Yesterday, Allison Lee, Acting Chair of the SEC, directed the staff of Corp Fin to “enhance its focus on climate-related disclosure in public company filings.” This action should come as no surprise. As I wrote just yesterday, Lee has used almost every opportunity to emphasize the importance of the SEC’s taking action to mandate climate risk disclosure. (See, for example, this NYT op-ed, her remarks at PLI entitled Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation and this statement, “Modernizing” Regulation S-K: Ignoring the Elephant in the Room.”) “Now more than ever,” Lee said in her statement, “investors are considering climate-related issues when making their investment decisions. It is our responsibility to ensure that they have access to material information when planning for their financial future.” But what will this enhanced focus on climate entail?
Is mandatory climate risk disclosure a done deal yet? Acting SEC Chair Allison Lee has taken almost every opportunity to emphasize the importance of the SEC’s taking action to mandate climate risk disclosure. (See, for example, this NYT op-ed, her remarks at PLI entitled Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation and this statement, “Modernizing” Regulation S-K: Ignoring the Elephant in the Room.”) And now, according to Reuters, Acting Corp Fin Director John Coates remarked during a conference on climate finance that the SEC “‘should help lead’ the creation of a disclosure system for environmental, social and governance (ESG) issues for corporations.” But how to craft the new rules? With the new Administration in Washington, many of the think tanks and advocacy groups are making their voices heard on just that—crafting mandatory climate disclosure regulations. The reports of two are discussed below; there are definitely some common threads, such as the need for the SEC to onboard climate expertise and organize a platform or two for stakeholder input. Their recommendations may also provide some ideas for voluntary compliance and some insight into the direction the SEC may be going.
In his 2021 letter to CEOs, BlackRock CEO Laurence Fink asked companies to disclose a “plan for how their business model will be compatible with a net zero economy”—that is, “one that emits no more carbon dioxide than it removes from the atmosphere by 2050, the scientifically-established threshold necessary to keep global warming well below 2ºC.” (See this PubCo post.) Now BlackRock Investment Stewardship has posted a powerpoint presentation that sets out BIS’s expectations in greater detail. The presentation concludes with a caution that, “where corporate disclosures are insufficient to make a thorough assessment, or a company has not provided a credible plan to transition its business model to a low-carbon economy, including short- medium- and long-term targets, we may vote against the directors we consider responsible for climate risk oversight.”
The new Administration in Washington brings an expectation of change at the SEC in many areas, one of them being SEC Enforcement, where a shift toward more aggressive enforcement is anticipated. That change has already begun. A week ago, Acting SEC Chair Allison Lee restored authority to senior officers in Enforcement to approve the issuance of Formal Orders of Investigation, an action designed to allow senior officers, under delegated authority, to authorize staff to subpoena documents and take sworn testimony. This delegated authority could have the effect of accelerating action by the SEC. And just a couple of days later, Lee, in consultation with Corp Fin, Enforcement and Investment Management, took action to ensure that Enforcement will no longer recommend to the SEC “contingent settlement offers,” that is, settlement offers that are conditioned on the grant of waivers of the automatic disqualification that results from certain securities violations or sanctions. The action was intended “to reinforce the critical separation” between the enforcement process and the consideration of requests for waivers to ensure that the process for “consideration of waivers is forward looking and focused on protecting investors, the market, and market participants from those who fail to comply with the law.” Will the change have any impact?
In November 2020, amendments to Reg S-K to modernize the required business narrative became effective. The amendments including changes related to disclosure about a company’s human capital resources, replacing a requirement to disclose only the number of employees with a new requirement to disclose, to the extent material, information about human capital resources. In particular, the amendments identified as non-exclusive examples of measures or objectives that the company may focus on in managing the business “measures and objectives that address the attraction, development, and retention of personnel.” Even these measures, the SEC emphasized, were not a mandate. However, then-SEC Chair Jay Clayton said at the time of adoption that he expected “to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.” The principles-based rules did not articulate specific metrics for human capital resources disclosure, allowing companies wide latitude in crafting their disclosure to focus on information that is material to each company. At the same time, however, the rules did not provide much direction, leaving many companies at something of a loss for how to proceed. In this paper, Compensation Advisory Partners provides an “early read on developing best practices” regarding human capital disclosure, analyzing the earliest disclosures to provide some guidance on topics, trends and level of detail provided. The CAP paper also includes a number of useful samples. Similarly, Willis Towers Watson reviewed the first three dozen human capital disclosures by companies in the S&P 500 published in 10-Ks filed since the effective date of the new requirement and, in this report, provides some data on the prevalence of topics and metrics.
Yesterday, Corp Fin posted a sample comment letter containing the types of comments that Corp Fin staff might, depending on the particular facts and circumstances, issue to companies seeking to raise capital in securities offerings amid the current market and price volatility. In that context, Corp Fin believes that “specific, tailored disclosure about market events and conditions, the company’s situation and the potential impact on investors is warranted to provide investors with the information they need to make informed investment decisions and comply with the company’s disclosure obligations under the federal securities laws.” Corp Fin suggests that companies preparing offering disclosure documents take these sample comments into account, particularly if the disclosure documents would not typically be subject to staff review, such as automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements. While most of the sample comments are not altogether surprising, Corp Fin does have some notable suggested additions to the prospectus cover page.
Remember the clawback provision of SOX 304? That provision provides a reimbursement remedy against CEOs and CFOs when the issuer has restated its financial statements as a result of misconduct. Although the provision was enacted in 2002, it wasn’t until 2007 that an executive was successfully hit with a clawback claim (and a big one it was—the executive returned approximately $600 million in cash and options). And since then, SOX 304 hasn’t gotten all that much of a workout. As reflected in this Order, the SEC has just brought settled charges against the former CEO and CFO of WageWorks Inc., alleging that they made false and misleading statements and omissions, including to the company’s outside audit firm, that led to improper revenue recognition and ultimately resulted in a financial restatement. The settlements with both former executives included reimbursement of incentive-based compensation under SOX 304.
On Monday, the SEC announced that John Coates has been appointed Acting Director of Corp Fin. He has been the John F. Cogan Professor of Law and Economics at Harvard University, where he also served as Vice Dean for Finance and Strategic Initiatives. If that name sounds familiar—even if you haven’t been one of his students—it may be because he sometimes pops up in Matt Levine’s column in Bloomberg as the author of “The Problem of Twelve,” which he describes as the “likelihood that in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies.” Beyond that, he has been a very active member of the SEC’s Investor Advisory Committee, and Committee recommendations he has authored may give us some insight on his perspective on issues.
In this paper, Gaming the System: Three ‘Red Flags’ of Potential 10b5-1 Abuse, from the Rock Center for Corporate Governance at Stanford, the authors examined data from over 20,000 Rule 10b5-1 plans to investigate the extent of insider trading abuse. The study found that some executives did use 10b5-1 plans to conduct “opportunistic, large-scale selling that appears to undermine the purpose of Rule 10b5-1” and highlighted three “red flags” that could be used to detect potentially improper exploitation of Rule 10b5-1. Although the authors acknowledge that they could not determine for certain whether any insiders that avoided losses or otherwise achieved “market-beating returns” actually traded on the basis of material nonpublic information, they contended that average trading returns of the magnitude they found in the study “are highly suspect and, as such, these red flags are suggestive of potential abuse.”
Today, the SEC announced that President Biden —Happy Inauguration Day +1—has appointed Democratic SEC Commissioner Allison Lee as the new Acting SEC Chair to replace the Republican appointee, Elad Roisman. (Former CFTC Chair Gary Gensler is expected to serve as the permanent SEC Chair, but will first need to go through the confirmation process. See this PubCo post.) Lee has focused much of her attention at the SEC on ESG issues, such as climate and diversity, and, in the press release, she indicated that climate and sustainability would “continue to be a priority” for her. (See, e.g., this PubCo post and this PubCo post.) In addition, yesterday, the new administration imposed, at least informally, a regulatory freeze. The memorandum from the President’s Chief of Staff asks the agency heads not to propose or issue any rules or publish any rules in the Federal Register until a new department or agency head appointed or designated by the new President approves the rule. While Congress can use the Congressional Review Act to scrap agencies’ “midnight regulations” (see this PubCo post), this action represents a speedy approach to the same end available to the Executive branch for some recent rulemakings, many of which were adopted in the surge at the end of the last term.