SEC Chair Gensler faces Senate Committee—will the SEC moderate Scope 3 disclosure requirements?
Last week, SEC Chair Gary Gensler gave testimony before the Senate Banking, Housing and Urban Affairs Committee. While his prepared testimony largely revisited familiar themes, the Committee’s questioning offered a bit more insight. Committee Chair Senator Sherrod Brown cautioned at the outset that Republicans have “bellyached”—and he assumed would today—about Gensler’s “ambitious agenda,” but added that, “if Wall Street and its allies are complaining,” that means Gensler is doing his job. And right on cue, Ranking Member Senator Pat Toomey cast doubt on recent SEC actions that, he said, raised questions about how well the SEC was handling its responsibility to facilitate capital formation. Where was the SEC, he asked, when some crypto lending platforms “blew up,” resulting in billions in losses? And while the SEC has failed to provide regulatory clarity for the crypto market, he contended, it has instead been busy proposing many controversial and burdensome rules that are outside the SEC’s mission and authority. After West Virginia v. EPA (see this PubCo post), he warned, the SEC should consider itself to be on notice from the courts. In particular, some on the Committee—on both sides of the aisle—took aim at the SEC’s climate disclosure proposal—particularly Scope 3 disclosure—and Gensler’s responses made clear that he heard the criticisms, both from the Committee and from commenters, and that there would be some changes to the proposal as the SEC tries to “find a balance.” But far would those changes go?
SEC v. AT&T headed to trial—is Reg FD constitutional?
Reg FD cases rarely get to court, but here’s one that, barring a settlement, appears to be headed to trial. In a 129-page opinion in SEC v. AT&T, 9/08/22, the federal district court for the SDNY denied summary judgment for both sides in a case the SEC brought in March of 2021 against AT&T and three members of its Investor Relations Department for violations of Reg FD. (See this PubCo post.) The SEC alleged that, in March 2016, AT&T learned that, as a result of a “steeper-than-expected decline in smartphone sales,” AT&T’s first quarter revenues would fall short of analysts’ estimates by over a $1 billion. Given that AT&T had missed consensus revenue estimates in two of the three preceding quarters, AT&T, it was alleged, embarked on a “campaign” to beat consensus revenue estimates for Q1: the three defendant IR employees were asked by the CFO and IR Director to contact the analysts whose estimates were too high to “walk” them down. As part of that campaign, the SEC alleged, they selectively disclosed the company’s “projected or actual total revenue, and internal metrics bearing on total revenue, including wireless equipment revenue and wireless equipment upgrade rates.” The campaign worked. But—and it’s a big but—it also led the SEC to bring claims against AT&T for violating Reg FD, and against the three IR employees for aiding and abetting that violation. As to AT&T and the other defendants, the Court was not persuaded by their arguments that there was insufficient evidence to support the SEC’s claims of a Reg FD violation, nor did the Court agree that Reg FD was “invalid” under the First Amendment. And, as to the SEC, while the Court viewed as “formidable” the evidence showing that the information at issue was material, nonpublic and selectively disclosed, the question of scienter was a closer one, and a reasonable jury could find for the defendants on that point.
Corp Fin speaks at “SEC Speaks”
At last week’s PLI program, SEC Speaks, Corp Fin Director Renee Jones and crew discussed a number of topics, among them disclosure of emerging risks, recent rulemakings, staff focus on Part III disclosures, shareholder proposals and MD&A disclosures. But there’s no denying that the most entertaining moments came from the caustic side commentary provided by former SEC Commissioner Paul Atkins, whose perspective on current trends is, hmmm, distinctly at odds with the zeitgeist currently prevailing at the SEC.
SEC adopts inflation adjustments mandated by the JOBS Act
Today, the SEC adopted a number of inflation-related adjustments under the JOBS Act, including an adjustment to the revenue cap in the definition of “emerging growth company,” as well as adjustments to certain thresholds and limitations in the crowdfunding exemption under Reg Crowdfunding. Inflation has been very real in the last couple of years, so the adjustments are more substantial than for the prior period. The new inflation-adjusted amounts will become effective upon publication in the Federal Register.
Diversity for foreign private issuers
Countries outside the U.S. have sometimes been trendsetters when it comes to board diversity. For example, according to the California’s board gender diversity bill, SB 826, signed into law in 2018, “in 2003, Norway was the first country to legislate a mandatory 40 percent quota for female representation on corporate boards.” Under Nasdaq’s board diversity rules (see this PubCo post), board diversity encompasses more than gender diversity—it also includes persons who self-identify as underrepresented minorities or LGBTQ+. Nasdaq’s new diversity rules also apply to foreign private issuers. What does “board diversity” mean for foreign private issuers and non-US companies considering US IPOs? Does it focus solely on women or does it have a broader scope? Who are “underrepresented individuals in home country jurisdiction”? These questions and more are addressed in this fascinating piece, Board Diversity for Foreign Private Issuers: Does Board Diversity Mean the Same Thing Worldwide?, from Cooley’s Singapore office, posted on the Cooley CapitalXchange blog.
Fifth Circuit hears oral argument on challenge to Nasdaq board diversity rules—will the rules survive?
On Friday, August 6, 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.) As anticipated, a court challenge to these rules didn’t take long to materialize. On Monday, August 9, the Alliance for Fair Board Recruitment filed a slim petition under Section 25(a) of the Exchange Act in 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.) That petition was soon followed by a new petition challenging the rules filed by the National Center for Public Policy Research and subsequently transferred to the Fifth Circuit where the earlier filed petition was pending. (See this PubCo post.) Last week, a three-judge panel of the Fifth Circuit heard oral argument in the case, Alliance for Fair Board Recruitment, National Center for Public Policy Research v. SEC. Did it signal a result?
California’s proposed Climate Corporate Accountability Act goes belly up—for now at least
“California Approves a Wave of Aggressive New Climate Measures” was a headline in the NYT on Thursday, and that included a “record $54 billion in climate spending, a measure to prevent the state’s last nuclear power plant from closing, sharp new restrictions on oil and gas drilling and a mandate that California stop adding carbon dioxide to the atmosphere by 2045.” But one climate bill didn’t make the cut. That was SB 260, California’s Climate Corporate Accountability Act, which, on Wednesday, failed to pass in the California legislature, notwithstanding much ink being devoted to it this past year (see, e.g., this Bloomberg article). Had the bill been signed into law, it would have mandated reporting and disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities with total annual revenues in excess of a billion dollars that “do business in California.” Those requirements for GHG emissions reporting and attestation exceeded even the SEC’s proposed climate disclosure proposal. (See this PubCo post.) And, under the existing broad definition of “doing business” in California, the bill would have captured a large number of companies, estimated to be about 5,500, including many incorporated outside of California. (Nothing new for the Golden State—see this PubCo post and this PubCo post.) According to Politico Pro, Scott Wiener, the sponsor of the legislation, said in a statement that he was “deeply disappointed in this result….If we want to avoid a full climate apocalypse, we need to understand corporate pollution—all the way down the supply chain.” He added that “he ‘won’t give up’ and that he’s ‘very likely’ to reintroduce SB 260 next year.” Time will tell.
SEC adopts final pay-versus-performance disclosure rule [updated]
[This post revises and updates my earlier post primarily to reflect in greater detail the contents of the adopting release.]
Last week, without an open meeting, the SEC finally adopted a new rule that will require disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance—a new rule that has been 12 years in the making. In 2010, Dodd-Frank, in Section 953(a), added Section 14(i) to the Exchange Act, mandating that the SEC require so-called pay-versus-performance disclosure in proxy and information statements. The SEC proposed a rule on pay versus performance in 2015 (see this PubCo post and this Cooley Alert), but it fell onto the long-term, maybe-never agenda until, that is, the SEC reopened the comment period in January (see this PubCo post). According to SEC Chair Gary Gensler, the new rule “makes it easier for shareholders to assess a public company’s decision-making with respect to its executive compensation policies. I am pleased that the final rule provides for new, more flexible disclosures that allow companies to describe the performance measures it deems most important when determining what it pays executives. I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies.” In the adopting release, the SEC articulates its belief that the disclosure “will allow investors to assess a registrant’s executive compensation actually paid relative to its financial performance more readily and at a lower cost than under the existing executive compensation disclosure regime.” For the most part, although there is some flexibility in some aspects of the new rule, the approach taken by the SEC in this rulemaking is quite prescriptive; the SEC opted not to take a “wholly principles-based approach because, among other reasons, such a route would limit comparability across issuers and within issuers’ filings over time, as well as increasing the possibility that some issuers would choose to report only the most favorable information.” Commissioners Hester Peirce and Mark Uyeda dissented, and their statements about the rulemaking are discussed below.
Corp Fin issues new CDIs on universal proxy
At the end of last week, Corp Fin issued three new CDIs related to universal proxies under Rule 14a-19. In November 2021, the SEC amended the federal proxy rules to mandate the use of universal proxies in all non-exempt solicitations in connection with contested elections of directors of operating companies. By mandating the use of universal proxies—proxy cards that, when used in a contested election, include a complete list of all candidates for director duly nominated by both management and dissidents—the SEC’s rules now allow a shareholder voting by proxy to choose among director nominees in an election contest in a manner that closely mirrors in-person voting. (See this PubCo post.) The new CDIs address questions that have arisen in connection with notice and proxy statement disclosure. Below are brief summaries.
SEC adopts amendments to whistleblower program
On Friday, the SEC, without holding an open meeting, adopted two amendments to the whistleblower program that had been proposed in February. The vote was three to two. Under the SEC’s whistleblower program, the SEC may “make monetary awards to eligible individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions exceeding $1 million and certain successful related actions.” Awards must be in the range of 10% to 30% of the monetary sanctions collected. The two new amendments relate to changes that had been adopted in 2020 regarding awards under related programs and award amounts. According to SEC Chair Gary Gensler, the amendments will “help enhance the whistleblower program. The first amendment expands the circumstances in which a whistleblower who assisted in a related action can receive an award from the Commission for that related action rather than from the other agency’s whistleblower program. The second amendment concerns the Commission’s authority to consider and adjust the dollar amount of a potential award. Under today’s amendments, when the Commission considers the size of the would-be award as grounds to change the award amount, it can do so only to increase the award, and not to decrease it. This will give whistleblowers additional comfort knowing that the Commission would not decrease awards based on their size….I think that these rules will strengthen our whistleblower program. That helps protect investors.” The amendments to the whistleblower rule will become effective 30 days after publication in the Federal Register.
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