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The order details the various legal challenges and describes the multiple submissions to the Eighth Circuit requesting a stay pending judicial review. Following those submissions, the SEC moved to establish a consolidated briefing schedule encompassing all motions seeking a stay. That motion was opposed by 31 parties that urged the Eighth Circuit to expedite briefing on the already-filed emergency stay motions. It seems the SEC determined to use its discretionary authority under Exchange Act Section 25(c)(2) and Section 705 of the Administrative Procedure Act, which it may do if it finds “justice so requires,” after those oppositions were filed.
Don’t mistake the stay for an indication that the SEC is backing down from defending the rules in any way. The order makes this clarifying comment:
In issuing a stay, the Commission is not departing from its view that the Final Rules are consistent with applicable law and within the Commission’s long-standing authority to require the disclosure of information important to investors in making investment and voting decisions. Thus, the Commission will continue vigorously defending the Final Rules’ validity in court and looks forward to expeditious resolution of the litigation.
But the Commission finds that, under the particular circumstances presented, a stay of the Final Rules meets the statutory standard. Among other things, given the procedural complexities accompanying the consolidation and litigation of the large number of petitions for review of the Final Rules, a Commission stay will facilitate the orderly judicial resolution of those challenges and allow the court of appeals to focus on deciding the merits.
Further, a stay avoids potential regulatory uncertainty if registrants were to become subject to the Final Rules’ requirements during the pendency of the challenges to their validity.
Keep in mind that the order says nothing about the phased-in compliance dates, so what this might ultimately mean for whether and when companies, especially large accelerated filers, have to comply with the rules is unknown at this point — it’s still dependent on SEC action and/or how the litigation progresses. While the order notes that the SEC has used this authority twice before, that doesn’t give us any precedent to point to for the compliance timeline since both referenced rules were ultimately vacated (plus, as we all know, prior results do not guarantee a similar outcome).
It seems unwise to scale back or slow down compliance efforts — “regulatory uncertainty” already exists. Ultimately, given requirements in numerous other jurisdictions, mandatory climate reporting of one kind or another seems inevitable for many SEC registrants regardless of the fate of the SEC rules. And, as the amount of publicly available climate data increases, keep in mind that the SEC will continue looking at that and issuing comments or taking other action, with or without the final rules, per its 2010 climate disclosure guidance. Footnote 8 of the order clarifies that the stay does not impact that guidance.
During the morning panel and the Corp Fin Workshop on day 1 of SEC Speaks, a number of Staff participants discussed 2024 priorities for the Disclosure Review Program. As always, note that all Staff comments are subject to the standard disclaimer that the views are the person’s own in their official capacity and not necessarily reflective of the views of the Commission, the Commissioners, or members of the Staff, and our summaries are based on our real-time notes.
Cicely LaMothe, Deputy Director of Disclosure Operations, highlighted these three high-level priorities for 2024:
– Incorporating new rulemaking into the Disclosure Review Program
The Staff’s work doesn’t end with the adoption of a new rule — the Disclosure Review Program Staff gets up to speed, considers how disclosure documents are impacted and considers whether internal or external guidance needs to be updated and how to schedule reviews to make sure the team is covering appropriate filings. In the first year following effectiveness, the Staff tries to take a reasonable approach, recognizing that many companies are trying to make a good-faith effort to comply. In addition to confirming all requirements are met and you’ve carefully considered CDIs and other guidance, remember that most new rules have structured data requirements and if you incorrectly tag or fail to tag data, your disclosures are more likely to be more closely reviewed by the Disclosure Review Staff.
– Proactively addressing emerging issues
The Staff is continually monitoring world events that impact reporting companies and their disclosures, and they consider whether developments could be material to segments of companies that they review — for example, the market disruptions in the banking industry in early 2023. Companies should be doing the same and revisiting and updating descriptions in risk factors and MD&A as the landscape changes.
– Strategically engaging with stakeholders in both the above areas
Corp Fin Director Erik Gerding gave some more granular insight on disclosure topics that remain or have become top of mind for the Disclosure Review Program Staff in 2024. Here’s a non-exclusive list:
– Areas that involve judgment or where FASB or IASB have recently issued accounting standards (e.g., segment reporting)
– Non-GAAP compliance
– Critical accounting estimates disclosures in MD&A
– Disclosures regarding supplier finance programs in notes to the financial statements and in MD&A
– Disclosures by China-based issuers
– Inflation disclosures, ensuring that disclosure addresses particularized risks and impacts specific to the company
– Interest rate and liquidity risk disclosures
– Emerging areas, including AI and exposure to commercial real estate market changes
– Newly-required disclosures, including clawbacks, SPACs and cybersecurity
Yesterday, the SEC posted this notice & request for comment for a proposed NYSE rule change that would amend Section 102.06 of the NYSE Listed Company Manual to extend the period for which a SPAC can remain listed if it has signed a definitive agreement with respect to a Business Combination. As described below, this would better align NYSE’s approach with Nasdaq’s:
Section 102.06e of the Manual provides that the Exchange will promptly commence delisting procedures with respect to any listed SPAC that fails to consummate its Business Combination within (i) the time period specified by its constitutive documents or by contract or (ii) three years, whichever is shorter.
Section 102.06e requires the Exchange to promptly commence delisting procedures even for listed SPACs that have entered into a definitive agreement with respect to a Business Combination within three years of their listing date, but that are unable to complete the transaction before the three-year deadline established by 102.06e. As a practical matter, any such NYSE-listed SPAC would need to liquidate, transfer to a market that provides a longer period of time to complete the Business Combination, or face delisting.
The Exchange notes that Nasdaq’s SPAC listing requirements include a three-year limitation that is substantially similar to that included in the Exchange’s SPAC listing standard. However, Nasdaq appeal panels have granted additional time to SPACs that appeal their delisting for failure to consummate a Business Combination within three years in circumstances where the SPAC has a definitive agreement and requests additional time beyond the three years provided by the applicable rule to enable it to consummate its merger.
Accordingly, the amendment would provide that NYSE will commence delisting procedures with respect to any SPAC that fails to:
(i) enter into a definitive agreement with respect to its Business Combination within (A) the time period specified by its constitutive documents or by contract or (B) three years, whichever is shorter or
(ii) consummate its Business Combination within the time period specified by its constitutive documents or by contract or forty-two months, whichever is shorter.
Since the SEC adopted final climate disclosure rules, one of the most consequential interpretive issues raised to date relates to Scope 3 emissions — even though the proposed requirement to disclose Scope 3 emissions was omitted in the final rules and the release explicitly states that “the disclosure of Scope 3 emissions in Commission filings will remain voluntary.”
The issue is this: Item 1504 of Regulation S-K requires a company with one or more targets or goals that materially affected or are reasonably likely to materially affect its business, results of operations, or financial condition to report any (no materiality qualifier) progress made toward meeting those disclosed targets and goals. Well, what if a company has set and is required to disclose a science-based, net zero, Scope 3-specific or other target that covers Scope 3 emissions (especially if a majority of the company’s emissions are Scope 3)? How does it disclose progress without disclosing Scope 3 emissions? And could it be misleading to omit them, particularly if other indicators of progress are inconsistent with a company’s progress on Scope 3?
There are a few footnotes in the release that are worth noting. Footnote 947 cites comment letters suggesting that Scope 3 should be required if it’s implicated by targets and goals or transition plans, and footnote 356 (on an unrelated topic) reminds companies of their obligations under Rule 408 and Rule 12b-20 — not to make materially misleading statements or omissions and “to provide such additional information as is necessary to keep their disclosures from being misleading.”
On the other hand, footnote 2494 may be read to suggest that the rule’s requirements related to targets, goals and transition plans are not intended to trigger emissions disclosure that is not otherwise required by Item 1505:
All registrants subject to the final rules, including SRCs and EGCs, are not required to disclose GHG emissions metrics other than as required by Item 1505, including where GHG emissions are included as part of a transition plan, target or goal.
There’s no clarity or consensus on this yet. Some law firm alerts point to language in the release and anticipate that the rule will not be interpreted to require Scope 3 disclosures. Others note that targets and goals that cover Scope 3 come with a risk that the SEC Staff may take the position that emissions disclosures will be required.
John previously shared CAQ’s criticism of the PCAOB’s roundtable addressing the NOCLAR proposal, specifically that “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.” This Troutman Pepper memo goes into more detail on the issues that were raised during the roundtable.
Having missed the roundtable myself since I was engrossed in the SEC’s open meeting at the time, I was happy to read that some of the issues raised by lawyers in the earlier comment period were at least touched on during the roundtable. Here are snippets on a few topics from the memo:
– During the roundtable, a divergence of opinions emerged on whether the proposal’s “could reasonably have a material effect” threshold is overly broad. Ironically, even among proponents of this threshold, there was no consensus on its meaning, with some equating it to a “reasonably possible” scenario and others to a “reasonably likely” one. This lack of clarity underscores the argument that the proposed language might be too ambiguous, potentially leading to inconsistent application across audits.
– Remarks by several panelists and commenters emphasized PCAOB’s lack of detailed cost analysis. For example, the proposal itself states the anticipated additional costs will be “substantial,” but fails to put forth any meaningful economic analysis demonstrating the impact of the added costs. For some, this absence of specificity in outlining the financial implications of compliance raises questions about the feasibility and reasonableness of the proposed standards. Several roundtable panelist and commenter insights further illuminated the tangible impact of these costs, particularly on Emerging Growth Companies and other smaller and newly-public companies, as well as smaller audit firms, who have borne the brunt of increased auditing costs as a result of recent SEC rulemaking.
– The roundtable discussion underscored the inherently fact-intensive nature of privilege analysis. This complexity necessitates that auditors, in their efforts to comply with the proposal, may need to navigate the delicate task of assessing the credibility of sources, such as legal counsel, without infringing upon protected communications. This is particularly challenging given the proposal’s perceived requirement for auditors to independently evaluate NOCLAR and make definitive conclusions regarding such noncompliance.
– A critical issue often discussed in comment letters and during the roundtable is that the proposed standard would require auditors to delve into complex regulatory matters without the necessary expertise. As Nasdaq stated in its comment letter, ”[t]he Proposal would require auditors to duplicate a significant amount of work already done by a company’s legal and compliance team.” The proposal thus raises questions about the value such duplication would bring to investor protection or financial statement accuracy. Nasdaq’s comment letter also aptly articulates this concern, stating, ”[a]uditors will need to develop or hire legal experts in every area of law in virtually every country and jurisdiction in the world in order to fulfill their duties under the Proposal.”
Keep in mind that the roundtable isn’t the only way the PCAOB sought additional feedback. It also reopened the comment period through March 18, 2024. I count 43 more comment letters submitted in March 2024 (preceded by 140 in 2023).
In late March, NYSE filed a proposal with the SEC seeking to amend NYSE rules and the Listed Company Manual to conform to the recent changes to Rule 15c6-1(a) to shorten the standard settlement cycle to T+1. The SEC issued its notice of filing and immediate effectiveness of the amendments early this week. The amendments relate to Rules 235 (Ex-Dividend, Ex-Rights) & 236 (Ex-Warrants) and the following sections of the Listed Company Manual: Section 204.12 (Dividends and Stock Distributions), Section 703.02 (Stock Split/Stock Rights/Stock Dividend Listing Process) and Section 703.03 (Short-Term Rights Offerings Relating to Listed Securities Listing Process).
NYSE’s filing describes the amendments, and I’ve excerpted a few descriptions below:
Under Dealings and Settlements, Delivery Dates on Exchange Contracts currently provides that a “Regular Way” contract for sale of securities is due on the second business day following the day of the contract. The Exchange proposes to delete the word “second” from this rule to reflect settlement on T+1, rather than T+2.
Current Rule 235 provides that transactions in stocks shall be ex-dividend or ex-rights on the business day preceding the record date fixed by the corporation or the date of the closing of transfer books. The Exchange proposes to delete the phrase “the business day preceding,” such that the rule would provide that these transactions would be ex-dividend or ex-rights on the record date. The current rule further provides that if the record date or closing of transfer books occurs upon a day other than a business day, Rule 235 shall apply for the second preceding business day. The Exchange proposes to delete the word “second” from this portion of the rule to conform to a T+1 settlement cycle.
Current Section 204.12 of the Listed Company Manual (Dividends and Stock Distributions) requires the Exchange to arrange for and give advance notice of changes in dealings in the stock to an “ex-dividend” basis, which is generally two business days prior to the record date. The Exchange proposes to amend Section 204.12 to provide that an “ex-dividend” basis would generally be on the record date to reflect a T+1 settlement cycle.
The operative date for the rule change is May 28, with the following specific implementation schedule:
Accordingly, the Exchange proposes that Wednesday, May 29, 2024 would be the first date to which the proposed rules described herein would apply (i.e., the first record date to which the new ex-dividend date rationale will be applied). During the implementation of the T+1 settlement cycle, the Exchange proposes that the ex-dividend dates will be as follows:
Record Date Ex-Dividend Date
May 24, 2024 May 23, 2024
May 28, 2024 May 24, 2024
May 29, 2024 May 29, 2024
A record date of Friday, May 24, 2024 would be a date prior to the effective date of the amendments to Rule 15c6-1(a) of the Act to shorten the standard settlement cycle for most broker-dealer transactions from T+2 to T+1.8 The rules described above would apply to this record date in their current form and, thus, the “ex-dividend date” would be the first business day preceding the record date or Thursday, May 23, 2024. Monday, May 27, 2024 is Memorial Day, which is an Exchange holiday; accordingly, there would be no record date on a holiday. A record date of Tuesday, May 28, 2024 would also fall under the Exchange’s current rules, and the first business day preceding such record date would be Friday, May 24, 2024. On Wednesday, May 29, 2024, the proposed rules described above would apply, such that, for the record date of May 29, 2024, the “exdividend date” would be the same business day.
Yesterday, during a well-staffed Corp Fin Workshop — the last panel of the day at “The SEC Speaks in 2024” — each participating Staff member discussed a key disclosure topic highlighting 2023 trends and comments and 2024 considerations. This is always a very useful conversation! (Keep in mind that all Staff comments are subject to the standard disclaimer that the views are the person’s own in their official capacity and not necessarily reflective of the views of the Commission, the Commissioners, or members of the Staff, and our summaries are based on our real-time notes.) Two buzz-worthy topics addressed in this year’s panel were disclosures under the final cyber rules and discussions of AI in SEC filings.
With respect to cyber incident disclosures, the Staff stressed that the disclosure of the incident’s impact should be qualitative in addition to quantitative — including when the related harm can’t be quantified. For example, to the extent material, disclosures should discuss the impact of any data theft and of the incident generally on the company’s reputation, competitiveness and customer or vendor relationships, even if those can’t be linked to bottom line numbers on a quarterly or annual basis.
The Staff also discussed the concept of “without unreasonable delay.” If you have regular protocols and procedures in place, including ones that layer in the materiality assessment for the incident, any change to those procedures that delays or is done to delay or postpone the materiality determination might constitute “unreasonable delay.” The Staff also noted that companies might not need to wait for the investigation or fact gathering to be complete to make a materiality determination, and instruction 2 contemplates that possibility by allowing unavailable information to be provided later by amendment.
One of the key themes from yesterday — from the Corp Fin Staff at least — was their focus on transparency through a multi-pronged approach to engaging with companies using one-to-one and one-to-many communications, including speaking engagements and participation in conferences. The Staff’s thoughtful, specific and timely commentary supported this IMHO, and the panels were publicly available to all.
With respect to AI disclosures, the Staff participating in the Corp Fin Workshop at “The SEC Speaks in 2024” said that 59% of annual reports filed by large accelerated filers made some mention of AI this year, up from 27% the prior year. Discussions were included in risk factors, the business section or MD&A, and 33% of filings included disclosures in both the business and risk factors sections. The Staff also identified the financial statements, disclosure controls and procedures and the board’s role in risk oversight as other areas where AI-related disclosures may be required under existing rules.
In considering what to address in AI disclosures, the Staff highlighted the following considerations:
– Whether use of AI exposes the company to additional operational or regulatory risks, including risks related to data privacy, discriminatory results or bias, IP, consumer protection, regulatory compliance and macroeconomic conditions
– Whether the company’s disclosure on its use and development of AI and material AI risks are tailored to its facts and circumstances
– Whether the company has support for its claims when disclosing AI opportunities
– Whether disclosure of the board’s role in AI oversight is warranted
– Whether investors would benefit from disclosure of the company’s use of any AI risk management framework—like NIST or any industry specific guidance (similar to cybersecurity disclosures)
– Whether the company faces risks related to the EU AI Act and whether current general disclosure, if any, should be more tailored to address how a company will be impacted based on its particular facts and circumstances
In a morning panel at “The SEC Speaks in 2024” featuring senior members of Corp Fin, Chief Counsel Michael P. Seaman discussed the Staff’s interpretation of the definition of “shell company” particularly in the context of reverse mergers and particularly where the public company allocates potential future profits of its legacy business (including any proceeds from the sale of that business) through the issuance of contingent value rights (CVRs) to existing pre-transaction shareholders. Where what is being sold is the opportunity for the private company to go public through a company with some cash but little else remaining because the business has been signed away with a CVR, the SEC Staff considers this a merger with a shell company with all the attendant consequences.
This Goodwin alert from January has more on this based on comment letters Corp Fin Staff has issued in the life sciences reverse merger context. It identifies these considerations from those comment letters:
– Does the combined company intend to continue any operations of the public company? Does the combined company intend to retain any of the public company’s employees for a meaningful period of time following the closing? Did the pre-closing public company stockholders receive a CVR entitling them to the value of legacy assets of the public company to be sold following the closing of the RM?
– The Staff did not provide specific guidance as to what would constitute more than “nominal other assets” to avoid being characterized as a shell company under its broadened interpretation of the Rule 12b-2 definition.
– The Staff indicated that accounting for a RM as a reverse recapitalization (as opposed to a reverse asset acquisition) is a strong indication that the public company should be viewed as a “shell company.”
The alert continues with some high-level implications of that status for both the combined company and the investors. At closing, the company will have to consider whether shell-company-related 8-K disclosure is required, and going forward, deal with the following, many of which Michael raised during the panel and recommended that folks reach out to the Office of Chief Counsel with questions.
– Delayed Form S-3 Eligibility: the post-merger combined company will not be Form S-3 eligible until 12 full calendar months after closing of the RM (e.g., similar to an IPO, the combined company needs “seasoning” through 12 calendar months of SEC reporting).
– Delayed Filing of Form S-8: the post-merger combined company will need to wait at least 60 calendar days post-closing of the RM to file a Form S-8 for any equity plans or awards.
– “Ineligible Issuer” Status: the post-merger combined company will be an ineligible issuer for three years following the closing of the RM (e.g., no free writing prospectus, no WKSI status despite public float, etc.).
– No Incorporation by Reference: although Form S-1 is available for offerings (including for a resale shelf registration statement), the post-merger combined company will be ineligible to use incorporation by reference until Form S-3 becomes available (e.g., manual updates will be required to keep a resale shelf prospectus current).
– No Rule 145(c) Securities on the Form S-1 Resale Shelf: investors who were affiliates of the private company and receive securities of the public company in the RM (i.e., Rule 145(c) securities) will be statutory underwriters with respect to resales of those securities and, as such, the Staff has indicated that such securities may not be included in the Form S-1 resale shelf and instead may be sold only in a fixed price offering in which such investors are named as underwriters in the prospectus.
– Rule 144(i)(2) Compliance: applies to all public resales of Rule 145(c) securities per Rule 145(d), as well as “restricted” or “control” securities of the issuer per Rule 144 (e.g., holders of restricted securities and any affiliates of the public company are also affected).