For quite a few companies, the late June SolarWinds enforcement sweep may have been the first time they received a “voluntary” request for information from the SEC’s Division of Enforcement. These requests, which are not necessarily “voluntary,” send companies scrambling for a game plan on how to respond. In this memo, BakerHostetler outlines the process behind these types of requests and how they fit into the larger inquiry or investigation that the SEC’s Division of Enforcement may be pursuing when a company receives this type of request. The memo offers advice on how to approach these requests, noting:
Companies are placed in a more favorable position if they provide to the Staff documents and information sufficient to avoid the possibility of receiving a formal order directed specifically at the company. This is because, as stated above, the Staff is often moved by a company’s willingness to cooperate, which in turn could shape the outcome of the investigation, including its resolution. Furthermore, from an optics perspective, a formal order initiating an investigation against a specific company (as opposed to an MUI or a general sweep) could pose a threat to the company’s reputation and have market consequences because, more often than not, companies tend to disclose the existence of a formal investigation to their shareholders and in public filings.
In my experience, it is best to have a game plan in place before receiving a voluntary request from the SEC, so that everyone knows how to respond and quickly implement appropriate measures, such as preserving documents. Given the current enforcement environment and the SEC’s embrace of big data, we certainly may be seeing more sweep investigations that will generate these sorts of voluntary requests for information.
As the Summer turns the corner here in early August and back-to-school time rapidly approaches (I still have one kid in college, one in high school and I teach a class at Georgetown Law), my thoughts inevitably turn to our Proxy Disclosure/Executive Pay conferences coming up on October 13 – 15. My attention turns to the conferences partly because I now must have to come up with my contribution to our great course materials, but also because I look forward to our conferences the most when the post-Summer speaking circuit ramps up. We have a great lineup of speakers and a quite a few interesting topics to cover, so I encourage you to sign up today!
Last week, SEC Chair Gary Gensler made remarks at the Principles for Responsible Investment “Climate and Global Financial Markets” Webinar which provide the most comprehensive look to date at what the SEC may be considering for its upcoming climate change disclosure rulemaking. Drawing an analogy to the quantitative and qualitative scoring system used in the Olympics, Gensler noted that public company disclosure evolves over time based on areas of interest to investors, and now investors want more disclosure about climate change. He noted that the disclosure should be “consistent and comparable” and “decision-useful,” i.e., not generic text. To this end, Gensler has explained the parameters of what such disclosure could look like:
Qualitative disclosures could answer key questions, such as how the company’s leadership manages climate-related risks and opportunities and how these factors feed into the company’s strategy.
Quantitative disclosures could include metrics related to greenhouse gas emissions, financial impacts of climate change, and progress towards climate-related goals.
For example, some companies currently provide voluntary disclosures related to what’s called Scope 1 and Scope 2 greenhouse gas emissions. These refer, respectively, to the emissions from a company’s operations and use of electricity and similar resources.
Many investors, though, are looking for information beyond Scope 1 and Scope 2, to Scope 3, which measures the greenhouse gas emissions of other companies in an issuer’s value chain.
Thus, I’ve asked staff to make recommendations about how companies might disclose their Scope 1 and Scope 2 emissions, along with whether to disclose Scope 3 emissions — and if so, how and under what circumstances.
I’ve also asked staff to consider whether there should be certain metrics for specific industries, such as banking, insurance, or transportation.
Another question is whether companies might provide scenario analyses on how a business might adapt to the range of possible physical, legal, market, and economic changes that it might contend with in the future. That could mean the physical risks associated with climate change. It also could refer to transition risks associated with stated commitments by companies or requirements from jurisdictions.
In fact, many companies have announced their intentions to reduce their greenhouse gas emissions by a certain date, making “net zero” commitments or other climate pledges. 92 percent of companies in the S&P 100 plan to set emission reduction goals.
Today, though, companies could announce plans to be “net zero” but not provide any information that stands behind that claim. For example, do they mean net zero with respect to Scope 1, Scope 2, or Scope 3 emissions?
Even if they haven’t made such statements themselves, companies often operate in jurisdictions that have made commitments, such as to the Paris Agreement, that could lead to regulatory or economic changes within those locations. I’ve asked staff to consider which data or metrics those companies might use to inform investors about how they are meeting those requirements.
With regard to applicable standards for disclosure, Gensler noted that many commenters referred to the Task Force on Climate-related Financial Disclosures (TCFD) framework, and he has “asked staff to learn from and be inspired by these external standard-setters.”
Gensler went on to address disclosure by funds that market themselves as “green,” “sustainable,” “low-carbon.”
While Gensler did not address the timing for climate risk disclosure proposals, all of the tea leaves point to proposed rules being considered before the end of 2021.
In his remarks last week, SEC Chair Gary Gensler noted that more than 550 unique comment letters were submitted in response to Commissioner Allison Herren Lee’s statement on climate disclosures in March, and three out of every four of these responses supported mandatory climate disclosure rules. Over on PracticalESG.com, Lawrence Heim recently blogged about the most hotly debated issues in the comments based a sample of 20 submissions from large public companies and asset managers. The hot topics include the reporting framework, timing, furnished vs. filed and the location of the disclosure, content and various other matters such as safe harbors and internal controls. Be sure to check out PracticalESG.com to keep up with all of the latest ESG developments!
My own perspectives on climate risk and the importance of climate risk disclosure have evolved considerably since the SEC issued its 2010 interpretive release on climate change disclosure, and I think one key contributor to that is a hobby that many do not know that I have: gardening. While it may not be something that got talked about much on the Dave & Marty Radio Show, I have had an avid interest in gardening and landscape design for many years. While we can all get some sense of how dire the climate situation is by following the news, working a garden and tending to a forest can be a real eye-opener in terms of the risks from climate change. In just a few short years, I have observed considerable changes in the ability to grow certain plants and the overall health of the forests and waterways in my area. Talk about a wake-up call. Disclosure of climate change risk by public companies is not going to reverse these trends, but it is an important step toward focusing everyone on the issues, and we can only hope that awareness will continue to drive change.
A perennial topic of discussion and speculation has been the role that the SEC should play in regulating the ever-expanding world of digital assets. What to some appears to be a regulatory void that has evolved in recent years presents a fascinating case study about the intersection of innovation and regulation. One side argues that too much regulation would stifle innovation in digital assets, while the other side argues that not enough regulation will inevitably lead to fraud and abuse that erodes investor confidence in digital assets to the point that no one will want to risk their capital in the asset class going forward.
As this Bloomberg article notes, it has been a parlor game in Washington to try to divine which side of this debate SEC Chair Gary Gensler is on. Gensler is uniquely qualified to weigh in on this debate given that, in his most recent job at MIT, he studied and taught about all things crypto. The Bloomberg piece indicates that, at a speech yesterday at the Aspen Security Forum, Gensler said:
“While I’m neutral on the technology, even intrigued—I spent three years teaching it, leaning into it—I’m not neutral about investor protection. If somebody wants to speculate, that’s their choice, but we have a role as a nation to protect those investors against fraud.”
While Gensler has recently requested that Congress pass a law giving the SEC authority to oversee digital asset exchanges, he acknowledges that the SEC’s already has broad powers in this area. In support of the need for more regulation over crypto assets, Gensler drew an analogy to the automobile industry, stating that sales of automobiles did not fully take off until the government imposed rules on driving, like speed limits and traffic lights. While we don’t know exactly how and when digital asset regulations will evolve during Gensler’s tenure, it is now clear that some rules of the road can be expected.
In the same Aspen Security Forum speech where he discussed the SEC’s regulatory approach to crypto assets, Gensler noted that he was open to considering an ETF product focused on Bitcoin futures that would be subject to the SEC’s existing mutual fund rules. As Liz has discussed, a Bitcoin ETF has been the subject of prolonged debate at the SEC, and was the subject of a strongly-worded Staff statement from the Division of Investment Management back in May. While considering the Bitcoin ETF is just one of at least seven crypto issues that the SEC Staff is currently addressing, perhaps it is one that could see action sooner rather than later given the Chair’s openness to considering the approach.
I, like some securities practitioners, went through the crazy ICO fervor of a few years ago feeling like the most unpopular guy at the party, because I kept saying “these sure look like securities to me” and spouting off about a seven decades-old Supreme Court case that dealt with the sale of orange groves. On top of all that, I did not look very convincing in a hoodie. As any unpopular partygoer would do, I retired to the sidelines and became more of a wallflower amidst the ICO rager that ultimately got broken up by the SEC when the Staff made clear that selling tokens often did involve the offer and sale of a security.
But rather than just saying “I told you so,” I recognized that just because something is novel does not mean that we have to fear it, rather we should embrace the challenge of determining how to make it work within the framework of the laws and regulations that exist to protect investors. When I served as Chief Counsel of Corp Fin, we received many no-action requests on the topic of whether something was a security, and the Staff always considers those with an open mind. Sometimes, the answer is “this is a security,” but other times it is the opposite result. What the requesters always wanted was some certainty about the subject transaction before it occurred, and that is what more SEC regulation in the crypto space could bring – the certainty to operate in an area that is constantly evolving.
Last week, SEC Chair Gary Gensler gave a speech at a celebration for National Whistleblower Day, which commemorates the first U.S. whistleblower law that was passed unanimously on July 30, 1778. The law was passed after ten whistleblowers reported wrongdoing and abuses committed by a superior officer in the Continental Navy. Since 2015, the National Whistleblower Center has held an annual celebration on July 30th to honor and celebrate whistleblowers.
In his speech, Gensler noted that the SEC has paid out more than $900 million to nearly 180 whistleblowers through the SEC’s program administered by the Office of the Whistleblower. Gensler indicated that he has asked staff “to examine whether and how the program could be further strengthened to ensure that misconduct within the remit of the SEC is identified, addressed, and stopped.”
Yesterday, the SEC announced that it had paid more than $4 million to four whistleblowers who provided information and assistance in two separate enforcement proceedings. In accordance with the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not reveal a whistleblower’s identity.
Unfortunately, companies must continue to be on guard for bogus whistleblower complaints. As Liz first noted back in June, companies began receiving a variety of bogus whistleblower emails out of the blue, and John recently identified additional fake emails that were received by companies. The prospect of receiving fake emails complicates matters for company whistleblower programs, as they must implement additional steps to vet incoming messages to determine if they are legitimate complaints. We still do not know why this hoax has been perpetrated.
In this memo, Troutman Pepper provides an overview of the fake whistleblower complaints that companies have been receiving and addresses the best course for approaching this unusual situation:
Although the motives of the complainants in these cases are unclear, it appears that these complaints may relate to attempted cybersecurity scams. These potential “hoax” insider trading, bribery, or accounting fraud claims may present initial challenges for companies in evaluating whether the whistleblower complaints are legitimate grievances, or attempts to circumvent company cybersecurity controls. Accordingly, companies should take special care in investigating purported insider trading or other whistleblower claims where the source of the complaint and/or the employee involved in the alleged misconduct is/are anonymous. Specifically, company counsel (both internal and outside counsel) should collaborate with the company’s compliance and ethics, internal audit, cybersecurity and information technology personnel to evaluate the legitimacy of the complaint and determine whether any response to the complaint is warranted. If a company is unsure whether a recent whistleblower complaint alleging insider trading or other alleged misconduct is a hoax, we recommend that the company err on the side of caution and include IT when responding to the complaint to avoid downloading any links or other information that may be contained in the complaint.
We can only hope that whoever is sending these fake complaints will grow tired of the hoax, or will realize that their efforts are being thwarted by companies carefully vetting the complaints when they are received.
