Earlier this week, the SEC adopted technical amendments to the share repurchase disclosure requirements that were originally adopted in May 2023 for the purpose of reflecting the Fifth Circuit’s vacatur of the rule amendments in the regulatory text that appears in the Code of Federal Regulations (CFR).
As I had noted in the blog last month, the vacated rule amendments were still showing up in the text of the regulations, prompting Corp Fin to issue an unusual announcement pointing folks in the direction of the pre-amendment rule text.
Now, the Commission has officially adopted these technical amendments to revise the CFR to reflect the court’s vacatur of the May 2023 share repurchase disclosure amendments, dialing the text of the rules back to pre-amendment language. These technical amendments will go into effect when the adopting release is published in the Federal Register, but of course the “old” rule text is already in effect by virtue of the Fifth Circuit’s December 19, 2023 decision to vacate the May 2023 rule amendments.
In my blog series this week on the SEC’s climate disclosure rules, I have been tackling various aspects of the new rules (and the subsequent fallout) that I find interesting, recognizing that a more complete discussion of the requirements will be addressed in our upcoming webcast next Wednesday and in the next issue of The Corporate Counsel. Today I want to tackle the new safe harbor that the SEC adopted to cover certain portions of the climate disclosure requirements.
Whenever I ponder safe harbors, I always think about the rant that my old friend Marty Dunn would inevitably engage in whenever the topic of safe harbors came up. In his best whiny lawyer voice, he would talk about how when lawyers were given broad principles-based rules or statutory requirements to work with, they would say “this is too hard to figure out, we really need a safe harbor,” but then if you adopt a more detailed requirement, the whiny lawyers would say “this is too prescriptive, you haven’t given us enough flexibility to apply this to particular situations.” Such are the laments of a man who spent almost twenty years of his life working on rulemakings and providing interpretative guidance at the SEC!
In the case of the climate disclosure rulemaking, the SEC ended up with a safe harbor that was not originally proposed. The Commission had proposed a safe harbor for Scope 3 emissions data to mitigate potential liability concerns that companies would have had about providing emissions information derived largely from third parties in a company’s value chain. The proposed safe harbor would have provided that disclosure of Scope 3 emissions by or on behalf of the company would have been deemed not to be a fraudulent statement, unless it was shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith. Obviously, this safe harbor approach was no longer necessary once the Commission did not proceed with a Scope 3 disclosure requirement.
In the proposing release, the Commission did actually solicit comment on whether to provide a safe harbor for disclosures related to a company’s use of internal carbon pricing, scenario analysis, and a transition plan, while also requesting comment on whether it should adopt a provision similar to Item 305(d) of Regulation S-K that would apply the PSLRA safe harbors to forward-looking statements made in response to specified climate-related disclosure items, such as proposed Item 1502 pertaining to impacts of climate-related risks on strategy. Marty’s “whiny lawyers” out there responded in the affirmative, essentially on the principle that “everybody loves a safe harbor, right?” The Commission obliged, adopting Item 1507 of Regulation S-K to provide a safe harbor from private liability for climate-related disclosures (excluding historical facts) pertaining to transition plans, scenario analysis, the use of an internal carbon price, and targets and goals.
The safe harbor that the Commission ultimately adopted in Item 1507 of Regulation S-K relates to the very familiar, 1990s-era statutory safe harbor for forward-looking statements that was enacted in the Private Securities Litigation Reform Act (PSLRA) in the form of Securities Act Section 27A and Exchange Act Section 21E. In addition to the forward-looking statement exemptions expressly provided for under the PSLRA, the Commission has authority under the PSLRA to provide exemptions from liability for other statements based on projections or other forward-looking information if the Commission determines that such exemption “is consistent with the public interest and the protection of investors.” The Commission previously utilized this authority only once, when it adopted Item 305 of Regulation S-K requiring disclosure concerning market risk.
Item 1507 states that the disclosures (other than historic facts) provided pursuant to the following Regulation S-K provisions constitute “forward-looking statements” for purposes of the PSLRA statutory safe harbors: (i) Item 1502(e) (transition plans); (ii) Item 1502(f) (scenario analysis); (iii) Item 1502(g) (internal carbon pricing); and Item 1504 (targets and goals). Given that the PSLRA safe harbor only extends to forward-looking statements, the safe harbor is not available for statements consisting solely of historical fact, because the Commission stated that “such information does not involve the assumptions, judgments, and predictions about future events that necessitates additional protections.” The safe harbor provision provides non-exclusive examples of historical facts that are excluded from the safe harbor, including information related to carbon offsets or RECs described pursuant to a target or goal, and a company’s statements in response to Item 1502(e) or Item 1504 (targets and goals disclosure) about material expenditures actually incurred.
Perhaps most helpfully, the final rules provide that the PSLRA safe harbors will apply to the specific climate-related forward-looking statements in connection with certain transactions and disclosures by certain issuers, notwithstanding that these transactions and issuers are excluded from the PSLRA safe harbors in subparagraphs (a) and (b) of Section 27A of the Securities Act and Section 21E of the Exchange Act (including, for example, forward-looking statements made in connection with an IPO).
Importantly, to get the benefit of the statutory PSLRA safe harbors, a company would still need to satisfy all of the requirements specified in the Sections 27A and 21E, including that a forward-looking statement must be accompanied by a meaningful cautionary statement that identifies important factors that could cause actual results to differ materially from those in the forward-looking statement.
A whiny securities lawyer might say that the Commission’s new safe harbor in Item 1507 does not give us much, in that, at least in most cases, the forward-looking statements provided in response to the identified disclosure items arguably could have already been within the protections afforded by the PSLRA statutory safe harbors, because they constitute statements of the plans or objectives of management for future operations. In response, a grateful securities lawyer might say that at least we have the added clarity that the safe harbors apply (similar to the clarity provided for all of these years in Item 305 of Regulation S-K), and the Commission did go so far as to override the provisions of the PSLRA that prohibited reliance on the safe harbors by specified issuers and in specified transactions, such as in an IPO. I think both types of securities lawyers are in the right on this one!
While the SEC’s climate disclosure rules did ultimately include several accommodations for different types of issuers, the SEC did not make accommodations for foreign private issuers. This approach is consistent with a trend in recent years where the SEC has determined to apply new disclosure requirements equally to domestic and foreign private issuers, after a historical approach of trying to accommodate different circumstances faced by foreign private issuers and encourage US listings through a more accommodative regulatory environment.
When the SEC climate disclosure rules were proposed, the Commission explained that accommodations for foreign private issuers were not appropriate, because climate-related risks “potentially impact both domestic and foreign private issuers regardless of the registrant’s jurisdiction of origin or organization.” The Commission noted that requiring the same climate-related disclosures from foreign private issuers was important to “achieving the Commission’s goal of more consistent, reliable, and comparable information across registrants.” The Commission also noted at the proposal stage that Form 20-F “imposes substantially similar disclosure requirements as those required for Form 10-K filers on matters that are similar and relevant to the proposed climate-related disclosures, such as risk factors and MD&A.”
In response to the Commission’s proposal, some commenters indicated that the Commission should permit foreign private issuers to follow the climate disclosure requirements of their home jurisdiction or of an alternative reporting regime to which they are subject. It was noted that this approach could ease the burden of complying with multiple climate disclosure requirements and avoid the potential outcome of foreign issuers not listing in the U.S. After considering these comments, the Commission noted in the adopting release:
While we acknowledge commenters who suggested that foreign private issuers be permitted to substitute compliance with the final rules through disclosures made in response to requirements of other jurisdictions, we are not adopting substituted compliance at this time. We believe it makes sense to observe how reporting under international climate-related reporting requirements and practices develop before making a determination whether such an approach would result in consistent, reliable, and comparable information for investors. The Commission may consider such accommodations in the future depending on developments in the international climate reporting practices and our experience with disclosures under the final rules.
Clearly, the Commission does not think that international climate-related disclosure standards are far enough along in other jurisdictions to rely on for US reporting purposes. As Lawrence Heim recently noted on the PracticalESG.com blog:
There is much momentum behind the ISSB sustainability disclosure standards, but that doesn’t guarantee governments are falling over each other to adopt the framework. In the US, the SEC’s final climate disclosure rules bluntly addressed ISSB standards in footnote 147:
“While we acknowledge that there are similarities between the ISSB’s climate-related disclosure standards and the final rules, and that registrants may operate or be listed in jurisdictions that will adopt or apply the ISSB standards in whole or in part, those jurisdictions have not yet integrated the ISSB standards into their climate-related disclosure rules. Accordingly, at this time we decline to recognize the use of the ISSB standards as an alternative reporting regime.”
To some, that may be a bitter pill to swallow but it could be prescient.
So, while the Commission still dangles the prospect of a “substituted compliance” approach in some far away future, in the meantime, foreign private issuers are expected to be subject to the same one-size-fits-all approach when it comes to reporting climate-related information for purposes of the U.S. federal securities laws.
It should be noted that one group of foreign private issuers did catch a break from the Commission – Canadian registrants that use the Multijurisdictional Disclosure System (MJDS) and file their Exchange Act registration statements and annual reports on Form 40-F will not be required to comply with the SEC’s climate disclosure rules, consistent with the framework of the MJDS that allows filers to follow their home jurisdiction laws and rules.
A total of 266 respondents participated in the survey, mostly representing larger US companies. The respondents cited cybersecurity as their No. 1 priority, with enterprise risk management cited as the No. 2 priority, with finance and internal audit talent, compliance with laws and regulations, and finance transformation rounding out the top five priorities. Trending topics such as artificial intelligence governance and ESG reporting received comparably less attention.
On the topic of Audit Committee effectiveness, respondents highlighted three key areas for improvement:
1. Increased discussion and/or engagement from members during meetings — highlighted by 29% of respondents.
2. Improved quality of pre-read materials — highlighted by 28% of respondents.
3. Improved quality of presentations during meetings — highlighted by 26% of respondents.
It is interesting how the focus of the audit committee has changed just over just the past year. The report notes that last year’s survey identified ESG disclosure and reporting as among the top-three audit committee priorities, behind cybersecurity and enterprise risk management. The report also addresses the topics of audit quality, audit committee turnover and rotation and audit committee expertise.
While I fully recognize that we only just kicked off Spring, you know as well as I do that Fall will be here before we know it, and it will be time to attend our live and in-personProxy Disclosure & 21st Annual Executive Compensation Conferences in San Francisco. With all that is going on at the SEC and in the governance and compensation worlds these days, you will not want to miss the great panels that we are in the process of assembling for these conferences. Sign up now and take advantage of our early bird pricing!
While litigation over the SEC’s climate disclosure rules proliferates (as we have covered in this blog and on PracticalESG.com over the course of the past week and a half), some in Congress have been maneuvering to invoke the rarely used Congressional Review Act to overturn the SEC’s rulemaking action. This Kramer Levin memo notes:
House Republicans began drafting a CRA resolution to repeal the final rule before it was published. Senate Republicans are working on a similar proposal. If both houses of Congress pass and the president signs a joint CRA resolution or if Congress successfully overrides a presidential veto, then not only would the final rule be rescinded but the SEC would be prevented from re-promulgating the rule or any substantially similar rule without specific authorization in a law enacted after approval of the joint resolution.
The machinations of the Congressional Review Act are very complicated, and the Congressional Research Service has provided some helpful FAQs to explain Congress’s authority to overturn rules that have been newly issued by federal agencies. The Congressional Research Service FAQs provide this helpful overview:
The Congressional Review Act (CRA) is a tool that Congress may use to overturn rules issued by federal agencies. The CRA was included as part of the Small Business Regulatory Enforcement Fairness Act (SBREFA), which was signed into law on March 29, 1996. The CRA requires agencies to report on their rulemaking activities to Congress and provides Congress with a special set of procedures under which to consider legislation to overturn those rules.
Under the CRA, before a rule can take effect, an agency must submit a report to each house of Congress and the comptroller general containing a copy of the rule; a concise general statement describing the rule, including whether it is a major rule; and the proposed effective date of the rule. After receiving the report, Members of Congress have specified time periods during which they must submit and act on a joint resolution of disapproval to take advantage of the CRA’s special “fast track” procedures. If both houses pass the resolution, it is sent to the President for signature or veto. If the President were to veto the resolution, Congress could vote to override the veto.
If a joint resolution of disapproval is submitted within the CRA-specified deadline, passed by Congress, and signed by the President, the CRA states that the disapproved rule “shall not take effect (or continue).” The rule would be deemed not to have had any effect at any time, and even provisions that had become effective would be retroactively negated.
Furthermore, if a joint resolution of disapproval is enacted, the CRA provides that a rule may not be issued in “substantially the same form” as the disapproved rule unless it is specifically authorized by a subsequent law. The CRA does not define what would constitute a rule that is “substantially the same” as a nullified rule. Additionally, the statute prohibits judicial review of any “determination, finding, action, or omission under” the CRA.
Since its enactment, the CRA has been used to overturn a total of 20 rules: 1 in the 107th Congress (2001-2002), 16 in the 115th Congress (2017-2018), and 3 in the 117th Congress (2021-2022).
I am certainly no politico, but it seems to me that a successful CRA challenge to the SEC’s climate disclosure rules is a long shot, given that Republicans would need to not only garner support of a joint resolution of Congress, but also override an inevitable Presidential veto. Then again, I never thought the CRA would be used as successfully as it was in the beginning of the Trump administration, when the SEC’s resource extraction issuer rule was successfully overturned (only to reemerge yet again at the very end of the Trump administration).
While on the topic of the resource extraction issuer disclosure rules, following Congress’s action to undo an earlier iteration of the rule, the SEC adopted new requirements in the waning days of the Trump administration. The rule requires a resource extraction issuer to provide information about the type and total amount of such payments made for each project related to the commercial development of oil, natural gas, or minerals, and the type and total amount of payments made to each government.
During Gensler’s term as SEC Chair, the topic of revisiting the resource extraction issuer disclosure requirements has been on the agenda, but that effort has not yet come to pass. Absent further Commission action, 2024 will be the first year when resource extraction issuers must provide the required disclosures. Following the two-year transition period contemplated by the rules adopted in December 2020, a Form SD reporting the required payment information must be furnished within 270 days after the end of the resource extraction issuer’s fiscal year. For a calendar-year end resource extraction issuer, that would mean filing the first Form SD in September 2024. Smaller reporting companies and emerging growth companies are exempt from these reporting requirements, unless subject to similar requirements under an alternative reporting regime. Companies that complete an IPO are not required to comply until the fiscal year following the year in which the IPO is completed.
For more information, be sure to check out our “Resource Extraction” Practice Area.
I learned a new term today, and that is “AI washing.” As for its definition and usage, think “greenwashing,” but instead in the context of artificial intelligence. In one of his recent YouTube videos that I can never seem to get used to, SEC Chair Gary Gensler tackles the problem of investment advisers, broker dealers and public companies improperly touting the benefits of AI for the purpose of misleading investors. In the video, he notes:
I get why so many people are talking about artificial intelligence. AI is the most transformative technology of our time, fully on par with the internet.
It’s already being used in finance, where it has the potential benefits of greater inclusion, efficiency, and user experience.
But let’s face it, when new technologies come along, we’ve also seen time and again false claims to investors by those purporting to use those new technologies.
Think about it. Investment advisers or broker dealers might want to tap into the excitement about AI by telling you that they’re using this new technology to help you get a better return. Public company execs, they might think that they will enhance their stock price by talking about their use of AI.
Well, here at the SEC, we want to make sure that these folks are telling the truth. In essence, they should say what they’re doing, and do what they’re saying. Investment advisers or broker dealers should not mislead the public by saying they are using an AI model when they’re not, nor say that they’re using an AI model in a particular way, but not do so.
Public companies should make sure they have a reasonable basis for the claims they make and yes, the particular risks they face about their AI use, and investors should be told that basis.
AI washing, whether it’s by financial intermediaries such as investment advisers and broker dealers, or by companies raising money from the public, that AI washing may violate the securities laws.
So, everyone may be talking about AI, but when it comes to investment advisers, broker dealers, and public companies, they should make sure that what they say to investors is true.
This is of course a problem that reliably repeats itself whenever significant innovation or some other business or market developments make a particular area the “hot” investing topic. I can distinctly recall this phenomenon back in the 1990s, when it seemed that every company wanted to claim some connection to the nascent Internet, and more recently we observed the frenzy when terms like “crypto” and “ESG” became the buzzwords du jour. As the old adage goes, “securities are sold, not bought,” so it is inevitable that the latest area of investor focus is worked into the sales pitch in some way, shape or form.
For public companies in particular, these days AI developments often need to be addressed in public disclosures, because AI is rapidly changing the landscape in many industries and is likely to continue to have an outsized impact going forward. I don’t see Chair Gensler’s statements as intended to discourage full and fair disclosure about AI developments, rather I think that companies need to be very balanced in describing both the benefits and risks arising from AI, and accurately convey the uncertainty associated with the evolving technology. When addressing AI developments, the relevant context is always important, so that it is clear that the company is not discussing AI just because it is the hot topic today. Further, once companies address AI in their disclosures, it is important keep that disclosure updated as this fast-moving technology evolves. And finally, if your company is in the business of manufacturing widgets, please do not change the name of the company to “AI Land, Inc.” or something like that, which seems like an inevitable outcome whenever these “fad” investment terms emerge.
As we have chronicled in this blog and on PracticalESG.com, a number of lawsuits seeking to challenge the SEC’s climate disclosure rules have been filed in the week and half since the SEC adopted the rules on March 6. To date, litigation challenging the rules has been filed in four federal courts of appeals, including the U.S. Court of Appeals for the Fifth, Sixth, Eight and Eleventh Circuits. There is no doubt that additional lawsuits will continue to be filed.
In the Fifth Circuit, the petitioners Liberty Energy Inc. and Nomad Proppant Services LLC filed a motion seeking an administrative stay and stay pending judicial review. The petitioners indicated that they would be “irreparably harmed” by the failure to grant a stay because the disclosures that will be first required in 2026 must include data collected in 2025 and companies are implementing systems to prepare the required disclosure. The SEC opposed this motion, but on Friday, March 15, the three judge panel in the Fifth Circuit granted the petitioners’ motion and imposed a temporary stay.
Given that litigation is pending in multiple courts of appeals, ultimately the Judicial Panel on Multidistrict Litigation will consolidate the challenges in a single court of appeals and that court will ultimately determine whether the Fifth Circuit stay will remain in place.
For more details on these developments, be sure to check out our coverage on PracticalESG.com. If you’re not yet a member of PracticalESG.com, subscribe online, email sales@ccrcorp.com or call 800.737.1271.
