In Chamber of Commerce v. CARB, Federal District Court dismisses two claims challenging California’s climate disclosure laws
As we’ve pointed out before, given the prevailing views on climate disclosure among folks in the new Administration, including the nominee for SEC Chair—and all that portends for the SEC’s climate disclosure regulation—the States may, in many ways, take on much larger significance. Case in point: California’s climate disclosure laws and the ongoing litigation challenges there. In January last year, the U.S. and California Chambers of Commerce, the American Farm Bureau Federation and others filed a complaint (and in February, an amended complaint) against two executives of the California Air Resources Board and the California Attorney General challenging these two California laws. The lawsuit seeks declaratory relief that the two laws are void because they violate the First Amendment, are precluded under the Supremacy Clause by the Clean Air Act, and are invalid under the Constitution’s limitations on extraterritorial regulation, particularly under the dormant Commerce Clause. The litigation also seeks injunctive relief to prevent CARB from taking any action to enforce these two laws. (See this PubCo post.) California then filed a motion to dismiss the second and third causes of action in the amended complaint for lack of subject matter jurisdiction (Rule 12b-1) and failure to state a claim (Rule 12b-6). Interestingly, however, the motion did not seek dismissal of Plaintiffs’ First Amendment claim (except as to the Attorney General, whom the motion sought to exclude altogether on the basis of sovereign immunity), even though California asserted that Plaintiffs’ First Amendment challenge was “legally flawed.” Plaintiffs then moved for summary judgment on the First Amendment claim, and California moved to deny that motion or to defer it, enabling the parties to conduct discovery. In November of last year, in this Order, the Federal District Court for the Central District of California denied Plaintiffs’ motion to dismiss as to that first claim (violation of the First Amendment) and granted California’s motion to deny or defer the motion for summary judgment. (See this PubCo post.) Now, in Chamber of Commerce v. California Air Resources Board, the Court has issued an Order granting California’s motion to dismiss and dismissing Plaintiffs’ second and third causes of action under the Supremacy Clause and dormant Commerce Clause (as invalid extraterritorial regulation). Stay tuned.
Under the new Administration, will Enforcement have a lighter touch?
Reuters is reporting exclusively that, according to its sources, under the new Administration, some Enforcement staff at the SEC “have been told they need to seek permission from the politically appointed leadership before formally launching probes,” marking a “change in procedure that could slow down investigations.” According to Reuters, some Enforcement staff have recently “been told that they will need to seek the Commission’s approval for all formal orders of investigation, which are required to issue subpoenas for testimony or documents.” Previously, Reuters reported, authority to formally launch investigations had been delegated to Enforcement directors or other senior staff, including even supervising attorneys; during the first term of the current Administration, the “SEC required approval by its two enforcement [co-]directors to formally launch probes.” However, the article indicates, Enforcement staff may still conduct informal investigations, including requesting information. The article indicates that Reuters was unable to determine whether these new instructions were the result of a formal SEC vote to “revoke the delegation of that authority, or who ordered the change.” Reuters suggested that “the change does not necessarily mean fewer investigations will be launched, but it means the Commissioners are taking more control over enforcement earlier in the process.” Reuters speculates that the move might reflect an effort to end the “weaponization” of government. Or, perhaps this move might also presage a “lighter touch” by SEC Enforcement under the new Administration?
SEC charges “AI-washing” at Presto Automation
Is “-washing” the securities fraud equivalent of “-gate” for political scandals? First we had greenwashing, then diversity-washing, and now we have AI-washing—a topic that, as discussed in the SideBar below, SEC officials made a lot of noise about last year. And this recent action by the SEC certainly seems to allege just that—even though the SEC doesn’t actually use the term. In mid-January, the SEC announced “settled charges against Presto Automation Inc., a restaurant-technology company that was listed on the Nasdaq until September 2024, for making materially false and misleading statements about critical aspects of its flagship artificial intelligence (AI) product, Presto Voice. Presto Voice employs AI-assisted speech recognition technology to automate aspects of drive-thru order taking at quick-service restaurants.” However, as alleged in the Order, the AI technology used in the product was not developed by Presto—at least not until September 2022; rather, the company deployed speech recognition technology owned and operated by a third party. But, the SEC charged, Presto failed to disclose in its SEC filings that it used the third party’s AI technology, rather than its own, to power all of the Presto Voice units it deployed commercially during that time period. What’s more, once Presto did begin to use its own proprietary technology in the Presto Voice units, the SEC alleged, the company “misrepresented the capabilities of the product by claiming that it eliminated the need for human order taking.” Not the case, the SEC alleged; “substantial human involvement” was actually required. The SEC charged that Presto made materially misleading statements in violation of the Securities and Exchange Acts and failed to maintain adequate disclosure controls; however, in light of its financial condition and remedial actions, the SEC imposed only a cease-and-desist order and no civil money penalty.
Commissioner Peirce offers her prescription for a “path back to normal”
This week, SEC Commissioner Hester Peirce delivered the keynote address at the Northwestern Securities Regulation Institute in San Diego. Her theme: that public companies are “confronting a symptom of a larger societal malady—importing politics and contentious social issues into everything we do.” According to Peirce, the “SEC, so-called stakeholders, and the burgeoning industry of advisers, consultants, accountants, and attorneys peddling their costly wares to public companies, sometimes with the agreement of corporate executives, drag companies into social and political melees. Their efforts, an insidious form of rent-seeking, are often quite convincingly disguised in a cloak of ethics and morality.” In her remarks, she proposed seven steps toward regaining what, in her view, was the “path back to normal.” A harbinger of what is to come in the next four years?
Corp Fin posts new and revised CDIs regarding notices of exempt solicitation
Corp Fin has posted several new or revised CDIs that address exempt solicitations under the proxy rules. With certain exceptions, Rule 14a-2(b)(1) exempts “any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another’s behalf, the power to act as proxy for a security holder and does not furnish or otherwise request, or act on behalf of person who furnishes or requests, a form of revocation, abstention, consent or authorization.” Under Rule 14a-6(g), a person who engages in an exempt solicitation under Rule 14a-2(b)(1) and beneficially owns over $5 million of securities of the class that is the subject of the solicitation is required to mail or furnish to the SEC, not later than three days after the date the written solicitation is first sent or given to any security holder, five copies of the Notice of Exempt Solicitation (Rule 14a-103). The Notice (Form PX14A6G) must attach as an exhibit all written soliciting materials “required to be submitted.” The new CDIs are summarized below. Something new and helpful: for revised CDIs, the SEC has provided a mark-up of the CDI showing the revisions.
In case there was any doubt, SEC approves Nasdaq proposal to remove Board diversity rules
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) A court challenge to these rules quickly materialized: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post.) In December last year, the en banc Fifth Circuit issued its opinion in Alliance for Fair Board Recruitment v. SEC vacating the SEC’s order approving Nasdaq’s board diversity proposal by a vote of nine to eight. According to an article in Bloomberg Law, following the decision, a “Nasdaq representative said the exchange disagreed with the court’s decision, but doesn’t plan to appeal the ruling. An SEC spokesperson said the agency is ‘reviewing the decision and will determine next steps as appropriate.’” (That, of course, was prior to the last election.) That question is now moot: Nasdaq filed a proposal with the SEC seeking to remove from the Nasdaq rules the relevant board diversity provisions to reflect “a Federal court’s vacatur of the Commission’s order of August 6, 2021, approving rules related to Board diversity disclosures. Nasdaq has requested that the Commission waive the operative delay to allow the proposed rule change to become effective on February 4, 2025.” And, this past Friday, the SEC declared the proposal to be immediately effective. Just in case anyone was unsure about the status of the board diversity rules, the effect of the proposal will be to “clarify Nasdaq’s rules by aligning them with the court’s decision.”
SEC approves NYSE proposal to limit the use of reverse stock splits to regain compliance with price criteria
In October last year, the NYSE proposed, like Nasdaq, to take on the challenge of repeated reverse stock splits by limiting the circumstances under which a listed company could use a reverse stock split to regain compliance with the minimum price criteria. The NYSE subsequently filed a couple of amendments to the proposal, and, while comments are still being solicited, the SEC has now approved the proposed rule change, as modified by Amendment No. 2, on an accelerated basis.
SEC approves Nasdaq proposal modifying minimum bid price compliance periods
In August 2024, Nasdaq submitted a new rule proposal aimed at accelerating the delisting process for companies with shares that trade below $1. Briefly, under the proposal, a company that was non-compliant with the $1 minimum bid price requirement and did not regain compliance after two 180-day compliance periods would be suspended from trading on Nasdaq. In addition, any company that has effected a reverse stock split within the prior one-year period but becomes non-compliant with the $1 minimum bid price requirement would immediately be sent a Delisting Determination without any compliance period. (See this PubCo post.) Last week, the SEC approved the proposal.
Commissioner Mark Uyeda designated as acting SEC Chair
The SEC has announced that Commissioner Mark T. Uyeda has been designated Acting Chair of the SEC. As you know, Paul Atkins has been nominated to serve as Chair, following his confirmation by the Senate. Uyeda said that he is “honored to serve in this capacity after serving as a Commissioner since 2022, and a member of the staff since 2006….I have great respect for the knowledge, expertise, and experience of the agency and its people. The SEC has a vital mission—protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation—that plays a key role in promoting innovation, jobs creation, and the American Dream.”
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