On Friday, the SEC announced the departure of Renee Jones as head of Corp Fin. She has been Director of Corp Fin since June 2021 and will be returning to her position on the faculty of Boston College Law School. In her place as Director of Corp Fin will be Erik Gerding, who is currently serving as Deputy Director of Corp Fin. SEC Chair Gary Gensler praised Jones for leading Corp Fin “during a time when we have proposed—and in numerous cases adopted—critical reforms to benefit investors….I am grateful for her counsel, judgment, and deep understanding of the capital markets. Thanks to Renee’s leadership, we have enhanced investors’ access to the full, fair, and truthful information as required by our securities laws to make informed investment decisions.” Gerding remarked that he “look[s] forward to continuing the work that Renee led at the Division over the last year….” Will we see any difference in Corp Fin rulemaking? Time will tell.
Jones led Corp Fin through 12 rule proposals, including proposals for climate disclosure, SPACs and cybersecurity risk disclosure, and nine rule adoptions, including rules for compensation clawbacks, pay versus performance and Rule 10b5-1 plans. Gerding joined the SEC in October 2021 and is currently the head of Legal and Regulatory Policy in Corp Fin. Like Jones, he was a law professor prior to joining the SEC. He has also practiced at Cleary Gottlieb.
Is there anything we can discern about the views of the new appointee? In 2021, Gerding submitted, as a private citizen, an 18-page letter in response to the request of then-Acting SEC Chair Allison Herren Lee for input on climate change disclosures, which may give us some insight into some of his perspectives on climate disclosure in particular and on regulation in general. Summarized below is a small selection of his recommendations that might illustrate some of his views on climate disclosure in particular and on regulation in general.
The letter begins by presenting Gerding’s argument in support of the SEC’s authority to issue rules requiring climate risk disclosure and expressing his agreement with the Lee’s broad conception of “materiality” in this context. (See this PubCo post.) With regard to potential climate rulemaking, Gerding recommended that the SEC consider these conceptual principles:
- “the need for disclosure to cover physical, transition, and liability risks;
- the need for disclosure to focus on remedying the factors that frustrate accurate asset-pricing with respect to these three risks;
- the demand by investors for information on both process and substance;
- the importance of quantitative disclosures in addition to qualitative ones;
- how crucial asset duration is for investors with respect to climate risks; and
- the problems issuers and investors face because of uncertainties with insurance coverage and hedging.”
For example, Gerding discussed the need to address those factors that impair the ability of investors to “price climate risk,” particularly the “the lack of granular data on the physical location of a company’s assets,” which “may prevent investors from understanding the scope of physical risk affecting the company.” He emphasized that “[u]ncovering hidden correlations of risks provide one of strongest justifications for climate risk disclosures,” especially for investors seeking to diversify their portfolios. He also observed that investors “need not only information about climate risks of assets, but the term/duration of those assets as well.”
He also suggested a number of different items of Reg S-K that should cover climate disclosure—physical, transition and liability risk—including the sources and availability of raw materials and working capital needs (Item 101); description of physical properties (Item 102); risk factors (Item 105); and MD&A (Item 303). For example, with regard to physical risk, he recommended that the SEC require issuers to disclose whether particular material assets are located in areas subject to certain climate events, such as flooding and wildfires, using designated maps that show locations where risks are greater, “building towards an ultimate goal of tagging individual assets with geo-locational data.” He also recommended disclosure by companies of material physical risks from climate change of their supply chains.
With regard to transition risk, he suggested amending Item 305, Quantitative and Qualitative Disclosures about Market Risk, to require quantitative and qualitative disclosures, including market risk analyses, of “whether the increasing price of carbon will pose market risks to issuers.”
In addition, Gerding criticized the
“important deregulatory revisions to Regulation S-K in 2020, as part of a larger wave of hasty deregulatory actions while much of the public was preoccupied with the health and economic impacts of the pandemic. These under-the-radar changes may negatively impact high quality, comparable disclosures on climate risk, because they:
- Water down disclosure rules by introducing ‘principles-based’ qualifiers to Item 101 descriptions of an issuer’s business;
- Deemphasize environmental laws by ‘refocusing’ disclosure in Item 101(c) on other non-environmental government regulations;
- Raise the threshold for disclosure of pending litigation proceedings from $100,000 to $300,000; and
- Dilute risk factor disclosure under Item 105 by introducing a ‘principles based’ approach.”
In his view, a “‘principles-based’ approach should supplement, not replace, existing disclosure rules.”
Finally, with regard to private companies, he concurred with other commentators “that even the best-designed climate disclosures will have a deteriorated impact if the rules apply only to public companies and registered offerings while capital continues to migrate from public markets to private markets.” More generally, he was “concerned about expanded transaction exemptions enabling the migration of capital from brightly-lit, well-regulated public markets….” He indicated that his “concerns have only grown after the Commission took yet another hasty deregulatory move in 2020 to expand radically the scope of transaction exemptions.” He recommended that the SEC “use its authority to condition transaction and resale exemptions on improved disclosure, including disclosure on climate risks described in this letter.” For example, he advocated that the SEC “condition the use of the most important exemptions, such as Rule 506 under Regulation D on making disclosure to investors similar to what is required under Regulation S-K and S-X. This condition should particularly apply to large issuers or large issuances.” He also advocated that the SEC “tighten its rules for counting beneficial owners for purposes of the thresholds for when companies become Exchange Act reporting companies,” an item that is on the current SEC agenda with a target date for a proposal of April 2023. (See this PubCo post and this PubCo post.)