influence people? Please participate in this anonymous poll to share your thoughts:
Late yesterday afternoon, the SEC posted a Sunshine Act Notice for an open meeting of the Commissioners to be held next Wednesday, July 13th. Here’s what’s on the agenda:
1. The Commission will consider whether to adopt amendments to the proxy rules governing proxy voting advice.
2. The Commission will consider whether to propose amendments to update certain substantive bases for exclusion of shareholder proposals under the Commission’s shareholder proposal rule (Rule 14a-8).
Businesses need to be on high alert for state-sponsored business spying originating from China, according to a warning issued yesterday by the FBI and Britain’s MI5. The WSJ reported on the details – here’s an excerpt:
In a rare joint appearance on Wednesday at the headquarters of MI5, Christopher Wray, director of the Federal Bureau of Investigation, and Ken McCallum, director-general of MI5, urged executives not to underestimate the scale and sophistication of Beijing’s campaign.
“The Chinese government is set on stealing your technology — whatever it is that makes your industry tick — and using it to undercut your business and dominate your market,” Mr. Wray told the audience of business people. “They’re set on using every tool at their disposal to do it.”
The intelligence & security chiefs said the spying is aimed in large part at stealing tech companies’ intellectual property. The article also reports that the FBI is currently opening a new counterintelligence investigation into China roughly every 12 hours – and MI5 is running seven times as many investigations into suspicious Chinese activity now as it was in 2018.
Make sure your risk management system and cyber protections are up-to-date, consider your business relationships with China-based companies, and think about risk factor disclosure if you could be at risk and haven’t already described the threat and possible implications to your business.
Here’s an informative Twitter thread from an apparent “Main Street Investor” about how to read Form 10-Ks. Approaches to Form 10-K analysis can vary by type of investor – but the disclosure sections mentioned here are also important to larger institutional investors and asset managers (and they also tend to draw comments during Staff disclosure reviews).
Don’t let the digs at “legal filler” get you down – there’s insight that we lowly lawyers can glean from what many investors are looking at:
1. Business Section – the part that tells the company’s story
2. Risk Factors – especially company & industry-specific
3. MD&A – the whole thing
4. Notes to Financials – John pointed out that even though lawyers aren’t accountants, it’s worth focusing on accounting policies in the notes to financials – and asking questions if they appear to differ from peers’
While the Form 10-K process can sometimes suffer from “too many cooks in the kitchen,” anyone who’s working on it should know which parts draw the most eyeballs and make sure to read those through. Those are also the parts of your peers’ Form 10-Ks that you should keep tabs on.
If anything crazy jumps out (based on your understanding of your company’s situation or in comparison to what peers are saying), you can ask about it. You also want to make sure that the portions of the document that you’re directly involved with are consistent with the “main parts” of the document.
I’d also like to think that securities lawyers play a pretty big role with many of these sections, since SEC rules drive the disclosures – as well as Staff disclosure reviews & enforcement actions. Check out the January-February 2018 issue of The Corporate Counsel newsletter for a very practical nuts & bolts approach on drafting risk factors. Our handbooks are also filled with essential info – including on business disclosures and the MD&A.