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Yesterday, the SEC announced this 98-page release to re-propose amendments to Reg M that would remove the references to credit rating agencies from existing exceptions provided in Rule 101 and Rule 102. Section 939A of the Dodd-Frank Act directed the Commission to remove references to credit ratings included in certain rules, and this is the SEC’s third attempt for these particular amendments: they were initially proposed in 2008, and then re-proposed in 2011. The Fact Sheet explains what the proposal aims to do:
Proposed Amendments to Regulation M
The Commission proposed to remove the requirement that nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities be rated investment grade by at least one nationally recognized statistical rating organization. In place of that requirement, under Rule 101, the Commission proposed to except (1) nonconvertible debt securities and nonconvertible preferred securities of issuers having a probability of default of less than 0.055%, as measured over certain period of time and as determined and documented using a “structural credit risk model,” as defined in the rule, and (2) asset-backed securities that are offered pursuant to an effective shelf registration statement filed on the Commission’s Form SF-3. The Commission proposed to eliminate from Rule 102 the existing exception for investment grade nonconvertible debt securities, nonconvertible preferred securities, and asset-backed securities.
Recordkeeping Requirement
To aid the Commission in its examination and oversight of broker-dealers who aredistribution participants or affiliated purchasers and rely on the proposed exception in Rule101 for certain nonconvertible debt securities and nonconvertible preferred securities, newparagraph (b)(17) of Rule 17a-4 would require those broker-dealers to retain the writtenprobability of default determination supporting their reliance on the exception. Rule 17a-4(b)(17) would require broker-dealers relying on Rule 101’s exception for certainnonconvertible debt securities and nonconvertible preferred securities to preserve, for aperiod of not less than three years, the first two years in an easily accessible place, the written probability of default determination.
The comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer. We’ll be posting memos in our “Credit Ratings” Practice Area.
Yesterday, the SEC posted a Sunshine Act Notice for an open meeting of the Commissioners to be held next Wednesday, March 30th, which will also include Staff from Corp Fin and the Division of Investment Management. Here’s what’s on the agenda:
The Commission will consider whether to propose amendments regarding special purpose acquisition companies, shell companies, the use of projections in Commission filings and a rule addressing the status of special purpose acquisition companies under the Investment Company Act of 1940.
Pedal to the metal, everyone. Let’s recap this week so far, which still has two business days remaining:
For members, we’ll be keeping our cheat sheet updated – bookmark it to keep up on significant developments. And if anyone at the Commission is reading this, I want to personally thank you – first & foremost, for your hard work on all of these topics, but also, for thoroughly rewarding my procrastination on the blogs this week.
With final rules under the Holding Foreign Companies Accountable Act adopted late last year, the SEC now has a process in place to fulfill the statute’s requirement to identify companies that use auditors that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority of a foreign jurisdiction where the firm is located. The Staff has now started to list provisional & final determinations of identified issuers in charts on this page.
Six companies have been provisionally identified so far and have 15 business days to submit evidence disputing the identification. The Commission’s role at this stage of the process is solely to identify issuers that have used public accounting firms to audit their financial statements that the PCAOB has determined that it is unable to inspect or investigate completely – and it urges companies to consult the adopting release for information on how the HFCAA will be implemented.
Corp Fin issued some M&A-related CDIs yesterday. Here’s what John had to say about them on the DealLawyers.com blog this morning: Yesterday, the SEC’s Division of Corporation Finance issued a handful of new CDIs relating to M&A topics. Here are links to the individual CDIs & a brief summary of the issues they address:
Exchange Act Form 8-K
– CDI #102.04 – The material terms and conditions of an acquisition agreement that should be disclosed in an Item 1.01 Form 8-K.
– CDI #102.05 – Whether the acquisition agreement should be filed as an exhibit to the Item 1.01 Form 8-K.
Proxy Rules & Schedules 14A/14C
– CDI #101.02 – When a private target that isn’t soliciting its own shareholders may be viewed as engaged in a “solicitation” of the acquirer’s shareholders.
– CDI #132.01 – The availability of Rule 14a-12 for communications by a private target under the circumstances described in CDI #101.02.
– CDI #132.01 – The availability of Rule 14a-12 for communications by an acquirer relating to a transaction for which the target is soliciting proxies but the acquirer is not.
Tender Offers & Schedules
– CDI #166.01 – Guidance on the circumstances under which the Staff will not object to will not object to purchases by the SPAC sponsor or its affiliates outside of the redemption offer.
Our “Audit Fees” Handbook notes that shareholders tend to question auditor independence if a company’s proxy statement indicates that fees paid for non-audit services are more than 20-30% of the total fees received by the independent auditor. According to this scoop from WSJ reporter Dave Michaels, the SEC is also looking into that:
Regulators are carrying out a sweeping investigation of conflicts of interest at the nation’s largest accounting firms, asking whether consulting and other nonaudit services they sell undermine their ability to conduct independent reviews of public companies’ financials, according to people familiar with the matter.
The Securities and Exchange Commission probe highlights the agency’s new focus on financial-market gatekeepers such as accountants, bankers and lawyers. These firms help companies raise capital and communicate with shareholders, but also have duties under federal investor-protection laws. Auditors are a shareholder’s first line of defense against sloppy or dodgy accounting.
This write-up from Francine McKenna provides even more context and notes that it’s somewhat surprising that the SEC’s Miami office appears to be leading this inquiry. But, the investigation certainly aligns with recent statements out of Washington from the SEC’s Acting Chief Accountant.
What does this mean for companies? Well, this is definitely not a new issue. But the extra attention may mean that audit committees need to start exercising even more scrutiny over fees for non-audit services. It’s never a great look for a company to have to defend the independence of its auditor.
Tune in to CompensationStandards.com at 2pm Eastern tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer discuss the latest areas of focus for compensation committees, especially given today’s environment & their expanding ESG-related responsibilities. You’ll also get a preview of how 2022 proxy season is shaping up!
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
The proposed amendments to the Commission’s rules would require that public companies include extensive quantitative and qualitative information about climate change in their annual reports and registration statements. The earliest that these disclosures would be required if adopted is in 2024 for the largest public companies. The rule proposals are wide ranging and would require that companies add new sections to their annual reports and registration statements that would provide details about climate change matters that are today often disclosed in separate communications outside of the SEC reporting system.
Most significantly, the SEC would require specific disclosure of a public company’s direct GHG emissions (Scope 1) and indirect GHG emissions (Scope 2), as well as indirect emissions form upstream and downstream activities (Scope 3), but in the case of Scope 3 emissions only if material or if the company has set a goal that includes Scope 3 emissions. Disclosures about Scope 3 emissions would be subject to a safe harbor for liability under the federal securities laws and would not be required from smaller reporting companies. For disclosures concerning Scope 1 and Scope 2 emission, companies would be required to file an attestation report covering the disclosures and to provide certain related information about the service provider that prepared the attestation report, which need not be an independent auditor but must meet certain requirements. If these requirements were adopted, public companies would have to rapidly develop processes and procedures that will support the public disclosure of this information in SEC filings.
Among other provisions, the proposed rules would require specific information about climate-related goals or targets that have been set by public companies, including the scope of such goals or targets, data demonstrating progress in meeting such targets, the plans for meeting the goals or targets and information about the use of carbon offsets or renewable energy certificates. Such disclosures, to the extent they are forward-looking, would be protected from certain liability provisions by the safe harbor for forward-looking statements in the Private Securities Litigation Reform Act.
While the Commission did not select one set of standards regarding climate change as the basis for these proposed disclosure requirements, it did model the proposed climate-related disclosure framework in part on the TCFD’s recommendations and also draws upon the GHG Protocol. In this way, certain of the proposed disclosure requirements will be familiar to those public companies that are already providing information under these pre-existing standards.
The breadth and complexity of the Commission’s proposal is certain to draw a significant amount of comment from interested parties, and there will certainly be threats of potential litigation if the rules are adopted in a manner similar to the proposals. As a result, it could prove challenging for the SEC to bring these proposals to final adoption and to implement them in the time frames that have been proposed.
Check out Lawrence’s blog today on PracticalESG.com for more details about the proposal. He’ll be following up with more analysis in blogs over the coming week and beyond. We’ll also be posting memos in our “ESG” Practice Area on this site.
For a great discussion of practical points that you’ll need to understand, join us at 1pm ET on April 12th for our webcast – “Parsing the SEC’s New Climate Disclosure Proposal.” This program will bring together perspectives from high-level former Corp Fin Staffers – Sidley’s Sonia Barros and MoFo’s Dave Lynn – along with Travelers’ Chief Sustainability Officer & Group General Counsel Yafit Cohn and NuStar Energy’s Executive Director of Sustainability & ESG Mike Dillinger, and PracticalESG.com Editor Lawrence Heim. This webcast is free for members of TheCorporateCounsel.net and PracticalESG.com. If you aren’t already a member, email sales@ccrcorp.com.
While big institutional investors push the SEC for climate disclosure rules that would make it easier to compare corporate info, the grassroots effort among smaller shareholder proponents also shows no signs of stopping. Climate proposals are proliferating in both number & type, according to the 112-page “Proxy Preview” issued last week by As You Sow, Si2 and Proxy Impact. Here’s an excerpt (also see the resources in our “Proxy Season” and “Shareholder Proposals” Practice Areas):
Climate change has jumped to the top of the proxy season agenda this year and is the biggest single topic. Climate-related concerns undergird a growing number of proposals that seek consistency between corporate policy and political influence, too. Resolutions about environmental management also implicitly address the climate, but so do new human rights resolutions about environmental justice. In all, there are 145 proposals about the environment, up substantially from 91 last year.
The report also shares these stats:
– The number of proposals specifically on climate change has nearly doubled to 110, up from 79 last year.
– A striking change is the near-total focus on greenhouse gas (GHG) emissions targets, with most proposals asking for a transition to net-zero status by 2050. Only eight ask about deforestation and water. Sixty-eight of the 101 resolutions about carbon asset risk address emissions (up from 29 at
this point last year).
– Proponents are starting from a position of strength established last year when average support for climate proposals topped 50 percent for the first time.
– New proposals are targeting use of carbon offsets, accounting & reporting controls for emissions, cryptocurrency carbon footprint, financing of fossil fuels, and social inequities relating to a “just transition”
– After gradually diminishing from a high of nearly 50 proposals 10 years ago, the number of environmental management proposals has risen again, to 35, with more likely. These include proposals about plastics, repairing products to reduce waste, chemical footprints, agricultural practices, and mining.
These trends don’t just create headaches for management and securities lawyers – they’re affecting director support. That’s one reason why creating, maintaining & disclosing a viable net-zero transition plan is becoming so important.
Join us tomorrow at 2pm ET for the webcast – “Shareholder Insights: 2022 Priorities” – to hear from Council of Institutional Investors’ Glenn Davis, Dimensional Fund Advisors’ Kristin Drake, Sustainable Governance Partners’ Rob Main, and Federated Hermes – International’s Tim Youmans. We’ll be discussing key priorities, voting policy adjustments and how to maximize engagement opportunities during the heart of the proxy season.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
