Category: Securities
SEC dials back final climate disclosure rules
We’ve been trying to read the tea leaves for two years now, speculating about where the SEC’s final climate disclosure rules might land, especially as criticism about the proposal from the corporate sphere and from Congress intensified, and snippets about the contents of the final rule leaked to the press. This conjecture is now at an end: yesterday, by a vote of three to two, the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies and in public offerings.” If you tuned in to the SEC’s open meeting yesterday—with over two hours devoted to the climate rules—you didn’t see a lot of happy faces. The dissenters (Commissioners Hester Peirce and Mark Uyeda) thought the rule was unnecessary and went too far and Commissioner Caroline Crenshaw thought the final rule didn’t go far enough, but was barely acceptable as a “floor” for disclosure. Only SEC Chair Gary Gensler and Commissioner Jaime Lizárraga seemed to think that the balance was about right. Apparently, a coalition of attorneys general from ten states isn’t very happy either. Law 360 is reporting that the group immediately petitioned the Eleventh Circuit to review the new climate rules. (See the SideBar below.)
The disclosure, which will be included in registration statements and annual reports, will draw, in part, on disclosures provided for under the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. The new rules will require public companies to disclose information about the material climate-related risks, companies’ governance, risk management and any material climate-related targets or goals, as well as disclosure of the financial statement effects, such as costs and losses, of severe weather events and other natural conditions. Importantly, as widely rumored, in response to public feedback, the SEC has jettisoned the mandate for Scope 3 GHG emissions reporting; the final rules require disclosure of Scope 1 and/or Scope 2 GHG emissions on a phased-in basis only by accelerated and large accelerated filers when those emissions are material. Companies will also be allowed more time to file their emissions disclosures. Attestation will also be phased in. According to Gensler,
“Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure,’….Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain and, when necessary, provided guidance with respect to those disclosure requirements….These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”
Another scoop about expected SEC climate disclosure rules
Since many of you may, like me, be having the vapors waiting for the SEC to finally divulge the new climate disclosure rules, I thought I’d share this latest scoop from Reuters. According to Reuters, not only is the SEC dropping the mandatory Scope 3 requirement, it is also moderating the requirements for disclosure of Scopes 1 and 2.
Another EV manufacturer charged for material misrepresentation to investors
It’s almost as if someone put a hex on electric vehicle manufacturers that went public through de-SPACs. In 2022, SEC Enforcement charged Nikola Corporation, an aspiring manufacturer of low- or zero-emission semi-trucks, alleging that Nikola “defrauded investors by misleading them about its products, technical advancements, and commercial prospects,” leading to a $125 million settlement. (See this PubCo post.) Then we had a twofer—settled actions against two manufacturers of electric vehicles for misleading investors. In the first case, Hyzon Motors Inc., a maker of hydrogen fuel cell electric vehicles, was charged with misleading investors about the status of Hyzon’s products, business relationships and vehicle sales, agreeing to pay a civil penalty of $25 million. Then, the predecessor to Spruce Power Holding Corporation, XL Fleet, which provided fleet hybrid electrical vehicles, was alleged to have misled investors about its sales pipeline and revenue projections. As the successor, Spruce agreed to pay a civil penalty of $11 million. (See this PubCo post.) But that’s not the end of it. Now we have charges against Lordstown Motors Corp., a manufacturer of electric vehicles focused on the commercial fleet market, for “misleading investors about the sales prospects of Lordstown’s flagship electric pickup truck, the Endurance.” Lordstown went public through a de-SPAC transaction in 2020 and filed for bankruptcy in 2023. As a result of this action, Lordstown agreed to a cease-and-desist order and disgorgement of $25.5 million.
Climate disclosure rules officially slated for March 6 open meeting
Consideration of the SEC’s long anticipated climate disclosure rules—the “Enhancement and Standardization of Climate-Related Disclosures for Investors”—is finally on the SEC’s open meeting agenda for March 6. There have been lots of rumors about the timing and the contents of the final rule, so now we’ll actually have the opportunity to see what the SEC has settled on. (For discussions of the substance of the proposal, see this PubCo post, this PubCo post and this PubCo post.) Stay tuned.
After 1576 days, DC District Court holds proxy advisor rule invalid
A Federal District Court has just held invalid the SEC’s rule regarding proxy advisory firms. The case dates back to 2019(!), when ISS sued the SEC and then-SEC Chair Jay Clayton in connection with the SEC’s interpretive guidance that proxy advisory firms’ vote recommendations were, in the view of the SEC, “solicitations” under the proxy rules and subject to the anti-fraud provisions of Rule 14a-9. (See this PubCo post.) Rules confirming that interpretation were adopted in 2020. In its amended complaint, ISS contended that the interpretation in the release and the subsequent rules were unlawful for a number of reasons, including that the SEC’s determination that providing proxy advice is a “solicitation” is contrary to law, that the SEC failed to comply with the Administrative Procedure Act and that the views expressed in the release were arbitrary and capricious. Now, after 1576 days, the DC District Court has agreed, holding that the “SEC acted contrary to law and in excess of statutory authority when it amended the proxy rules’ definition of ‘solicit’ and ‘solicitation’ to include proxy voting advice for a fee.”
Corp Fin staff advice on “eligible sell-to-cover” transactions under Rule 10b5-1
Many thanks to thecorporatecounsel.net blog for posting this memorandum to the ABA’s Joint Committee on Employee Benefits from three members of that committee regarding their informal discussions with SEC staff about a couple of questions that have arisen about the scope of the exception for “sell-to-cover” transactions under Rule 10b5-1.
Reuters scoop: SEC to jettison Scope 3 requirements from climate disclosure proposal
Today, Reuters reported exclusively that the SEC is indeed planning to eliminate some of the more controversial requirements in its climate disclosure proposal. Of course, we’re talking Scope 3. (See this PubCo post, this PubCo post and this PubCo post.). To be sure, this news doesn’t come as a complete surprise. Even a year ago, the SEC floated the idea that, in response to concerns regarding potential litigation (among other things), it may well pare down and loosen up some of its proposed rules on climate disclosure. In this article in Politico and this article in the WSJ, “three people familiar with the matter” and “people close to the agency” told reporters that SEC Chair Gary Gensler was “considering scaling back a potentially groundbreaking climate-risk disclosure rule that has drawn intense opposition from corporate America.” But at that point, according to Politico, SEC officials stressed that “no decision has yet been made.” (See this PubCo post.) Reuters is now reporting that, according to “people familiar with the matter”—are they the same people, I wonder?—among the requirements the SEC plans to scrap in the final rules is the requirement to disclose Scope 3 GHG emissions.
What ESG backlash? KPMG survey finds companies plan to increase spending on ESG
ESG backlash notwithstanding, a recent global survey conducted by KPMG of 550 company directors and members of management showed that the vast majority of global organizations plan to increase spending on sustainability initiatives over the next three years. Why? KPMG’s US ESG Audit Leader told Bloomberg that the “key reason” at the moment for the increased interest in ESG “‘is really regulatory pressure.’ Regulations are forcing companies to ‘inject the same level of rigor into [their] sustainability reporting that is required of financial reporting….Historically, sustainability reporting has sat with a very small group of under-resourced people,’ [she said]. Now as requirements evolve, ‘the amount of effort and rigor that needs to go into reporting has changed substantially.’” But these expenditures are not designed purely for compliance, KPMG concluded; they are also considered “a valuable tool for enhancing financial performance both now and in the future.” Nevertheless, “organizations are facing real challenges in delivering against this objective”; as KPMG observed, there seems to a “a disconnect between perception and preparedness.”
Fifth Circuit grants petition for rehearing en banc for Nasdaq board diversity rule
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. 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.) It didn’t take long for a court challenge to these rules to materialize: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post) In October 2023, a three-judge panel of the Fifth Circuit denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on this panel happened to all be appointed by Democrats. Petitioners then filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. (See this PubCo post.) Not that politics has anything to do with it, of course. That petition for rehearing en banc has just been granted by the Fifth Circuit—on Presidents’ Day—and the opinion of the lower court was vacated.
Gensler won’t rush SEC’s agenda
As reported by Bloomberglaw.com, during an interview on “Balance of Power” on Bloomberg Television, SEC Chair Gary Gensler said that he does not intend to “rush” the SEC’s agenda “to get ahead of possible political changes in Washington,” that is, in anticipation of the November elections. According to Bloomberg, he insisted that he’s “‘not doing this against the clock….It’s about getting it right and allowing staff to work their part.’” As the article reminds us, if Republicans win all three branches in November, they could repeal regulations adopted shortly before the turnover in party control. In addition, a number of the SEC’s rules are being challenged in court and “those court battles could bleed into next year.”
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