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.
In a recent decision in In re Lottery.com Securities Litigation, (SDNY 2/24), a federal judge held that corporate statements concerning preliminary results for a completed quarter constituted “forward looking statements” protected under the “bespeaks caution” doctrine. The case arose out of a series of allegedly false and misleading statements by the target of a de-SPAC transaction made before and after completion of the merger.
One of the challenged statements was an October 21, 2021 press release announcing the company’s results for its third fiscal quarter, which ended on September 30, 2021. The plaintiffs alleged that since the results disclosed were for a completed quarter, they should not be regarded as forward looking statements. The Court disagreed:
The 10/21/21 Press Release’s statements regarding Lottery’s preliminary revenue results are nonactionable under the bespeaks-caution doctrine because they, too, are “statements whose truth [could not] be ascertained until some time after the time they [we]re made.” In re Philip Morris, 89 F.4th at 428 (citation omitted). Plaintiffs contend that these statements were “simply not forward-looking” because they “concern[ed] revenue results for Q3 2021, a quarter that had already closed when the statement was made.” Lottery Class Opp. at 13.
Although this line of reasoning has some intuitive appeal, the Court disagrees. When applying the bespeaks-caution doctrine, courts in the Second Circuit generally treat “corporate statements of projections as to corporate earnings” as forward-looking statements, “without regard to whether the last day of the covered earnings period had passed.” Lopez v. Ctpartners Exec. Search Inc., 173 F. Supp. 3d 12, 39 (S.D.N.Y. 2016).
Citing the Lopez case, the Court went on to say that just because a quarter has been completed, that doesn’t mean its results have been finalized, and that insofar as a press release offers a “preliminary” calculation of those results “based on currently available financial and operating information and management’s preliminary analysis of the unaudited financial results for the quarter,” it involves forward-looking statements.
In January, the voluntary compliance period under the SEC’s Filing Fee Modernization Rule began and filers became eligible to voluntarily file fee data in Inline XBRL format. Yesterday, the SEC announced that it had posted “How do I” guidance on preparing iXBRL fee exhibits. If you’re not feeling particularly motivated to click through to the SEC’s website this morning, here’s the guidance in its entirety:
Filers can prepare an Inline XBRL filing fee exhibit (EX-FILING FEES) and submit it to EDGAR for processing with an option to construct structured filing fee information within EDGAR using the Fee Exhibit Preparation Tool (FEPT).
Filers using the FEPT to prepare an Inline XBRL Filing Fee exhibit as part of EDGAR Link Online (ELO) should refer to the EDGAR Filing Fee Interface Courtesy Guide (PDF, 1.2 mb). FEPT includes features such as prompts, explanations, and automated calculations to produce a filing fee exhibit in submission-ready format. Filers using FEPT to construct the EX-FILING FEES in EDGAR generally will receive error and warning messages before they submit both test and live filings.
Filers using XBRL should refer to the EDGAR XBRL Guide (Filing Fee Extract) (PDF, 0.5 mb). Constructing the Filing Fee Exhibit outside of FEPT, however, will provide filers with error and warning messages after they submit both test and live filings.
EDGAR will validate the Inline XBRL fee data submission and generally will issue warnings for any validation failures caused by incorrect or incomplete structured filing fee-related information until an announced date of approximately November 1, 2025, when it will suspend filings rather than issue warnings.
Note that accelerated filers will be required to submit fee data in iXBRL beginning on July 31, 2024 and all other filers will be required to do so on July 31, 2025.
The latest issue of The Corporate Counsel has been sent to the printer. It is also available now online to members of The CorporateCounsel.net who subscribe to the electronic format. The issue includes the following articles:
– Enforcement: What the SEC’s Record-Setting Year Means for Disclosures & Compliance
– Related Person Transactions: Navigating Common Transaction Types & Disclosure Issues
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According to a recent Bloomberg Law article, the percentage of S&P 500 companies including AI-related disclosure in their 10-Ks has increased from 28% in 2021 to 41% in 2023. That trend hasn’t escaped the SEC’s notice. As Dave noted in a recent blog, Corp Fin Director Erik Gerding recently observed that the Staff is focused on AI disclosures in SEC filings and cautioned that, among other things, companies need a basis for their claims.
That message was re-enforced by SEC Chair Gary Gensler in a speech delivered at Yale Law School earlier this week. Chair Gensler covered a wide range of AI-related topics in his remarks, and at one point zeroed in on the issue of “AI washing”:
As AI disclosures by SEC registrants increase, the basics of good securities lawyering still apply. Claims about prospects should have a reasonable basis, and investors should be told that basis. When disclosing material risks about AI—and a company may face multiple risks, including operational, legal, and competitive—investors benefit from disclosures particularized to the company, not from boilerplate language.
Companies should ask themselves some basic questions, such as: “If we are discussing AI in earnings calls or having extensive discussions with the board, is it potentially material?”
These disclosure considerations may require companies to define for investors what they mean when referring to AI. For instance, how and where is it being used in the company? Is it being developed by the issuer or supplied by others?
Gary Gensler’s message about avoiding “boilerplate” echoed another comment from Erik Gerding referenced in Dave’s blog. The Corp Fin director also observed that the Staff is seeing a lot of boilerplate in AI disclosures, particularly in the “Risk Factors” discussion. By the way, this is the second time in less than three months that the SEC Chair has flagged AI washing as a big area of concern for the SEC in public remarks. I guess public companies can’t say they haven’t been warned.
CEOs at companies involved in high-profile financial reporting or governance scandals often find themselves out of a job and face difficulties finding new executive positions. Interestingly, a new study points out that these “tainted” CEOs don’t face the same challenges when it comes to keeping existing board seats or obtaining new ones.
The study concludes that the likely explanation for this is that the value they add outweighs their baggage, which can be managed by limiting their role on the board. Here’s an excerpt from a recent CLS Blue Sky blog by the authors of the study:
Our empirical tests yield five key findings. First, firms with powerful CEOs or weak monitoring are not more likely than other firms to appoint tainted executives to their boards. In contrast, tainted executives tend to join the boards of less visible firms or those with greater advising needs. Second, firms generally avoid placing tainted directors on nominating and governance committees, both of which have important monitoring responsibilities. Instead, these directors often serve on committees that play more of an advisory role.
Third, the skills of tainted and non-tainted appointees are similar, and the evolution of board-level skills is comparable in firms appointing tainted and non-tainted executives to their boards. Fourth, after appointing tainted executives to their boards, firms perform better than a matched control sample. This effect is more pronounced for firms with greater advising needs. Importantly, firms with tainted appointees are not monitored less effectively.
The study also says that shareholder satisfaction with board’s performance remains stable or even improves after these tainted CEOs become directors, suggesting that their appointments meet the needs of the board.
We’ve posted the transcript for our recent webcast – “The ABCs of Schedule 13D and Schedule 13G”, which featured Barnes & Thornburg’s Scott Budlong, Simpson Thacher’s Jennifer Nadborny, Gibson Dunn’s David Korvin and Gunderson’s Andrew Thorpe. The webcast covered the following topics:
– Overview of Schedule 13D and 13G requirements
– Amendments to Schedule 13D and 13G filing deadlines
– Amendments and Guidance on Derivative Securities
– Guidance on Schedule 13D “groups”
– Recurring beneficial ownership reporting issues
– Implications of the amendments and guidance for activism and hostile M&A
Our panelists provided insights into the basics of beneficial ownership reporting, the changes to the reporting scheme resulting from the amendments, and the implications of the SEC’s new guidance on cash settled derivatives and Schedule 13D “group” formation.
