The Staff’s ongoing climate change disclosure review project often raises the question: what should companies do going into the Form 10-K season knowing what areas the Staff has focused on in the comment process? My advice has generally been “stay the course.” Unless you are a recipient of a one of the Staff’s climate change comments letters – in which case the outcome may depend on the ultimate resolution of those comments – now is probably not the best time to completely revamp your climate-related disclosure in the Form 10-K.
As had been the case before the Staff’s review project got under way, it is critically important to consider the SEC’s 2010 guidance when preparing your disclosures, and it may be appropriate to take extra steps this year to document and “pressure test” your materiality analysis when considering that guidance. Further, it is always helpful to draw on your engagement efforts to understand what information investors are interested in seeing, so that you can consider that input when preparing the Form 10-K and proxy statement.
We will undoubtedly see rule proposals regarding climate change risks in the near term, and when those rules are ultimately adopted, it will then be appropriate to reconsider your disclosure approach in light of those more specific disclosure requirements.
As the proxy season fast approaches, be sure to keep up with the latest developments covered in our Proxy Season Blog. For example, Emily recently highlighted the best practice takeaways from Broadridge’s 2022 proxy design library. If you do not have access to the Proxy Season Blog, subscribe today!
Yesterday, the SEC announced the appointments of Erica Y. Williams as Chairperson and Christina Ho, Kara M. Stein, and Anthony (Tony) C. Thompson as Board members of the PCAOB. The SEC stated that Duane DesParte will continue to serve as a Board member and will remain Acting Chairperson until Erica Williams is sworn in.
Under the Sarbanes-Oxley Act, the SEC has the authority to select the members and the Chairperson of the Board of the PCAOB. As John noted earlier this year, the SEC announced that it had removed PCAOB Chair William Duhnke and had designated Duane DesParte to serve as acting Chair. At the same time, the SEC announced that it was seeking candidates to replace all five current members of the PCAOB Board.
Williams is a partner at Kirkland & Ellis LLP and had previously served in various roles at the SEC and as Special Assistant and Associate Counsel to President Obama.
Ho has held positions with the Treasury Department, University of Maryland, Deloitte & Touche LLP and Elder Research.
Stein served as a Commissioner of the SEC from 2013 to 2019, and has also had roles at the University of Pennsylvania Carey Law School, the Center on Innovation at University of California Hastings Law and on the Hill.
Thompson currently serves as the Executive Director and Chief Administrative Officer of the CFTC, has served in other federal government positions and is an Air Force veteran.
Commissioners Peirce and Roisman, who had expressed concern with the firing of the PCAOB Board back in June, issued a statement expressing support for the new Board.
SEC Enforcement Director Gurbir Grewal delivered the Scott Friestad Memorial Keynote address at the “SEC Regulation Outside the United States – ThinkIn 2021” program yesterday, and he started off his speech by quoting from Lewis Carroll’s poem, The Hunting of the Snark. The quoted stanza ends with “Just the place for a Snark! I have said it thrice: What I tell you three times is true.” Grewal noted:
Repetition, after all, is a persuasive technique used regularly by effective orators and children alike to make convincing and, on occasion in my home, winning arguments. That’s because repeated information is often perceived as more truthful than new information. But as we all know, just because a statement is made repeatedly doesn’t necessarily make it true.
Grewal went on to rebut the often-repeated notion that the SEC is “regulating by enforcement,” particularly in the area of digital assets and ESG. Instead, he says that the SEC is “using all of our tools to pursue wrongdoers, protect investors, and fulfill our mission.” Grewal recounted a number of cases that the SEC has brought in the digital asset space, and commented on the progress of the Climate and ESG Task Force, as well as prior cases that the SEC has brought involving ESG issues.
At last week’s PLI Annual Institute on Securities Regulation, Corp Fin Director Renee Jones and Acting Deputy Director Lisa Kohl spoke about priorities in the Division, and it was mentioned that Corp Fin is in a hiring mode for lawyers. I am often asked about how to get a job in Corp Fin, and I always encourage people to go there when the can, because the Division provides opportunities for excellent training and experience and the chance to work with a very talented group of people. The window for job openings notoriously opens and closes over time, so often timing is the most important factor to consider when trying to land a job in the Division.
While the SEC does post more senior positions in Corp Fin from time to time, the best chance of getting in is by applying for positions in the Operations groups, where you would review filings. Once you have spent some time in Operations, it is often possible to move to other roles within the Division, or perhaps to other Offices or Divisions within the Commission. I believe that the hiring process in Corp Fin is relatively decentralized these days, so often you are interviewing with the people in Operations group that you would be working with if you were hired. If you have been thinking about working at the SEC, now might be a good time to dust off that resume!
Last week, ISS announced that it is seeking comments on its proposed voting policy changes for 2022. The comment period runs through November 16. As usual, ISS seeks input from all interested parties.
ISS solicits comment on 16 proposed voting policy changes across all markets, including the following key changes in the U.S.:
Gender Diversity – ISS proposes to extend its board gender diversity policy to companies that are not in the Russell 3000 and S&P1500 indices, effective for meetings on or after February 1, 2023.
Unequal Voting Rights – When ISS implemented its original unequal voting rights policy back in 2015, the attention was on addressing concerns with newly-public companies that adopted unequal voting rights without a sunset mechanism. As a result, companies with an unequal voting rights structure whose first shareholder meeting was prior to 2015 were exempted from the voting rights policy. ISS now proposes to remove the differential policy application that arose from that exemption and, after a grace period in 2022, begin in 2023 to recommend against responsible directors at all U.S. companies with unequal voting rights.
Climate – For the highest GHG emitting companies, ISS proposes a new climate-related board accountability policy. ISS proposes to recommend against the re-election of directors or any other appropriate items at companies that have not made appropriate climate-related disclosures, such as according to the TCFD framework, or that have not set quantitative GHG reduction targets.
Say-on-Climate – ISS proposes to codify the case-by-case analysis frameworks for management and shareholder say-on-climate proposals.
We can expect ISS to publish updated voting policies applicable for shareholder meetings occurring on or after February 1, 2022 in the coming weeks.
On Friday, the SEC announced that it approved the PCAOB’s Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act. Rule 6100 establishes a framework for the PCAOB’s determinations under the Holding Foreign Companies Accountable Act (HCFAA) that the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by an authority in that jurisdiction.
The HFCAA prohibits trading in a company’s stock if the company uses an audit firm for three consecutive years that a foreign jurisdiction prevents the PCAOB from inspecting completely, as determined by the PCAOB.
PCAOB Rule 6100 is effective immediately. In a statement issued on Friday, Chair Gensler noted that the Commission is on track to finalize by year-end the interim final rules that the Commission adopted earlier this year to implement the HFCAA.
The SEC recently announced that Nicole Creola Kelly has been appointed as Chief of the SEC’s Office of the Whistleblower. Kelly has more than 20 years of experience with the SEC, including as a Senior Special Counsel in the Office of the General Counsel, Counsel to former Chair Mary Jo White, Counsel to former Commissioner Kara M. Stein, and as an attorney in Enforcement and the Whistleblower Office.
Yesterday, the SEC announced a rule proposal that would update its electronic filing requirements to mandate the EDGAR submission of certain documents that filers still have the option to submit on paper. Here’s a copy of the 73-page proposing release and here’s a copy of the accompanying fact sheet. Want a statement from Gary Gensler? Okay, there’s one of those too.
The fact sheet says that the proposed rule changes are intended to promote more efficient storage, retrieval, and analysis of these filings, improve the SEC’s ability to track and process them, and modernize its records management process. According to the fact sheet, the rule would require the electronic submission of the following:
– Most of the documents that are currently permitted to be submitted electronically under Rule 101(b) of Regulation S-T, including filings on Form 6-K and filings made by multilateral development banks;
– The “glossy” annual report to security holders and certain foreign language documents, if submitted, in PDF format;
– Applications for orders under the Advisers Act;
– Confidential treatment requests for Form 13F filings; and
– Form ADV-NR (through the IARD system)
Form 11-K filers also would have to use iXBRL for financial statements included in those filings. Most of this stuff is a big yawn to corporate issuers, with the exception of the proposal to resurrect a filing requirement for the glossy annual report. As you may recall, the SEC effectively eliminated the longstanding requirement to furnish it with copies of glossy annual reports back in 2016. If this new proposal is adopted, companies will need to file a PDF of that document.
The most recent edition of the SEC’s Reg Flex agenda includes proposing rule amendments intended to “enhance issuer disclosures regarding cybersecurity risk governance, and in his September 2021 Senate Banking Committee testimony, SEC Chair Gary Gensler stated that he’d asked the Staff to “develop proposals for the Commission’s consideration on these potential disclosures.” So, it’s pretty clear that there’s cyber disclosure rulemaking on the horizon, but what form will the rule proposal take?
Last Friday, Commissioner Elad Roisman delivered a speech that suggests the debate may again be between those commissioners who favor principles-based rules and those who prefer a more prescriptive, line item-based approach. Not surprisingly, this excerpt from his speech indicates that Roisman’s squarely in the principles-based camp:
As some of you may have noticed, the Commission’s regulatory agenda includes possible regulatory action with regard to issuers, which could build on the Commission’s 2018 guidance. I have not seen any draft rule, so I cannot speak as to its nature or merits. But I will let you know some of the things that I would be looking for as I consider any additional rules in this area.
First, we need to define any new legal obligations clearly. Second, we need to make sure that these obligations do not create inconsistencies with requirements established by our sister government agencies. Third, we should recognize that some registrants have greater resources than others, and we should not try to set the resource requirements for an entity. And finally, because issuers’ businesses vary, the cybersecurity-related risks they face also will vary, and therefore a principles-based rule would likely work best.
My guess is that he’ll get buy-in from the other commissioners on the first three points, but given the reaction of the Democratic commissioners to prior principles-based proposals, I’m not very optimistic that Roisman will carry the day on his desire for a principles-based approach.
