Many companies breathed a sigh of relief last year when the SEC’s stock repurchase disclosure rules were vacated by the 5th Circuit. But this Woodruff Sawyer blog provides a reminder that although the burdensome disclosure rules may be gone, when it comes to buybacks, the regulatory heat is still on.
The blog points to the SEC’s 2023 enforcement action against Charter Communications and its 2020 enforcement action against Andeavor LLC targeting alleged internal control shortcomings with respect to buyback programs. In order to avoid the problems that these companies ran into, the blog recommends that companies ensure that the people executing the plan understand the parameters authorized by the board & establish robust strategies for assessing whether the company is in possession of MNPI before entering the market. Here’s an excerpt from the blog’s discussion of this latter recommendation:
In the context of share buybacks, as noted above, the question is not whether one individual has MNPI—it’s about the company. An approach that some companies have implemented is having the company’s general counsel send an email to certain executive officers to confirm that the company is not in possession of MNPI before initiating a share buyback. The CEO, CFO, and treasurer should generally be included in the list of recipients, as well as others depending on the company. It may also be a good idea to consider sending a similar email (or better yet, a call) to the chair or the lead director of the board, as applicable. Lastly, before sending an email like this, it would be a good idea to socialize the purpose of the email and how it’s a critical element of the company’s internal controls and procedures.
The blog says that for recipients other than the CEO, CFO and treasurer, the company shouldn’t provide details beyond what is included in the email – the fact that the CEO & CFO are addressees should be enough to get their attention.
With the SEC’s adoption of its climate disclosure rules, many companies are now confronting the need to comply with a not entirely consistent set of climate disclosure obligations imposed by the EU, California, and the SEC. Since that’s the case, the question for many companies is – “Where do we start?” This Proskauer memo may not be a bad place.
The memo contains a chart the key requirements of the EU’s CSRD and California’s reporting regimes, and also lays out the disclosure requirements set forth in the SEC’s original proposal. Now, since Meredith did everybody a solid by cataloging what aspects of the SEC’s proposal didn’t make the cut in final regs, I think it’s a fairly easy matter to go through and cull those aspects from the chart when you are identifying what’s required. Once you’ve got the chart of requirements in front of you, the memo offers the following thoughts on next steps:
As an initial step, a scoping exercise is recommended to analyse carefully which parts of your group or entities may be subject to the California Rules, CSRD and the proposed SEC Rules, respectively. If there is actual or potential capture, the next step would be to understand when the reporting requirements apply. Following the scoping and timing assessment, an analysis of the content required to be reported on can begin with an evaluation of whether any existing sustainability reporting and underlying policies and processes can be utilized, particularly for the California Rules where there is the potential to rely on other national and international sustainability reporting obligations and requirements.
In particular, companies are recommended to develop or revisit existing compliance frameworks that support the calculation of their GHG emissions data in accordance with the GHG Protocol 5 and TCFD, as that component is unlikely to change even if the California Rules are to be amended, and also will be useful to leverage for any capture under CSRD and the SEC Rules.
While most of us were busy watching the SEC adopt climate disclosure rules, the PCAOB held its previously announced roundtable on its controversial NOCLAR proposal. According to a statement on the event issued by the Center for Audit Quality, it didn’t go very well:
Transparency and accountability are pillars of effective public policy development. Unfortunately, the roundtable that the PCAOB held this week on its proposal related to company noncompliance with laws and regulations (NOCLAR) failed to live up to these principles. Specifically, the roundtable failed to address the concerns outlined in 78% of the comment letters the PCAOB received, including from those investors, audit committee members, auditors, academics and others who are concerned with the PCAOB’s proposal.
“Today’s NOCLAR roundtable was a missed opportunity for the PCAOB to further understand the views highlighted in numerous comment letters from engaged stakeholders,” said Julie Bell Lindsay, Chief Executive Officer, CAQ. “Not only did the roundtable surface disagreement as to the actual scope or intention of the proposal, but we are concerned that the lack of diverse stakeholder representation – particularly from investors and audit committees, two important audiences – resulted in dialogue that did not meaningfully address stakeholder concerns. Given the discussion at the roundtable, we believe that the appropriate response is to re-propose the standard, with an economic analysis, to begin to address these concerns.”
If you don’t want to take the CAQ’s word for it, a replay of the roundtable is available on the PCAOB’s website.
We’ve previously blogged about the comments on the proposal from investor groups, representatives of the accounting profession and the ABA’s Business Law Section. While some investor groups are supportive of the proposal, the business community & the accounting and legal professions have a lot of concerns about its implications. Those concerns are shared by some key members of Congress, and this roundtable was held in response to pressure from lawmakers. As Liz blogged last month, the PCAOB also reopened the comment period through March 18, 2024, so stay tuned.
The SEC recently announced a settled enforcement action against Lordstown Motors arising out of the company’s alleged misstatements concerning the sales prospects for the company’s electric vehicles. At the same time, it also settled a companion proceeding involving the company’s former auditor, in which the SEC alleged that the auditor violated independence standards. Here’s an excerpt from the SEC’s press release:
The SEC also instituted a related, settled administrative proceeding against Lordstown’s former auditor, Clark Schaefer Hackett and Co. (CSH). CSH provided certain non-audit services, including bookkeeping and financial statement services, to Lordstown during CSH’s audit of the company’s financial statements when it was a private entity. CSH then audited the same financial statements in connection with Lordstown’s merger with the SPAC and thus violated auditor independence standards of the SEC and the Public Company Accounting Oversight Board. Without admitting or denying the SEC’s findings, CSH agreed to a censure, a cease-and-desist order, the payment of more than $80,000 in civil penalties, disgorgement, and interest, and certain undertakings to improve its policies and procedures.
Bass Berry’s blog on this proceeding notes that it serves as a reminder that the SEC is focused on enforcing the auditor independence requirements set forth Rule 2-01 of Reg S-X. The blog reviews the audit committee pre-approval requirements for permitted non-audit services and the list of prohibited non-audit services, and offers some suggestions on best practices that audit committees should consider adopting to ensure compliance with the rule’s requirements.
In late February, the PCAOB issued its most recent inspection reports on the Big 4 accounting firms, and according to this WSJ article, the results were not great:
Several U.S. accounting giants had greater deficiencies in their audits of public companies’ 2021 financial statements compared to the previous year, according to annual inspection reports released Wednesday by the Public Company Accounting Oversight Board. The regulator, which compiles its findings with a lag, inspected 215 audits conducted by the Big Four accounting firms in the U.S.—Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers—down from 220 a year earlier. Deloitte, EY and PwC had an average deficiency rate of about 24%, up from roughly 13% a year earlier.
What about KPMG? The article says that KPMG’s deficiency rate was redacted from the PCAOB’s inspection report for some reason, so we don’t have data on that right now.
It seems to me that these latest inspection reports are a relevant data point to consider when contemplating the proposed revised NOCLAR standard discussed in this morning’s first blog. In an environment in which the nation’s top audit firms are evidently struggling with quality control issues & are confronting a growing shortage of accountants, adopting a demanding new auditing standard on noncompliance with laws and regulations may not just be a bad idea, but a potential recipe for disaster.
As Dave highlighted following the cybersecurity adopting release, the Commission clearly considered the concerns of commenters on many important issues and modified final cyber rules as a result of key comments. The same can be said of the final climate disclosure rules. The significant changes from the proposing release are detailed beginning on page 31 of the adopting release. During the open meeting, the Staff summarized those changes by highlighting that the final rules differ from the proposed by:
– Adopting a less prescriptive approach to certain of the final rules, including risk disclosure, board oversight disclosure and risk management disclosure
– Qualifying the requirement to provide certain disclosures based on materiality, including for expenses, impacts of climate-related risk and use of scenario analyses and internal carbon prices
– Eliminating the requirement to disclose board-level climate-related expertise
– Limiting the requirement to disclose Scopes 1 and 2 GHG emissions to only large-accelerated filers and certain accelerated filers, and only when material
– Exempting smaller reporting companies and emerging growth companies from the requirements to disclose Scopes 1 and 2 GHG emissions
– Omitting the proposed requirement to provide Scope 3 emissions for any registrant
– Removing the requirement to disclose the impact of weather events, natural conditions and transition activities on line items in the financial statements
– Including the requirement to disclose certain material expenditures related to the registrant’s climate-related strategy, transition plan, targets or goals under Reg. S-K rather than Reg. S-X
– Extending the PSLRA to certain forward-looking statements pertaining to transition plans, scenario analyses, carbon pricing and targets and goals
– Eliminating the proposed requirement for a private company party to a business combination registered on Form S-4 or F-4 to provide the S-K or S-X disclosures
– Eliminating the proposed requirement to disclose any material changes to the disclosures in Form 10-Qs
The Staff also highlighted key changes in compliance timing. First, recognizing the difficulty registrants face measuring and reporting GHG emissions by the 10-K deadline, the final rules provide an accommodation allowing GHG emissions for the most recently completed fiscal year to be reported in the Form 10-Q for the second quarter of the next fiscal year (which the 10-K would incorporate by reference) or in an amendment to the Form 10-K due at the same time as the second quarter Form 10-Q (with comparable delay permitted for FPIs). The final rules also provide extended and additional phase-in periods depending on filer status and the contents of the disclosure.
The final rule release acknowledges major developments in climate-related disclosure requirements in other jurisdictions since the proposed rules — specifically in California and the EU. I’m sure much ink will be spilled about how much additional effort the SEC rules will require of public companies that may be required to report under California and/or EU standards.
During the open meeting, Commissioner Peirce asked the SEC Staff whether the final rules preempt the requirements in California. The Staff highlighted that nothing in the rule expressly preempts any state law and, on the issue of whether there is implied preemption, that would be determined by a court in a future judicial proceeding that would come up under the specific facts and circumstances of that proceeding, including how the state laws would be applied and enforced.
Some readers may recall that the proposed climate rules required the new Reg. S-K disclosures be included in a separately captioned section titled “Climate-Related Disclosure” in a registration statement or annual report. In the final release, the SEC opted to give registrants some flexibility as to the placement of the climate-related disclosures under Reg. S-K but suggested that cross references in a separately captioned section may improve usability. For example, here is the addition to Form 10-K:
Part II
* * * * *
Item 6. Climate-Related Disclosure
Provide the disclosure required by subpart 1500 of Regulation S-K (17 CFR 229.1500 through 229.1507) in a part of the annual report that is separately captioned as Climate-Related Disclosure. A registrant may include disclosure that is responsive to the topics specified in Items 1500 through 1507 of Regulation S-K in other parts of the annual report (e.g., Risk Factors, Business, or Management’s Discussion and Analysis), in which case it should consider whether cross-referencing the other disclosures in the separately captioned section would enhance the presentation of the climate-related disclosures for investors.
In support of this decision to allow flexibility in placement, the SEC noted that the structured data requirements will facilitate investors’ ability to identify and compare climate-related disclosures, regardless of where they are placed — since, of course, the disclosures are required to be tagged in Inline XBRL.
Well, that didn’t take long. As reported by The Hill, within hours of adoption — while thousands of lawyers, accountants and sustainability professionals were just starting to read the 886 pages of the release — ten Republican-led states filed a petition for review in the 11th Circuit. The petition states that “the final rule exceeds the agency’s statutory authority and otherwise is arbitrary, capricious, an abuse of discretion, and not in accordance with law” and asks the 11th Circuit to declare the rule “unlawful and vacate the Commission’s final action.”
During the open meeting, Commissioner Lizárraga noted in his supporting statement, “With the broad interest this rulemaking has received, inevitably, some will view it as having gone too far, while others will see it as not having gone far enough.” That may have been prescient. The Hill gives the perspectives of two environmental groups and notes that legal challenges may come from both sides of the aisle:
The influential environmental groups Sierra Club and Earthjustice also announced they are weighing their own legal challenge to the SEC’s “arbitrary removal” of the so-called “Scope 3” provisions that would have required disclosure of emissions from a company’s supply chain and the use of its products.
As a reminder, the SEC proposed climate-related disclosure rules in March 2022, then reopened the comment period in May, and again in October of that year. We previously reported that the SEC had received 15,000+ comments on this proposed rulemaking, but Chair Gensler updated this number to 24,000+ comments, noting that the Commission received a flurry of additional comments in the 72 hours leading up to the open meeting.
I’m sharing a high-level overview here — starting with the new Regulation S-K requirements — pulling from the fact sheet. The final rules create a new subpart 1500 of Regulation S-K that requires public companies to include the following climate-related disclosure in their Exchange Act reports and registration statements:
– Climate-related risks: (1) Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition, (2) the actual and potential material impacts of those risks, (3) a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from mitigation or adaptation activities and (4) specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk or assess the impact of climate-related risks including the use, if any, of transition plans, scenario analysis, or internal carbon prices.
– Governance of climate-related risks: (1) Oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks, (2) the processes the registrant has for identifying, assessing, and managing material climate-related risks and (3) if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes.
– Targets and goals: Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition, including material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal.
– Emissions data and third-party assurance: (1) For large accelerated filers and accelerated filers that are not otherwise exempted, information about Scope 1 emissions and/or Scope 2 emissions, if material, and (2) for those required to disclose Scope 1 and/or Scope 2 emissions, an attestation report at the limited assurance level and, for large accelerated filers, following an additional transition period, at the reasonable assurance level.
The GHG emissions data requirement differs significantly from the proposed rules — note the absence of Scope 3 and the decision to limit Scopes 1 and 2 to large-accelerated filers and accelerated filers only when material. Tomorrow, we’ll cover some other key differences from the proposal. Also, check out Lawrence’s blog on PracticalESG.com for more details on the assurance and assurance provider aspects of the rules.
The final rules also create a new Article 14 of Regulation S-X that requires the following disclosures in the notes to a company’s financial statements:
– The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable 1% and de minimis disclosure thresholds (a registrant is not required to make a determination that a severe weather event or other natural condition was caused by climate change to trigger disclosure).
– The capitalized costs, expenditures expensed, and losses related to carbon offsets and RECs if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals.
– If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted.
As detailed memos become available, we’ll post them in our “Climate Change” Practice Area, so be sure to check that out in the coming days and weeks.