When we last checked in on the litigation over the SEC’s climate disclosure rule, the SEC had indicated that, if the rule survives litigation, it would provide a new implementation period for companies to come into compliance. Now things are heating up on the docket, with both sides submitting their briefs (along with many “intervenors”). Based on the calendar, most briefs should be in by now, with the petitioners’ response due mid-September.
This blog from Cooley’s Cydney Posner recaps the SEC’s key arguments in support of its authority to adopt the rule. Here’s an excerpt:
The SEC maintains that its “approach to climate-related information has been consistent with its longstanding interpretation of its statutory authority: the Securities Act and the Exchange Act authorize the Commission to mandate disclosures that protect investors by facilitating informed investment and voting decisions.” Each disclosure requirement in the rules is designed to elicit information with that goal and is therefore “necessary or appropriate in the public interest or for the protection of investors.” For example, the requirements to disclose Scope 1 and Scope 2 GHG emissions are a central measure of exposure to transition risk, one of the business and financial risks facing companies. Consequently, the SEC argues, the information is elicited is “necessary or appropriate in the public interest or for the protection of investors” and within the SEC’s authority.
Petitioners’ arguments, the SEC contends, set up a “strawman—challenging reimagined rules that the Commission did not enact and criticizing a rationale that the Commission expressly disclaimed.” Contrary to petitioners’ arguments, the rules were adopted “to advance traditional securities-law objectives of facilitating informed investment and voting decisions,” not to “influence companies’ approaches to climate-related risks or to protect the environment.” As reflected in the extensive factual record, the rules respond to “changed facts, including subsequent market and regulatory developments,” such as the current importance of climate-related risk information to investor decision-making and investor interest in detailed, consistent and comparable information. In adopting the rules, the SEC emphasized that they “do not ‘determine national environmental policy or dictate corporate policy,’” and emphasized that it “is ‘agnostic as to whether and how issuers manage climate-related risks so long as they appropriately inform investors of material risks.’” In addition, the rules “do not ‘prescribe any particular tools, strategies, or practices with respect to climate-related risk.’”
The blog also summarizes the Commission’s response to challenges under the Administrative Procedure Act and the First Amendment. As I mentioned, there are a lot of amicus briefs on both sides – here is one from 17 First Amendment scholars that defends the rule. Here’s a summary of their arguments:
The Knight Institute’s amicus brief, filed in support of the rule, makes four arguments. First, securities disclosure requirements that inform and protect investors do not ordinarily raise First Amendment concerns. Second, the climate disclosure rule falls within this longstanding tradition of securities disclosure requirements. Third, at most, the rule should be evaluated under the framework that the Supreme Court established in Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626 (1985). Finally, the rule survives Zauderer’s scrutiny.
It’s anyone’s guess what will happen to this rule, but there’s a chance that the court’s decision will be a mixed bag. The SEC acknowledges that possibility in its brief. Cydney notes:
While the SEC urged the court to agree with its conclusions that all of petitioners’ challenges fail, if the court were to determine otherwise, the SEC requests the court to remand, not vacate, and to sever any provision that the court determines to be unlawful.
In a decisive move that it previewed earlier this year, the California State Teachers’ Retirement System recently announced that it voted against the boards of directors at a record 2,258 companies this past proxy season – which is up from a then-record of 2,035 companies in 2023. This is out of about 10,000 meetings globally.
Although many companies have paused (or at least not accelerated) efforts on climate disclosure while we wait out litigation over the SEC’s rule, CalSTRS’ voting policies continue to matter because it is one of the largest pension funds in the world, with over $341 billion in assets. The pension fund articulates its expectations as follows:
CalSTRS expects all portfolio companies to accomplish the following, to help effectively manage the risks and opportunities associated with climate change:
– Publish a report on sustainability-related disclosures that aligns with the International Financial Reporting Standards, which took over the monitoring of companies’ progress on climate-related disclosures from the Task Force on Climate-related Financial Disclosure (TCFD).
– Disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions. Scope 1 emissions come from a company’s operations and Scope 2 emissions are from the generation of power a company uses.
In addition to the above disclosures, CalSTRS expects the highest global emitting companies on the Climate Action 100+ focus list and other high-emitting companies to also set appropriate targets to reduce GHG emissions, as this is an important step to reach a net zero portfolio by 2050 or sooner.
The press release says there has been improvement in methane emissions reporting over the past year, and that 10 companies have joined the Oil and Gas Methane Partnership 2.0 (OGMP 2.0), a United Nations-led framework committed to the measurement, reporting and mitigation of methane emissions, as a result of CalSTRS-led engagements.
Thanks to everyone who has reached out with well-wishes since I shared in April that I was going under the knife. It has always meant a lot to me to be part of this community and get to be connected on a personal level with so many of our readers and members, and this latest experience only underscored what a thoughtful community it really is. It’s been great to return to the blog this week!
As I shared a few months ago, I had some reservations about taking a medical leave. I still have several months ahead of me on this recovery journey – but the hardest part is behind me, and I’m very happy about that! And I have to say, the cardio improvements are even better than I’d imagined.
While this endeavor has renewed my gratitude for the everyday routines that we all sometimes take for granted, I am still definitely in learning mode when it comes to handling setbacks with grace and patience. And the biggest lesson for me – by far – has been the reminder that we are all connected (and that’s a good thing). I have had to depend on people in new ways and I’m happier than ever to lend a hand to others who are going through challenging times.
Thank you again to *everyone* who supported me during my leave, and to all of you for welcoming me back. I’m looking forward to catching up with you in the months to come and hopefully seeing many of you in San Francisco!
For more than thirty years, one of the most prevalent strategies for insider trading has gone undetected and unaddressed. This Article uncovers the techniques by which executives and directors sell overvalued stock worth more than $100 billion per year, shifting losses to ordinary investors. The basic idea is that insiders conceal their suspicious trades by publicly reporting them (as they are required to do) in ways that confuse or discourage investigators.
We develop a taxonomy of concealment strategies, complete with suggestive examples. We then empirically test our taxonomy using a database of essentially all stock trades since 1992. We find that insiders who trade using the subterfuges we describe outperform the market by up to 20% on average.
Worse yet, we find evidence that this simple subterfuge works. Essentially no one has ever been prosecuted for undertaking one of these suspicious trades. Nor do journalists or scholars seem to appreciate them. Accordingly, we call for scholars and prosecutors to cast a wider net in their studies and market surveillance, then discuss implications for the design of insider-trading reporting requirements and related legal rules.
That’s the abstract from “Insider Trading by Other Means,” a new 66-page research paper by Sureyya Burcu Avci, Cindy A. Schipani, H. Nejat Seyhun and Andrew Verstein, which is published in the Harvard Business Law Review. This Bloomberg article points out that this paper isn’t the group’s first foray into insider trading analytics: their earlierresearch on “insider giving” was cited in the SEC’s 2022 rule changes on insider trading and Rule 10b5-1 plans and supported the Commission’s decision to require insiders to report gifts on Form 4 within 2 business days.
Now, the authors are taking aim at Form 4 transaction codes. Specifically, “J codes” that are used to report transactions that don’t fall into any other transaction code category. They are calling for action – and it’s fair to think the SEC Enforcement Division will listen, given its focus on insider trading and fondness for data analytics (and according to a 2004 blog from Alan on Section16.net, they’ve investigated transaction codes before). Here’s an excerpt:
[I]nvestigators have been unduly passive with respect to insider trading proxies. Code J is a strong signal that insider trading may be underway. Investigators should, at the very least, treat suspicious J transactions as worthy of inquiry. Indeed, they should probably go further and prioritize J-coded transactions more aggressively than ordinary S transactions.
This recommendation is even stronger where the filing bears other worrying marks. J transactions are required to include an explanatory footnote. Filings that lack an explanation, or which use the wrong transaction code, are out of compliance with the law. Transactions with the issuer, or distributions from investment funds, may appear to be benign, but our tests indicate that these are especially likely to be suspiciously timed. Accordingly, investigators should take these keywords to be informative proxies.
Most centrally of all, investigators should take late-filed J-coded transactions to be highly suspicious. Our findings indicated intense abnormal returns with J-coded transactions are reported long after the transaction took place. In most cases, these transactions are already improper, and worthy of investigation for that reason. But even if delayed filing is sometimes justified, the overall trend remains strong. Investigators should scrutinize even lawfully delayed J-coded transactions because such transactions are strongly associated with abnormal profits.
Likewise, investigators should examine more closely the transactions between insiders and their corporations. We found that J-coded transactions discussing SEC Rule 16b-3 were suspiciously well timed, despite the SEC’s view that these transactions are often benign. Plainly, the story is more complicated.
When scrutiny unearths false or deceptive Form 4 filings, prosecutors should take aggressive action.
Despite the findings, my own experience is that the vast majority of folks are truly attempting to correctly report transactions under a complex Section 16 regulatory regime. So, how do we stay out of the crosshairs? The authors note that this is an area where “the law abides partially in the craft wisdom about what is commonplace and acceptable” – but they mention a great resource:
Romeo and Dye’s two-volume handbook offers more than 1000 pages of practical guidance, focused just on the details of how to fill out the one-page Form-4 and its peers. Romeo and Dye also publish a treatise on Section 16 law, more generally.
Forgive me for including a shameless plug, but I have to admit I would struggle in my day job if I didn’t have access to Peter and Alan’s vast array of accumulated wisdom. If you aren’t already a member of Section16.net, you should sign up. And more urgently, make sure to catch the star himself, Alan Dye, at our “Proxy Disclosure & 21st Annual Executive Compensation Conferences,” October 14th and 15th! We have an awesome agenda filled with expert practitioners who will share their insights. Alan, Dave, John, Meredith and I love this community and we are very eager to see as many folks as possible in person in San Francisco! Register and book your hotel room today, if you haven’t already done so. Virtual attendance is also still an option if you’re not able to join the party in person!
Earlier this year, I shared on our Proxy Season Blog that Glass Lewis and at least one big asset manager are considering “director commitment policies” as part of their review and voting recommendations/decisions. A blog from Stefan Padfield of the National Center for Public Policy Research recaps the proponent perspective on this topic, with a novel proposal submitted to several companies this past season that requested directors to:
“disclose their expected allocation of hours among all formal commitments set forth in the director’s official bio, with allocation being permissible “on a weekly, monthly, or annual basis.”
The Corp Fin Staff agreed with several companies that this proposal could be excluded from the proxy statement on the basis of micromanagement. Another company did not seek no-action relief, submitting the proposal to a vote by stockholders, where it received support from about 3% of the voting power. But Stefan says the NCPPR is undeterred:
Given the ever-increasing responsibilities of corporate directors, as well as generally increasing demands on their time, limiting oversight of overboarding to counting board seats and CEO spots is unsustainable. Accordingly, we will likely be submitting a similar proposal next season and urging the SEC staff to reconsider its conclusion in Johnson & Johnson. Asking prospective directors how they intend to allocate their hours among their often numerous commitments should not be viewed as improper micromanagement but rather basic accountability fully within the ambit of shareholders to request.
Be on the lookout for more on this topic as we head into 2025…
I’ve blogged before about the “infodemic” of misinformation and widespread mistrust. For a while, companies were able to stay out of the fray. But this op-ed, published in World Finance by activism defense expert Kai Liekefett of Sidley, argues that the epidemic of lying has unfortunately now made its way into proxy contests, damaging the notion of fair director elections. Kai calls for Congress to step in to solve the problem.
Kai shares his view that in recent years, the Corp Fin Staff has been spread thin and has not issued as many comments under Rule 14a-9 as he would expect to see based on questionable statements being made in proxies. Part (a) of that rule says:
No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.
Rule 14a-9 applies not only to companies, but also to dissidents, who Kai says feel more leeway to take liberty with facts. Companies have limited options when faced with what they believe are materially misleading dissident statements. Here’s Kai’s “call for action”:
It is time to protect the integrity of corporate elections and the shareholder vote. Misleading statements, half-truths and outright lies undercut corporate democracy. We believe it is time for Congress to level the playing field. The SEC should receive more resources to monitor proxy contests. In addition, the proxy rules should be tightened and provide the SEC with more authority to sanction violations. For instance, the SEC should have the right to require proxy rule violators to publicly withdraw false statements. The SEC should also be authorised to enjoin proxy contests and impose severe sanctions on repeat violators (freeze-out periods, for example). Lastly, it should be clarified that the mere filing of a complaint with the SEC is insufficient to ‘moot’ a lawsuit over misstatements in a proxy contest.
These changes would correct a fundamental imbalance in our current system between companies and activist shareholders. Simply put, both companies and investors should be held to the same standard. Some may argue that in our free market system, investors should engage in their own research before voting, rather than relying on a government regulatory agency to police proxy contests.
However, in fast-moving proxy fights, even institutional investors do not have the time, resources, or manpower to fact check all statements. Proxy advisory firms like ISS and Glass Lewis, who influence significant portions of the vote, are similarly ill positioned to combat misinformation. Retail shareholders, a major focus of the SEC’s mandate, are even more vulnerable to disinformation in proxy fights. For these reasons, the investor community cannot solve this issue on its own.
Given current trends, it’s already past time for Congress to step in. The SEC takes a leading role to combat misleading or untruthful statements in other contexts – and Congress should enable it to do the same in proxy contests. Lying with impunity should not become a norm in our corporate elections.
Yesterday, the SEC posted a Sunshine Act Notice for an open meeting next Tuesday, August 20th. The agenda includes 3 PCAOB-related matters:
1. The Commission will consider whether to approve the Amendments to PCAOB Rule 3502 Governing Contributory Liability, as adopted by the Public Company Accounting Oversight Board. (For background, see Meredith’s June blog from when the PCAOB adopted this standard.)
2. The Commission will consider whether to approve the new auditing standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit and related amendments, as adopted by the Public Company Accounting Oversight Board. (For background, see Dave’s May blog from when the PCAOB adopted this standard.)
3. The Commission will consider whether to approve the Amendments Related to Aspects of Designing and Performing Audit Procedures that Involve Technology-Assisted Analysis of Information in Electronic Form, as adopted by the Public Company Accounting Oversight Board. (For background, see Dave’s June blog on this topic.)
Along with announcing the open meeting, the Commission posted an extension of the date by which it must act to approve or disapprove the above proposals. The open meeting date falls within the extended date for action.
The SEC’s open meeting agenda reflects that the PCAOB has been very active this year with updating standards, including in ways that affect auditor liability. I blogged yesterday about a lawsuit that alleges that PCAOB disciplinary actions are unconstitutional – which shows that Newton’s third law of motion also applies in the regulatory context.
Hopefully, nobody reading this is currently dealing with a “late filer” situation. But most securities lawyers are faced with this issue at one point or another during their career. This 13-page Winston & Strawn memo is a good, up-to-date resource that covers the multitude of consequences & considerations that a late SEC filing can trigger:
– Notice to the SEC
– Exchange Act enforcement consequences
– Disclosure issues and insider trading concerns
– NYSE and Nasdaq issues
– Form S-3, Form F-3, and WKSI eligibility (including waivers of eligibility requirements and alternative approaches to registration statements during ineligibility)
– Requests for filing date adjustments
– Form S-8
– Form S-4 and Form F-4
– Resales of restricted or control securities
– Indentures and credit agreement covenants
The memo points out that when there’s a late filing, there is often some other big issue happening at the company that demands attention. So, understanding the late filing consequences and preparing in advance for those can alleviate some brain damage during a stressful time. Check out more resources in our “Late SEC Filings” Practice Area.
Even though this is supposedly a lighter time of year for proxy-related matters, we are on alert for issues affecting off-season companies & activities – and we are already looking ahead to 2025. To that end, we continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Following that blog an easy way to stay in-the-know on shareholder proposals, engagement trends and more.
Members can sign up to get that blog pushed out to them via email whenever there is a new post. Here are some of the latest entries:
– More Congressional Backlash for Climate Action 100+
Last week, Nasdaq posted a proposed rule change to modify the delisting process for certain stocks that fail to regain compliance with the exchange’s bid price requirement – so-called “penny stocks.” Specifically:
Nasdaq is proposing to amend Listing Rules 5810 and 5815 to provide that a company will be suspended from trading on Nasdaq if the company has been non-compliant with the $1.00 bid price requirement for more than 360 days. In addition, Nasdaq is proposing to modify the listing standards such that Nasdaq will immediately send a Delisting Determination, as defined in Rule 5805(h), without any compliance period, to any company that becomes non-compliant with the $1.00 minimum bid price requirement if the company effected a reverse stock split within the prior one-year period.
Nasdaq’s proposal states that the cumulative impact of the proposed rule change and a previous 2020 rule would be as follows:
• A company that effected a reverse stock split of any ratio will be subject to delisting if it falls out of compliance with the Bid Price Requirement within one year of the previous reverse stock split.
• A company that effected one or more reverse stock split with a cumulative ratio of 1-for-250 or higher will be subject to delisting if it falls out of compliance with the Bid Price Requirement within two years of the reverse stock split(s).
The rule comes on the heels of another Nasdaq proposal just last month that would apply to companies that use reverse stock splits to regain compliance with bid price requirements – and a new rule from last year about notice and disclosure requirements for reverse splits. (With all of these complexities, members should make sure to check out our “Stock Splits” Practice Area when navigating any splits or reverse splits.)
This blog from Cooley’s Cydney Posner says that Nasdaq’s latest proposal is at least partially responsive to a rulemaking petition that took issue with penny stocks trading on national exchanges. And this WSJ article explains why Nasdaq in particular is taking heat – with 421 penny stocks listed on Nasdaq as of last Thursday, out of the 509 total exchange-listed stocks that were trading below $1 per share. The article also says that exchange-listed companies carried out a record 495 reverse splits last year – and added another 249 in the first half of this year.
Nasdaq’s rule proposal has not yet been posted for notice on the SEC website and will need to be approved before going into effect.