In September last year, Corp Fin posted a sample letter to companies containing illustrative comments regarding climate change disclosures, presumably designed to help companies think about and craft their climate-related disclosure. (See this PubCo post.) Corp Fin began by noting that, under its 2010 guidance (see this PubCo post), depending on the facts and circumstances, climate change disclosure could be elicited in a company’s SEC filings in connection with the description of business, legal proceedings, risk factors and MD&A. Still, right now, there is little in the way of prescriptive climate disclosure requirements, although a proposal for climate disclosure regulation is high on the SEC’s agenda. (See this PubCo post.) Instead, companies have instead looked largely to standards of materiality to determine whether climate disclosure is required in their SEC filings. However, many companies provide climate disclosure in corporate social responsibility reports that are not filed with the SEC, but instead typically posted on company websites. As reported in a recent analysis by Audit Analytics, in the SEC’s most recent round of comment letters about climate last month, the climate disclosure on which the SEC is commenting is primarily contained in these CSR reports. And the SEC wants companies to justify—in some detail—why that disclosure isn’t also in companies’ SEC filings.
[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
The SEC has proposed to amend the complex beneficial ownership reporting rules. In the press release announcing the changes in beneficial ownership reporting, SEC Chair Gary Gensler described the amendments as an update designed to modernize reporting requirements for today’s markets, including reducing “information asymmetries,” and addressing “the timeliness of Schedule 13D and 13G filings.” Currently, according to Gensler, investors “can withhold market moving information from other shareholders for 10 days after crossing the 5 percent threshold before filing a Schedule 13D, which creates an information asymmetry between these investors and other shareholders. The filing of Schedule 13D can have a material impact on a company’s share price, so it is important that shareholders get that information sooner. The proposed amendments also would clarify when and how certain derivatives acquired with control intent count towards the 5 percent threshold, clarify group formation, and create related exemptions.” Here is the fact sheet, and here is the proposing release. Consistent with the apparently new comment period formula, the public comment period for each proposal will be open for 60 days following publication of the proposing release on the SEC’s website (April 11, 2022) or 30 days following publication in the Federal Register, whichever period is longer.
It’s been almost 12 years since Dodd-Frank mandated, in Section 953(a), so-called pay-versus-performance disclosure, but amazingly, no rules have yet been adopted to implement that mandate. Even more amazing, the SEC is still working on it. As expected, on Thursday last week, the SEC announced that it had reopened the comment period on rules, originally proposed in 2015, that would require disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance. The reopening of the proposal is due in part “to certain developments since 2015 when the proposing release was issued,” particularly, “developments in executive compensation practices.” Here is the SEC’s original proposing release, fact sheet and the proposal reopening the comment period. According to SEC Chair Gary Gensler in his statement on the reopening of the proposal, “this proposed rule would strengthen the transparency and quality of executive compensation disclosure….The Commission has long recognized the value of information on executive compensation to investors.” The questions posed by the SEC in the notice (discussed below) give us some insight into where the SEC may be headed with the proposal. In particular, as noted by Gensler, the 2015 proposal “relied upon total shareholder return as the sole measure of financial performance. Some commenters expressed concerns that total shareholder return would provide an incomplete picture of performance. In this reopening release, we are considering whether additional performance metrics would better reflect Congress’s intention in the Dodd-Frank Act and would provide shareholders with information they need to evaluate a company’s executive compensation policies.” The public comment period will be open for 30 days following publication of the release in the Federal Register.
In November 2021, Audit Analytics posted its 20-year review of restatements, showing that the number of “Big R” reissuance restatements in 2020, the last year of the review, was at a record low. According to the report, there were “81% fewer restatements in 2020 than the high in 2006 and 26% fewer than 2019.” Notably, however, while in 2005 reissuance restatements represented the majority of restatements, in 2020, reissuance restatements represented only 24.3% of restatements; revision restatements represented 75.7% of all restatements. At yesterday’s Northwestern Pritzker School of Law’s Annual Securities Regulation Institute, Lindsay McCord, Corp Fin Chief Accountant, raised a question: were companies being properly “objective” in assessing whether a restatement should be a “Big R” or “little r” restatement?
Although there is an SEC open meeting scheduled for this week, the commissioners won’t be taking up any proposals from Corp Fin at that meeting (see the agenda). That’s a little puzzling given that the SEC’s agenda for Corp Fin was near to bursting, especially for highly anticipated disclosure proposals on climate and human capital, among other things. Those two topics, for example, had appeared on the two most recent SEC reg-flex agendas with proposal target dates of October 2021, then delayed to December 2021, with expectations later vaguely conveyed for January 2022, unlikely now to be met. [UPDATE: At the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute on Tuesday, Corp Fin Director Renee Jones indicated that said that they expect to have a proposal on climate disclosure before the SEC this quarter.] However, according to Bloomberg, the SEC does have Corp Fin-related plans for this week: to reopen the public comment period on the 2015 pay-versus-performance proposal “after a vote taken behind closed doors.”
Corp Fin staff updates annual meeting guidance for presentation of shareholder proposals in light of continuation of COVID-19
Back in March 2020, before we could even imagine that we would still be struggling with COVID-19 in 2022, the SEC announced Corp Fin staff guidance regarding annual meetings. Because of limitations on the ability to hold in-person annual meetings as a result of health and travel concerns, the staff guidance provided “regulatory flexibility to companies seeking to change the date and location of the meetings and use new technologies, such as ‘virtual’ shareholder meetings that avoid the need for in-person shareholder attendance, while at the same time ensuring that shareholders and other market participants are informed of any changes.” (See this PubCo post.) That guidance was then updated in April 2020 and April 2021. (See this PubCo post and this PubCo post.) Now, the Corp Fin staff has once again updated that guidance for this year, tweaking the advice related to presentation of shareholder proposals to extend its application to the 2022 proxy season.
You might recall that, in 2019, Corp Fin discontinued its longstanding approach of responding by written letter to each no-action request to exclude a shareholder proposal. Instead, the staff responded by letter only when it believed “doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8,” and declined to respond by letter to requests that it considered to be ordinary course. The vast majority of responses were publicly communicated on a chart posted on the Corp Fin website. At the time, the staff indicated that the change was intended to make the process more efficient and effective. (See this PubCo post.) On review, the staff has now decided to revert back to prior practice.
Climate risk disclosure “glaringly absent” in financial statements? Will regulators act to require more?
In one of the illustrative comments in Corp Fin’s just published sample comment letter on climate issues, Corp Fin asks companies to explain what consideration they may have given to providing in their SEC filings the same type of expansive climate-related disclosure that’s in their corporate social responsibility reports. One place in companies’ SEC filings where climate-related disclosure is “glaringly absent,” according to this report from the Carbon Tracker Initiative, is in the financial statements. Although many companies face serious climate risk, and many have even made net-zero pledges, the report “found little evidence that companies or their auditors considered climate-related matters in the 2020 financial statements.” According to the lead author of the report, “[b]ased on the significant exposure these companies have to transition risks, and with many announcing emissions targets, we expected substantially more consideration of climate matters in the financials than we found. Without this information there is little way of knowing the extent of capital at risk, or if funds are being allocated to unsustainable businesses….” Financial statement disclosure was so deficient, the report concluded, investors were essentially “flying blind.”
This afternoon, Corp Fin posted a sample letter to companies containing illustrative comments regarding climate change disclosures. Presumably, the goal is to help companies think about and craft their climate-related disclosure.