The rumor mill cranked into high gear last week for the SEC’s final climate disclosure rule – with many outlets – including Politico and Forbes – reporting that the final rules are being internally circulated. Here’s an excerpt from the Forbes article:
According to Declan Harty of Politico, the final draft of the proposal is currently being circulated to commissioners for their consideration. If his sources are correct, this indicates that a vote will take place during the first quarter, probably sometime in March.
A rule adopted in 2024 will go into effect in 2026, which aligns with other global developments in this area including the European Union’s European Sustainability Reporting Standards. Domestically, California is developing their own reporting standards utilizing the same timeline.
However, the passage by the SEC will not be the final word in this development. Expect the Republican controlled House of Representatives to utilize their oversight authority to revoke the rule. The timing of that action will most likely be tied to the 2024 elections, and the likelihood that Republicans maintain control of Congress and gain control of the White House. With the rule not going into effect for almost two years, Congress can wait until after the election to override the rule. If they act now, President Biden will most likely veto, as he did when Congress overrode the Department of Labor rule allowing ESG considerations in retirement plans.
The article notes that we can also expect legal challenges if and when the rule is adopted. The Commission is well aware of that and will be working to ensure that the final release can be solidly defended against those attacks.
So far, the SEC hasn’t announced an open meeting to vote on this matter – but a lot of folks are sure to be watching for an announcement. Many had already been wagering on early March due to the Congressional Review Act and the SEC’s Reg Flex Agenda. But keep in mind that there could still be a lot to do behind the scenes even after a draft rule is circulated. When it comes to specific timing, we won’t know until we know!
Among the reports circulating last week about the SEC’s climate disclosure rule were a few – e.g., from Reuters and the WSJ – that the draft that is being internally circulated does not include a reporting requirement for Scope 3 emissions.
Eliminating the proposed “Scope 3” disclosure requirement would not be too surprising based on the comments that emphasized what a heavy lift this would be for private companies in the supply chain, the questions on whether there are reliable ways to collect & calculate these emissions, and the signals that major asset managers have been sending since the time the rules were proposed. But at many companies, “Scope 3” is the biggest part of their emissions. So, dropping that aspect of the rule would make a big difference in what’s reported – at least, in the US. Here’s more detail from Reuters:
If adopted, the new draft would represent a win for many corporations and their trade groups that lobbied to water down the rules. But it would also deviate from European Union rules which make Scope 3 disclosures mandatory for large companies starting this year and potentially complicate compliance for some global corporations.
The SEC’s original draft proposed mandatory disclosure of emissions for which companies are more directly responsible, dubbed Scope 1 and Scope 2. Some lobbyists pushed the SEC to require such disclosures only if they are material to a company’s business. Reuters could not ascertain whether the latest draft changed the Scope 1 and 2 requirement threshold.
See this blog from Cooley’s Cydney Posner for more detail on the back & forth on Scope 3. Stay tuned!
The SEC’s final rules on SPACs (and de-SPACs) – which were adopted almost exactly a month ago – have been published in the Federal Register. That means that the compliance date for most of the rules is July 1st of this year, and the compliance date for iXBRL tagging is June 30, 2025. The final rules will require additional disclosures in SPAC IPOs and de-SPAC transactions and heighten liability risks for those involved.
Of course, the rule also included guidance on “investment company” status, which is already in play. As I blogged last month, that aspect of the release – and the part about projections – is something that all companies should care about.
Securities lawyers aren’t exactly known to be “early adopters” of new technology. We tend to be skeptical. But the latest leap in “AI” capabilities is hard to ignore. This Gibson Dunn memo gives examples of how data analytics and artificial intelligence can make disclosure compliance work easier and better – and explains why you should get up to speed sooner rather than later. Here’s an excerpt:
There are several ways companies could use data analytics technology to assess and mitigate the risks posed by current and coming disclosure requirements. As an initial matter, companies could use some of the third-party tools described above to test their data and disclosures.[45]
Companies could use existing data sets of SEC comment letters and enforcement actions to develop their own lists of SEC hot topics and trends. Companies could use data analytics technology to compare the disclosures of peer companies and compare those disclosures against their own. This type of analysis could help companies identify whether peers are handling their disclosures differently and inform changes to their disclosures if the analysis identifies gaps. Especially in uncertain or new regulatory environments, such as the SEC’s new cybersecurity reporting rules and its proposed emissions reporting rules, evaluating and learning from the disclosures of peer firms is an important way to mitigate risk. Data analytics technology can make that process more efficient and dynamic.
Companies could also employ data analytics technology to learn from the mistakes peer companies have made with their disclosures. For example, companies could analyze SEC or Environmental Protection Agency (EPA) enforcement actions and identify the issues that triggered regulatory scrutiny. Data analytics technology could enable analysis of a vast number of relevant enforcement actions to discern key compliance errors or patterns of enforcement. Companies could also cross reference the disclosures of peer companies against SEC or EPA enforcement actions to identify which disclosures triggered investigation and enforcement.
Looking inward to the company’s own data, data analytics technology could be used to evaluate internal controls and monitor and analyze hotline or whistleblower complaints. Similarly, companies could employ data analytics technology to analyze their own historical disclosures and compare them against current enforcement priorities and new regulations to determine what the potential risks are and what, if any, sections of the disclosures need to be updated or modified.
The memo also shares ways that data analytics can be used to mitigate activism and litigation risks, address fraud and non-compliance, combat corporate misinformation, and more. The memo cautions that AI still has plenty of shortcomings and cannot be fully trusted. That said, regulators, activists, and plaintiffs are already using this technology – so companies (and their advisors!) will be at a disadvantage if they don’t understand its capabilities. I, for one, will be welcoming our robot overlords with open arms.
Earlier this week, the U.S. Chamber of Commerce announced that it had teamed up with other business organizations to file a lawsuit against the state of California over its new climate disclosure laws. Here’s what my colleague Zach Barlow shared about this development on PracticalESG.com (also see this WSJ article):
California Climate Disclosure Bills SB 253 and SB 261 are being challenged in a new lawsuit brought by the American Chamber of Commerce. The lawsuit argues that the bills are unconstitutional on two main grounds:
1. The laws violate the First Amendment by compelling speech.
2. The federal government preempts California through the Clean Air Act and the Dormant Commerce Clause.
“Both laws unconstitutionally compel speech in violation of the First Amendment and seek to regulate an area that is outside California’s jurisdiction and subject to exclusive federal control by virtue of the Clean Air Act and the federalism principles embodied in our federal Constitution. These laws stand in conflict with existing federal law and the Constitution’s delegation to Congress of the power to regulate interstate commerce. This Court should enjoin the Defendants from carrying out the State’s plan.”
This case is not only important to the California laws, but could also shed light on what a challenge to the SEC’s upcoming Climate Related Disclosures could look like. In a case against the SEC’s rule, compelled speech will certainly be raised as an issue and this case could give us an idea of how persuasive that argument will be for the courts. Additionally, point number 2 is likely to be inverted in a future SEC challenge. Instead of arguing that the state is preempted because the federal government has the sole power to regulate emissions, the argument could invoke the Major Questions Doctrine and argue that the SEC as a federal agency doesn’t have statutory authority to regulate emissions – an argument made in comments to the SEC proposal.
The arguments here are interesting and success on either point could mean the end of SB 253 and SB 261 and introduces more uncertainty about the future of the laws. In January, it was revealed that a budget shortfall would hamstring funding for the bills’ implementation. It’s unlikely that we’ll have concrete answers about the bills’ future anytime soon as the legal challenge will take time. Whatever the initial outcome, the losing party is likely to appeal.
It’s podcast week! I am happy to share another “Timely Takes” podcast – which is indeed very timely as we enter the height of proxy season. In this 13-minute episode, John interviews Alexander McClean and Margaret Rhoda of Harter Secrest & Emery about:
1. Significant new SEC disclosure requirements
2. Recently adopted disclosure requirements that won’t apply in 2024
3. ISS & Glass Lewis 2024 policy updates
4. Advice for companies tackling their annual disclosure obligations
I’m finding that these episodes are perfect for the morning commute. If you’d like to join John or Meredith for a podcast to share insights on a securities law, capital markets or corporate governance topic, please reach out to them at john@thecorporatecounsel.net or mervine@ccrcorp.com.
Since 1972, the SEC has had a policy that defendants that settle civil claims with the Commission can’t go out afterwards and deny the allegations – which is not-so-affectionately known as the “gag rule.” Earlier this week, the Commission swatted down the latest attack on that rule – by denying a rulemaking petition from the “New Civil Liberties Alliance.” Those are the very same folks who are leading the charge against the Chevron defense in Relentless v. Dept. of Commerce – and who have engineered the SEC v. Cochran challenges to the SEC’s administrative law judge system.
SEC Chair Gary Gensler took the opportunity to make a statement about the benefits of the settlement policy. Here’s an excerpt:
Entering into a settlement is a consequential choice for both the SEC and the defendant. The Commission, in agreeing to settle a case, is relinquishing the opportunity to present the case in court. The defendant, on the other hand, relinquishes the right to defend the case in court, in the press, and in the eyes of the public. Both parties are agreeing to a set of terms based upon this 1972 policy.
More than 50 years on, I think this policy has served the public and the Commission well. I believe that amending this policy in the manner proposed by the Petitioner would alter the impact of enforcement settlements if defendants could deny any wrongdoing in the court of public opinion and dismiss sanctions as the cost of doing business without the Commission being able to revive its ability to have its day in court.
He also implies that the settlement orders are “required reading” for anyone else who wants to stay out of trouble:
Further, an essential component of settlements is the public recitation of the facts. It informs the market as to what conduct is violative of the securities laws. It alerts investors that the Commission seeks to deter that conduct, and it helps other market participants comply with the law. A settlement that allows the denial of wrongdoing undermines the value provided by the recitation of the facts, and it muddies the message to the public.
As you can imagine, the “neither admit nor deny” policy is not roundly supported by companies and other defendants. It’s also drawn harsh criticism – on 1st Amendment grounds – from a federal court. You know who else isn’t a fan? SEC Commissioner Hester Peirce. Here’s an excerpt from her lengthy dissent from this week’s decision to deny the NCLA rulemaking petition:
The demand by the government that a defendant waive a fundamental constitutional right as a condition of settlement ought to be supported by a compelling rationale. Yet, as discussed above, the Commission’s rationale of record—that the no-deny policy is necessary to “avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact occur”—lacks firm footing. It would look bad if the SEC’s settlements were shown to be baseless, unfairly negotiated, or legally flawed. The most logical solution to that concern, however, is to make sure that settlements are rooted in fact, are fairly negotiated, and are legally sound. Employing superior bargaining power to extract an agreement that defendants agree not to denigrate the settlement is a suboptimal solution.
In the end, far from shoring up the Commission’s integrity, the reliance on these no-denial conditions undermines it. More than a decade ago, a court aptly explained the problematic perceptions that flow from the Commission’s practice of settling without admissions and prohibiting denials:
[H]ere an agency of the United States is saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.”
Keep in mind that when it comes to the “neither admit nor deny” policy, things could be worse! I don’t know the extent to which this materialized, but a couple years ago, Enforcement Director Gurbir Grewal indicated that the Staff and Commission might get more aggressive in requiring admissions as a condition to settlement, meaning that defendants would end up with a one-sided condition of “no deny.” My guess is that this is little consolation to the NCLA. Given their recent track record in court, perhaps there will be more to come…
Meredith blogged last year that the requirement for auditors to identify “critical audit matters” has not been living up to the PCAOB’s hopes & dreams. But based on a 3-year review of CAM trends from Ideagen Audit Analytics, it’s not because the requirement has somehow been overlooked. According to the report, 65% of 2022 opinions identified at least one CAM. This blog from Cooley’s Cydney Posner covers which topics have been most prevalent:
But taking a deeper dive, IAA pooled the CAMs related to many business combinations—asset valuation, fair value and impairment—and the result was the most common CAM subject: according to IAA, 33% of all FY2022 opinions with CAMs included a CAM for fair value of assets, exceeding the single subject total percentage for revenue recognition in FY2022. IAA notes that fair-value-related CAMs hit their highest percentage in FY2020 at 30% of total CAMs, which IAA attributes to “the uncertain forecasts indicating potential impairment during the pandemic.”
Among industries, IAA reports, CAMs regarding revenue from customer contracts were disclosed most frequently by “companies in the manufacturing industry, at 1,049 CAMs, and the services industry, at 1,045, each representing 39% of all CAMs with that topic.” It was also the most common CAM topic for companies in the manufacturing, services and construction industries. IAA observes that different characteristics of each industry may lead auditors to focus on specific audit areas.
Overall, as Cydney notes, the study flags revenue recognition from customer contracts as the most common CAM, at 13% of CAMs over the three-year period.
If you’re a geek for corporate governance, make sure to check out this 15-minute episode of our “Women Governance Trailblazers” podcast. Abby Adlerman joined us to discuss what’s going on in boardrooms – and how to keep up. Abby is CEO and founder of Boardspan, which provides measurement & analytics tools to boards. We discussed:
1. Abby’s career journey in corporate governance & finance – as an accomplished investment banker, e-commerce startup founder, Managing Director at Russell Reynolds, and CEO and founder of Boardspan.
2. Abby’s approach to keeping up with the dynamic corporate governance landscape, the biggest pivots that she has seen in the past few years, and what boards should be doing about AI.
3. The nature of conversations Abby has with boards, and how that has changed over time.
4. A usable framework for measuring culture at the board level.
5. What Abby thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
I co-host “Women Governance Trailblazers” with Vontier’s Courtney Kamlet. We’ve been doing monthly interviews for almost 5 years! To listen to any of our prior episodes, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
CalSTRS recently announced that its Investment Committee has approved changes to the pension fund’s Corporate Governance Principles and Stewardship Priorities – both of which will be in place for a three-year cycle. I blogged last week on CompensationStandards.com about the changes that affect executive compensation and compensation (and human capital) committees. In addition, the Corporate Governance Principles incorporate changes in these areas:
– Standardized global sustainability disclosure standards – CalSTRS endorses the International Sustainability Standards Board (ISSB) Standards.
– Boards of directors’ responsibilities – Including employee wellness factors, such as workforce diversity, pay, benefits, hiring, retention and business culture.
– ESG risks and opportunities – On this, CalSTRS says it believes responsible corporate governance, including the management of environmental, social, and governance factors, can benefit long-term investors like CalSTRS. It is important for companies to consider ESG issues to ensure they are long-term sustainable companies and have considered and addressed all risks and opportunities that could affect the livelihood of the business.
The Principles also explain why it makes sense for CalSTRS to look at whether portfolio companies are managing ESG issues – for engagements as well as investment decisions:
CalSTRS’ investment activities impact other facets of the economy and the globe. As a significant investor with a long-term investment horizon, the success of CalSTRS is linked to global economic growth and prosperity. Actions and activities that detract from the likelihood and potential of sustainable global growth are not in the long-term interests of the Fund. Consistent with its fiduciary responsibilities, CalSTRS adopted the Investment Policy for Mitigating Environmental, Social and Governance Risks to ensure that the corporations and entities in which CalSTRS invests strive for long-term sustainability in their operations.
The Investment Policy, in turn, says that to assist CalSTRS Staff and external investment managers in their investment analysis and decision-making, CalSTRS has developed a list of ESG risk factors that should be considered as part of the financial analysis of any active investment decision. For passive index strategies, CalSTRS uses the ESG risk factors to guide engagement activities. The topics that CalSTRS considers ESG risk factors are listed in an exhibit to the Investment Policy.
The 18-page Principles also address the pension fund’s expectations for risk oversight, political contribution policies, overboarding, evaluation & succession planning, auditor rotation, bylaw amendments, bundled proxy proposals, and more. If your company is one of the 9,000 in the CalSTRS’ portfolio – which you can check on this page – then you should know that these Principles will be used as a voting framework at your AGMs – and the Stewardship Priorities will guide engagements.
All that said, CalSTRS’ voting policies are pretty workable – at least on their face. Many of the policies – especially the ones on “ESG” – are phrased as expectations and do not expressly state that the fund will vote against directors if the company falls short. You’ll hear about it in engagements and may see escalation over time, but CalSTRS says it wants to work with portfolio companies to find reasonable outcomes that support long-term value.
