SEC Chair Jay Clayton has streamlined the Regulatory Flexibility Act Agenda to limit it to the rulemakings that the SEC actually expects to take up in the subsequent period. Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually plans to pursue in the following 12 months. (See this PubCo post and this PubCo post.) The SEC’s Fall 2019 short-term and long-term agendas have now been posted, reflecting priorities as of August 7, the date on which the SEC’s staff completed compilation of the data. Items on the short- and long-term agendas are discussed below.
It’s well recognized that the equity markets work pretty well for companies that trade in high volumes, but companies with low trading volumes? Not so much. Thinly traded securities often face liquidity challenges, including wider spreads, higher transaction costs, fewer market makers and potential difficulties for investors that seek to unwind their positions. These issues can discourage small- and medium-sized enterprises from accessing the public markets, a problem that the SEC has been anxious to address. To find potential solutions for these problems, in October 2019, the SEC solicited proposals for changes in equity market structure designed to improve the secondary trading markets for thinly traded securities. Nasdaq has just announced that it has submitted to the SEC an application for exemptive relief that would facilitate its proposal “to establish a tier nestled [sounds very cozy!] within the U.S. public equity markets that is better tailored and far more hospitable to thinly-traded securities than is the all-purpose, undifferentiated market environment in which they suffer today.”
[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
At an open meeting last week, the SEC voted three to two to adopt a proposal intended to modernize and improve disclosure regarding company stock repurchases. Issuers have something to be relieved about and something to be mildly anxious about. The good news is what the SEC didn’t do: the new rule does away with the proposed Form SR for domestic companies and backs off the proposed requirement for almost real-time (daily) reporting of share repurchases. Instead, the final rule moves to quarterly reporting of detailed quantitative information on daily repurchase activity, filed as exhibits to issuers’ periodic reports. The more vexing aspect is that domestic issuers will be required to begin this reporting, along with the new narrative disclosure, starting with the first Form 10-Q or 10-K covering the first full fiscal quarter (i.e., for the 10-K, the 4th quarter) that begins on or after October 1, 2023. That means that companies will need to get on the stick to begin to develop processes and procedures for collection of that data. In addition, the information will be deemed “filed” and not “furnished,” as originally proposed, which means that it could be subject to Section 18 and Section 11 liability. The amendments will also revise and expand the narrative requirements and add a new requirement for disclosure regarding a company’s adoption and termination of Rule 10b5-1 trading arrangements. In the press release, Chair Gary Gensler observed that “[i]n 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022….Today’s amendments will increase the transparency and integrity of this significant means by which issuers transact in their own securities. Through these disclosures, investors will be able to better assess issuer buyback programs. The disclosures will also help lessen some of the information asymmetries inherent between issuers and investors in buybacks. That’s good for investors, issuers, and the markets.” Commissioners Hester Peirce and Mark Uyeda dissented, with Peirce remarking that “better-than-it-might-have-been is not my standard for supporting a final rule.”
“Highly anticipated” is surely an understatement for the hyperventilation that has accompanied the wait for the SEC’s new proposal on climate disclosure regulation. The proposed rulemaking has been a subject of conjecture for many months, and internal squabbles about where the proposal should land have leaked to the press. (See this PubCo post.) As one of those hyperventilators, I’ve been speculating for months about what it might include, what it might exclude. Would it require disclosure of Scope 3 GHG emissions? Would a particular framework be selected or endorsed? Would the framework sync up with international standards or, if not, how would they overlap or conflict? Would the framework be industry-specific? Would scenario analyses be mandated? Would companies be required to obtain third-party attestation or other independent assurance? Would reporting be scaled? There were a lot of questions. Now, we finally know at least some of the preliminary answers: yesterday, the SEC voted, three to one, to propose new rules requiring public companies to disclose information about the material impact of climate on their businesses, as well as information about companies’ governance, risk management and strategy related to climate risk. The disclosure, which would be included in registration statements and periodic reports, would draw, in part, on disclosures provided for under the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. Compliance would be phased in, with reporting for large accelerated filers due in 2024 (assuming an—optimistic—effective date at the end of this year). The proposal would also mandate disclosure of a company’s Scopes 1 and 2 greenhouse gas emissions, and, for larger companies, Scope 3 GHG emissions if material (or included in the company’s emissions reduction target), with a phased-in attestation requirement for Scopes 1 and 2 for large accelerated filers and accelerated filers. The proposal would also require disclosure of certain climate-related financial metrics in a note to the audited financial statements. For some, a sigh of relief, for others, not so much.
West Virginia v. EPA: SCOTUS gives its imprimatur to the “major questions” doctrine, shaking up the “administrative state”
West Virginia v EPA, the next-to-final decision handed down by SCOTUS this term, is a significant decision regarding a rule that the EPA said was never even in effect, that it had no intention of enforcing and that it planned to later replace with a new still-to-be-developed rule. As the NYT phrased it, “it’s a case about a regulation that doesn’t exist.” (Sort of like an episode of Seinfeld—the show about nothing—except that it’s not the least bit funny.) So SCOTUS could have stopped right there, but the Court forged ahead—an indicator by itself—with a decision that is nevertheless shaking up administrative law and the extent of rulemaking authority that federal agencies have—or thought they had. Its impact will likely be felt, not just at the EPA, but also at many other agencies, including the SEC. Of course, the conservative members of the Court have long signaled their desire to rein in the dreaded “administrative state.” (See, for example, the dissent of Chief Justice John Roberts in City of Arlington v. FCC back in 2013, where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed.”) With this new decision by the Chief Justice (joined by five other justices), that desire has now been sated—for a while at least. In the majority opinion, SCOTUS declared that this case “is a major questions case,” referring to a judicially created doctrine holding that courts must be “skeptical” of agency efforts to assert broad authority to regulate matters of “vast economic and political significance,” requiring, in those instances, that the agency “point to ‘clear congressional authorization’ to regulate.’” In addition to the blow that the decision deals to climate regulation—“Court Decision Leaves Biden With Few Tools to Combat Climate Change,” is one of the headlines from the NYT—we can now expect the major questions doctrine to be brandished regularly against significant agency regulations across the board, and, with Congress perpetually at loggerheads and limited in its ability to authorize much of anything these days, it could well stymie much agency rulemaking. Does anyone question that, with SCOTUS’s new imprimatur, the doctrine will be raised in anticipated litigation against whatever version of the SEC’s climate disclosure regulation is adopted? As reported by Reuters, when asked by Bloomberg TV on Thursday about the impact of the decision on other agencies, Senator Patrick Toomey “singled out the SEC rule,” claiming that the SEC is “attempting to impose this whole climate change disclosure regime…with no authority from Congress to do that.” To better understand the major questions doctrine, it may be useful to take a closer look at the case.
You might remember that the first piece of legislation signed into law by the then-new (now outgoing) administration in 2017 was, according to the Washington Post, a bill that relied on the Congressional Review Act to dispense with the resource extraction payment disclosure rules. (See this PubCo post.) Under the CRA, any rules that were recently finalized by the executive branch and sent to Congress could be jettisoned by a simple majority vote in Congress and a Presidential signature. According to the Congressional Research Service, before the current outgoing administration took up the cudgel in 2017, “[o]f the approximately 72,000 final rules that [had] been submitted to Congress since the [CRA] was enacted in 1996, the CRA [had] been used to disapprove one rule: the Occupational Safety and Health Administration’s November 2000 final rule on ergonomics, which was overturned using the CRA in March 2001.” That’s because the stars are rarely in proper alignment: generally, the CRS indicated, for successful use, there will have been a turnover in party control of the White House and both houses of Congress will be majority–controlled by the same party as the President. That was the case in 2017, and, as of January 9, 2020, the CRA had been used to overturn a total of 17 rules, according to the CRS. Well, the stars are in proper alignment now. To observe that the new Congress and new administration have a lot on their plates is quite an understatement. Will they use the CRA to scrap any of the SEC’s “midnight regulations”?
SEC Chair Jay Clayton has repeatedly made a point of his intent to take the Regulatory Flexibility Act Agenda “seriously,” streamlining it to show what the SEC actually expected to take up in the subsequent period. (Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually planned to pursue in the following twelve months. See this PubCo post and this PubCo post.) The SEC’s Spring 2019 short-term and long-term agendas have now been posted, reflecting the Chair’s priorities as of March 18, when the agenda was compiled. What stands out is not so much the matters that show up on the short-term agenda—although there are plenty of significant proposals to keep us all busy—but rather the legislatively mandated items that have taken up protracted residency on the long-term (i.e., the maybe never) agenda.
At an open meeting yesterday, the SEC adopted, by the usual three to two, final Rule 13q-1 and an amendment to Form SD to implement Section 1504 of Dodd-Frank, which relates to disclosure of payments by resource extraction issuers. These rules, last proposed almost exactly a year ago (see this PubCo post), have had a long and troubled history. This effort at new resource extraction disclosure rules represents the SEC’s third attempt at these rules—making their consideration a holiday tradition, according to SEC Commissioner Hester Peirce—and today is almost on target as the tenth anniversary of the original proposal. Will the third time be the charm? Even if you’re not remotely drawn to the subject matter of these rules, you might nevertheless find worthwhile the debate at the meeting about whether this rulemaking was appropriately within the remit of the SEC: was the mandate about informing and protecting investors, maintaining orderly markets or facilitating capital formation or was it rather about social policy unrelated—or at most distantly related—to the SEC’s core mission? Will the majority view on that question have any influence on future legislation?
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.
Development International has posted its most recent Conflict Minerals Benchmarking Study, analyzing the results of filings for the 2016 filing period. The study looked at filings submitted by the 1,153 issuers that had filed conflict minerals disclosures as of July 10, 2017. The number of issuers filing disclosures for 2016 reflected a decline of 5.6% compared to 2015. Most interesting, however, is that, notwithstanding statements from Corp Fin, echoed by the Acting SEC Chair at the time, advising companies that they would not face enforcement if they filed only a Form SD and did not include a conflict minerals report, the vast majority of companies continued to file conflict minerals reports.