Last week, Meredith blogged about the debate over the possibility that the SEC’s climate rules might contain a “back door” through which Scope 3 emissions disclosures might be required. During the ABA Business Law Section’s “Dialogue with the Director” held on Friday, Corp Fin Director Erik Gerding confirmed that quantifying Scope 3 emissions in SEC filings is purely voluntary, and that the agency didn’t intend to introduce the possibility of a back door Scope 3 disclosure requirement. That’s welcome reassurance, but at the risk of being accused of seeing ghosts, I still think that some companies may face tough decisions about whether to “voluntarily” disclose Scope 3 emissions data.
In his remarks, Director Gerding acknowledged that while the rules don’t require Scope 3 disclosure, registrants with transition plans or targets & goals incorporating reductions in Scope 3 emissions will need to describe qualitatively how they are managing that process. That’s where I think things might get a little sticky, because the disclosure called for by the relevant Reg S-K line items is pretty granular. For example, Item 1504 requires registrants to address the following in their targets & goals disclosure:
– The scope of activities included in the target;
– The unit of measurement;
– The defined time horizon by which the target is intended to be achieved, and whether the time horizon is based on one or more goals established by a climate-related treaty, law, regulation, policy, or organization;
– If the registrant has established a baseline for the target or goal, the defined baseline time period and the means by which progress will be tracked; and
– A qualitative description of how the registrant intends to meet its climate-related targets or goals.
In addition, registrants must disclose any progress made toward meeting the target or goal and how any such progress has been achieved. Registrants are also required to discuss any material impacts to the business, results of operations, or financial condition directly resulting from the target or goal or the actions taken to make progress toward meeting it, and to provide quantitative and qualitative disclosures about material expenditures and impacts on financial estimates and assumptions directly resulting from the target or goal or actions take to make progress toward it.
As Sullivan & Cromwell pointed out in its memo on the climate change rules, “[g]iven the broad scope of the disclosure requirements under Item 1504, a company may need to disclose Scope 3 emissions metrics on an annually updated basis if it has a Scope 3 emissions reduction target that has materially affected, or is reasonably likely to materially affect, its business, results of operations or financial condition.”
I think the Staff is likely to take a hard look at Item 1504 disclosures during the review process. In light of Director Gerding’s comments, I doubt very much that the Staff will call for disclosure of Scope 3 emissions data in comment letters, but unless it applies a light touch, some of the comments on Item 1504 disclosure for companies with Scope 3 targets & goals could prove to be difficult to resolve. It seems plausible to me that after going a few rounds with the Staff on these comments, some companies may decide to “voluntarily” disclose Scope 3 data in order to resolve them.
One of the things that makes cybersecurity compliance particularly challenging is the mosaic of privacy and data protection laws and regulations that companies have to comply with. This FEI Daily blog from two PwC partners offers some advice to companies on how to manage their cyber compliance efforts:
There are several regulations at the state, federal and international level that organizations, particularly multinationals, should be focused on: NY DFS 500, the California Privacy Protection Agency’s (CPPA) draft Cybersecurity Audit and Risk Assessment Regulations, the EU’s GDPR and the SEC cyber rules, to name a few. Additionally, there is the anticipated CISA cyber incident reporting rule, coming as soon as March 2024. This patchwork of regulations will likely continue to grow in complexity in the months ahead.
So, how can companies untangle this — and where is the most effective place to begin? Start with understanding which regulations apply to your organization. Then, rationalize the common requirements between them and implement no regrets decisions to address those head on. Then, take stock of unique requirements for various geographies. Lastly, engage in public policy to help influence future regulation.
In this evolving regulatory climate, companies that embrace this new era of transparency are likely setting themselves up for success. Those who shy away from transparency do so at their own reputational risk.
The blog also identifies some other cybersecurity trends to watch in 2024 and offers tips on how companies can boost their defenses. These include investing in tools that will permit companies to scale their cloud security efforts and leveraging generative AI in their threat detection and analysis as well as in their cyber risk disclosure and incident reporting processes.
Don’t miss tomorrow’s free virtual event – “Developments in Human Rights Due Diligence, AI in ESG & Carbon Markets” – hosted by our colleagues at PracticalESG.com. You can register here for this 3-hour program, which will kick-off at 12:00 pm eastern tomorrow. This virtual event features three panels of experts who will provide insights into the intersection between supply chains & human rights due diligence, how AI may transform ESG supplier due diligence, problem solving & reporting, and developments in carbon markets.
These events are free to all – you don’t have to be a member of PracticalESG.com to attend. But if you’re attending events like these, you need the resources that PracticalESG.com provides. Become a member today by clicking here, emailing sales@ccrcorp.com or by calling (800) 737-1271.
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.
