Yesterday, the SEC’s climate disclosure rules made it into the Federal Register. That means that the rules will be effective on May 28th (although compliance with the rules will not be required until the various dates specified in the rules for different types of information and issuers). The timing of this publication diminishes the risk that any change in Presidential Administration would result in the undoing of the rules. Rather, as Dave blogged last week and discussed in our webcast earlier this week, a resolution under the Congressional Review Act would be going to President Biden for review (and likely would be vetoed).
Of course, as everyone knows, this does not mean the rule is out of the woods. This Cooley blog details the latest twists & turns in the 8th Circuit litigation, which involve petitioners requesting a new administrative stay and the SEC submitting a request that the stay be denied, as well as reporting that a new petition was submitted in the 5th Circuit after the consolidation order was issued.
Companies, meanwhile, are gearing up for compliance. I shared a redline of the rule text in yesterday’s blog. I’ve now been alerted to a streamlined alternative that weighs in at a breezy 63 pages (it strips out the intro language for each rule). It also provides coloring for each type of edit – e.g., red for deletion, blue for addition, green for movement. The redline is an appendix to Holland & Knight’s client alert on the new rules. At this stage, we are all continuing to get our arms (and minds) wrapped around the new requirements, and you really cannot have too many resources to help with that. We are continuing to post memos in our “Climate Change” Practice Area!
Earlier this month, Meredith blogged about a federal district court case out of Alabama that held that the Corporate Transparency Act is unconstitutional. She also wrote about FinCEN’s statement in response to this holding – which said that the government will continue to enforce CTA requirements against everyone except the specific plaintiffs in this case – and she predicted that the DOJ would appeal.
Sure enough, the DOJ has filed this notice of appeal. We do not yet know when the 11th Circuit will hear this case, what the decision will be, and whether a ruling will be issued before December 31, 2024, which is the compliance deadline for entities formed before January 1, 2024. This Denton’s blog points out that FinCEN could seek a stay of the District Court’s ruling on top of its previously issued statement – which may help companies read the tea leaves of where the court ultimately will come down.
Remember that public companies need to conduct a compliance review despite appearing to have an exemption from this statute. And this King & Spalding memo says it’s too early to write off the CTA. It encourages everyone to keep marching ahead – at least with respect to conducting the compliance review and establishing processes.
We know that many of you experienced significant problems with the live stream of Wednesday’s “The SEC’s Climate Disclosure Rules: Preparing for the New Regime” webcast. We sincerely apologize for the inconvenience and are working with our tech team to ensure this doesn’t happen again. We strive to offer our members high-quality programming in a user-friendly, accessible format. The webcast was excellent, and we think that those of you who listen to the archive – or read the transcript when it’s posted in the next week or so – will agree. However, the technical quality of the live webcast clearly did not live up to those standards, and for that we are truly sorry.
We don’t think simply saying “we’re sorry” is enough, so we’re also trying to make amends as best we can. Our team hustled to get the on-demand audio replay of the webcast posted as soon as possible. I’m pleased to say that it’s now available and does not have any of the audio problems experienced with the live feed. We are also applying for on-demand CLE credit for the webcast, so those of you who were counting on picking up credit for the webcast should be able to do that as well (pending approval from your state). You’ll need to follow the instructions on the webcast’s landing page to apply for on-demand CLE credit.
We sincerely appreciate your continued support of our sites and deeply value your membership. We will continue to strive to provide you with the quality resources and programming that you’ve come to expect from us, and we’re working hard to ensure that we don’t experience a problem like this again.
I am very sad to share that we have lost a true legend of the securities bar, former SEC Commissioner and Brooklyn Law School professor Roberta Karmel. Roberta passed away at her home in Hastings-on-Hudson, New York on March 23rd. Roberta made enormous contributions to the securities laws and to our profession, and I am truly heartbroken to have lost a wonderful friend and mentor.
As Roberta’s obituary notes, she grew up in Chicago and graduated from Radcliffe College and New York University School of Law. She started her career in the New York Regional Office of the SEC, rising to the position of Assistant Regional Administrator. Roberta moved from the SEC to private practice, and in 1977, President Jimmy Carter nominated her to serve as an SEC Commissioner. Roberta was subsequently confirmed by the Senate, and she became the first woman to serve as an SEC Commissioner. In 1980, Roberta returned to private practice and began her career in academia, where she distinguished herself as “a prolific scholar, publishing books and scores of articles on financial regulation and corporate law, and lectured as a visiting scholar at universities in Beijing, Bologna, Frankfurt, London, Melbourne, Paris, Shanghai, Seattle and Sydney.” Roberta retired as the Centennial Professor of Law of Brooklyn Law School, where she taught for 36 years. The title of one of Roberta’s most recent publications presents a very accurate description of her amazing career: Life at the Center: Reflections on Fifty Years of Securities Regulation.
After having admired Roberta from afar for many years, I was incredibly fortunate to have the opportunity to work with her as a trustee of the SEC Historical Society, where we all benefited from her keen insights and her far-reaching knowledge and wisdom. Roberta was a wonderful mentor and friend who helped me in so many ways. I had hoped that Roberta would join me for the webcast on materiality that I moderated for the SEC Historical Society just a few weeks ago, but unfortunately her health did not permit her to join us, and she expressed concern that she was unable to participate in the dialogue on such an important topic. I often think about the moving speech that Roberta delivered at my request to the ABA Business Law Section’s Federal Regulation of Securities Committee meeting back in 2016, where she noted “partisanship has undermined the SEC’s mission and credibility and made it very difficult for the SEC to complete rulemaking mandated by statute.” I distinctly recall how the entire audience attending in the ballroom was blown away by Roberta’s thoughtful words that day.
Of course, Roberta was not just a titan of the securities bar, she was beloved by her family, friends, colleagues, students and fellow SEC alumni, and to all of them I offer my deepest condolences.
On Tuesday of this week, BlackRock CEO & Chair Larry Fink published his letter to investors, which continues the theme in this week’s blogs of policies & reports from the world’s largest asset managers. BlackRock’s letter to shareholders doesn’t drop any bombshells about its portfolio company engagements or how it will vote at portfolio company meetings this spring – which is a good thing. Even without that drama, it understandably continues to get big headlines – and it is still an overall interesting read.
One thing I learned from this year’s letter is that, just like yours truly, Larry Fink’s dad owned a shoe store. The other thing I deduced is that this mid-March letter to investors could be the “new normal” for BlackRock communications. Based on the communication approach last year and this year, the January tradition of the “BlackRock Letter to CEOs” has fallen by the wayside, at least for now.
Something else that has fallen by the wayside is express “ESG” terminology, which has become too politically charged for Larry Fink’s tastes. However, BlackRock is not backing down from its multi-year messaging around the inevitable investment opportunity in the transition economy – specifically, with “energy infrastructure” as countries look to decarbonize their economies while at the same time achieving energy security. This year, though, the emphasis is on “energy pragmatism.” Here’s an excerpt:
Germany is a good example of how energy pragmatism is still a path to decarbonization. It’s one of the countries most committed to fighting climate change and has made enormous investments in wind and solar power. But sometimes the wind doesn’t blow in Berlin, and the sun doesn’t shine in Munich. And during those windless, sunless periods, the country still needs to rely on natural gas for “dispatchable power.” Germany used to get that gas from Russia, but now it needs to look elsewhere. So, they’re building additional gas facilities to import from other producers around the world.
Or look at Texas. They face a similar energy challenge – not because of Russia but because of the economy. The state is one of the fastest growing in the U.S., and the additional demand for power is stretching ERCOT, Texas’ energy grid, to the limit.
Today, Texas runs on 28% renewable energy – 6% more than the U.S. as a whole. But without an additional 10 gigawatts of dispatchable power, which might need to come partially from natural gas, the state could continue to suffer devastating brownouts. In February, BlackRock helped convene a summit of investors and policymakers in Houston to help find a solution.
Texas and Germany are great illustrations of what the energy transition looks like. As I wrote in 2020, the transition will only succeed if it’s “fair.” Nobody will support decarbonization if it means giving up heating their home in the winter or cooling it in the summer. Or if the cost of doing so is prohibitive.
“This is where the power of the capital markets can be unleashed to great effect,” the letter continues. And this ode to capital markets is the other big theme of the letter. In addition to highlighting BlackRock’s energy-related investments – such as a $12.5 billion agreement to acquire Global Infrastructure Partners (which owns things like pipelines, airports, wind projects, and more), the letter spotlights how capitalism makes America great. . . but not perfect.
Among other things, the letter discusses how BlackRock products can help solve not only our infrastructure problems, but also the looming global retirement crisis – and with that, the lack of hope among young people. While some might say that’s grandiose, I found it refreshing to read some traditional “marketing spin” in the annual letter to shareholders. Here are a few other interesting nuggets:
1. BlackRock will continue to invest in private markets in addition to public: “In private markets, we are prepared to capitalize on structural growth trends. Whether it’s executing on demand for much-needed infrastructure, or the growing role of private credit as banks and public lenders move away from the middle market, private capital will be essential. BlackRock is poised to capture share through our scale, proprietary origination, and track record. And we believe our planned acquisition of GIP will meaningfully accelerate our ability to offer our private markets capabilities to our clients.”
2. BlackRock will be offering more active equity funds (i.e., it’s not just “passive” index funds anymore): “BlackRock has been critical in expanding the market for ETFs by making them accessible to more investors and delivering new asset classes (like bonds) and investment strategies (like active).”
3. BlackRock will apply its voting policies to promote corporate governance & financial resilience: “we built one of the largest stewardship teams to engage with companies, often alongside our investment teams, because we never believed in the industry’s reliance on the recommendations of a few proxy advisors. We knew our clients would expect us to make independent proxy voting decisions, informed by our ongoing dialogue with companies – a philosophy that continues to underpin our stewardship efforts today. For our clients who have entrusted us with this important responsibility, we remain steadfast in promoting sound corporate governance practices and financial resilience at investee companies on their behalf.”
4. Voting Choice will continue to expand: “In 2022, BlackRock was the first in our industry to launch Voting Choice, a capability that enabled institutional investors to participate in the proxy voting process. Today, about half of our clients’ index equity assets under management can access Voting Choice. And in February, we launched a pilot in our largest core S&P 500 ETF, enabling Voting Choice for individual investors for the first time.”
When the Commission adopted climate disclosure rules earlier this month, it went to great lengths to demonstrate that the final rules incorporated feedback from the thousands of comment letters that were submitted in response to the proposal. In the open meeting at which the new rules were adopted, several of the Commissioners discussed ways in which the final rules differed from the proposal – which Meredith helpfully summarized for us all at the time.
To see how these accommodations are reflected in the actual line-item regulations, check out this 101-page redline that compares the final provisions of Reg S-X, Reg S-K, the affected forms and other statutes to what the Commission originally proposed. It’s wild that this redline tops 100 pages! But it is a lot quicker to read than the full 886-page adopting release – and it’s a good tool to help absorb the final rules.
Hat tip to Aon’s Karla Bos for alerting us that State Street Global Advisors has released its “Global Proxy Voting & Engagement Policy” – effective for voting decisions beginning March 26, 2024. This year, SSGA has centralized its standalone policies for specific markets and environmental & social factors into one Global Policy. That is a welcome change for those of us who are charged with keeping all the ins, outs & what-have-yous in our heads. I’m sure it was no small feat for the SSGA team to make it happen. The Global Policy includes these sections:
1. Overview of SSGA’s stewardship and voting program
2. Overview of proxy voting & engagement principles – effective board oversight, disclosure, shareholder protection, shareholder proposals, and engagement
3. Standalone sections addressing each of these principles
4. An appendix that sets forth SSGA’s criteria for “quality disclosure” on topics that are commonly the subject of shareholder proposals – climate disclosure, DEI disclosure, etc.
SSGA published this summary to highlight the substantive policy changes that were made as part of this update, which appear to primarily relate to director overboarding. Here’s an excerpt:
Beginning in 2024, we consider if a company publicly discloses its director time commitment policy (e.g., within corporate governance guidelines, proxy statement, company website). This policy or associated disclosure must include:
• Description of the annual review process undertaken by the nominating committee to evaluate director time commitments
• Numerical limit(s) on public company board seat(s) the company’s directors can serve on
For companies in the S&P 500, we may vote against the nominating committee chair at companies that do not publicly disclose a policy compliant with the above criteria, or do not commit to doing so within a reasonable timeframe.
For other companies in certain markets (such as the US non-S&P 500) that do not publicly disclose a policy compliant with the above criteria, we will consider the number of outside board directorships that the company’s non-executive and executive directors may undertake. Thus, State Street Global Advisors may take voting action against a director who exceeds the number of board mandates listed below:
• Named Executive Officers (NEOs) of a public company who sit on more than two public company boards
• Non-executive board chairs or lead independent directors who sit on more than three public company boards
• Non-executive directors who sit on more than four public company boards
If a director is imminently leaving a board and this departure is disclosed in a written, time-bound and publicly available manner, we may consider waiving our withhold vote when evaluating the director for excessive time commitments.
SSGA had previewed this update in a letter last year, so it shouldn’t come as a surprise. Although the summary doesn’t call out any other big updates, if SSGA is a significant shareholder for your company, it is worth viewing this year’s Global Policy as a “reset” that should be reviewed in full. Luckily, it is much easier to do that now that the policies are all in one document.
Sometimes it isn’t clear why investor votes come down on one side versus the other. Last week, in an effort to give more insight into those decisions, Vanguard released a 12-page report about key votes cast during the 2023 calendar year. The report covers both management and shareholder proposals (including director elections) and is broken down by region. The report is worth reviewing if Vanguard is a significant holder at your company and you are uncertain of how they will vote on this year’s proposals. Specifically, the report highlights “significant votes” as defined in the EU’s Shareholder Rights Directive, which means they:
(i) involved a vote at a company in which Vanguard-advised funds hold a meaningful ownership position, or (ii) conveyed Vanguard Investment Stewardship’s perspective on an important governance topic that arose in connection with a shareholder vote.
The “Key Votes Report” follows the publication of Vanguard’s Investment Stewardship Report, which was released earlier this month and includes high-level stats for the asset manager’s voting record on various management and shareholder proposal topics (see pg. 56) – as well as case studies and general takeaways. In this report, Vanguard noted that U.S. boards are responding to “universal proxy” with enhanced disclosure of director skillsets and effectiveness. Here’s an excerpt:
We saw many companies implement practices and enhance disclosure related to their board skills matrices, director capacity and commitment policies, and board effectiveness assessments. We shared with companies our perspective that these changes and their related disclosures give shareholders greater visibility into board operations and a better understanding of how boards fulfill their oversight role.
Across the Americas, independence was a primary factor in instances where the funds did not support a director’s election. When we observe a lack of sufficient board independence and/or have concerns related to key committee independence, the funds may not support the election of certain directors.
In addition, in the U.S. and Canada, the funds did not support compensation committee members in instances where issuers had not appropriately responded to significant concerns with executive compensation expressed through the prior year’s Say on Pay vote.
If you are amending bylaws this year, make sure to catch this nugget as well:
We observed that many U.S. companies, in response to legal and regulatory changes, unilaterally amended company bylaw provisions to limit executives’ liability, require specific jurisdictions for litigation, and/or adopt advance notice provisions impacting shareholders’ ability to bring proposals and director nominations to votes at company meetings of shareholders.
In these cases, we reviewed the impact these changes had on shareholder rights and engaged with companies to understand their rationale for adopting the provisions. In instances where we determined that the provisions were unduly onerous and/or otherwise alienated shareholder rights, the funds voted against relevant members of the board’s governance committee to express concern.
The Investment Stewardship report also notes that the team regularly attended industry events to promote corporate governance practices and share their perspectives. I know that everyone on the corporate side appreciates being able to gain insight & understanding from John and other members of Vanguard’s Investment Stewardship team at these events. I was happy to see that the report recognized those efforts!
Check out John’s latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. This one is a good complement to today’s webcast! In this installment, J.T. reviews:
4. Staff guidance on “sell to cover” Rule 10b5-1 plans
5. New SEC rules on projections
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email John and/or Meredith at john@thecorporatecounsel.net or mervine@ccrcorp.com.
Last week, the U.S. Court of Appeals for the Fifth Circuit issued an opinion that upheld the SEC’s use of a “gag order” in a civil consent decree. If this case – and the outcome – sound familiar, that’s because it is.
The decision – SEC vs. Novinger – follows a series of challenges by a defendant who sought to reopen a 2016 settlement with the SEC. He’s represented by the same organization that has petitioned the SEC to end this policy – and the latest opinion highlights that he was “disheartened but not dissuaded” by a similar ruling on his case two years ago, which John blogged about at the time. After bringing another motion at the district court level that raised the same claims as the one that was previously denied, the Court of Appeals once again had to weigh in.
In this instance, as in 2022, procedural defects prevented the court from examining the merits of the SEC’s “neither admit nor deny” policy. While the procedural mechanics are enough to make a corporate lawyer’s head spin, the bottom line was that the defendant didn’t bring the right type of motion (which would have been a “Rule 60(b) motion”), so the Appeals Court found that it did not have jurisdiction. And while you might think that leaves the door open to yet another challenge, the panel of judges seemed to shoot down that notion:
Novinger claims first that, after the Rule 60(b) motion failed in Novinger I, he had no other way to challenge the “gag order.” Specifically, he explains that he cannot bring a separate action nor violate the consent decree because of, respectively, the collateral-attack and collateral-bar rules. Assuming, arguendo, that Novinger is correct that no other avenues exist by which to obtain relief, that makes no difference. As the SEC points out, Novinger can, and did, seek relief under Rule 60(b). That he failed does not entitle him to some other form of relief.
So, despite the Fifth Circuit’s recent reputation as “The Place Where SEC Rules Go to Die,” the Enforcement Division’s policy lives to see another day, and if you are working on any settlements, it is something you will need to factor into your decisions. The policy continues to have plenty of critics, and the NCLA is relentless, so this is probably not the end of the story.