Tag: SEC
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.
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.
NAM seeks to challenge Rule 14a-8 regulatory process for shareholder proposals
You might recall that this past proxy season witnessed a significant number of shareholder proposals related to ESG—from both sides of the aisle. (See this PubCo post.) One of those proposals was submitted by the National Center for Public Policy Research to The Kroger Co., which operates supermarkets, regarding the omission of consideration of “viewpoint” and “ideology” from its equal employment opportunity policy. Kroger sought to exclude the proposal as “ordinary business” under Rule 14a-8(i)(7), and Corp Fin concurred. After Corp Fin and the SEC refused reconsideration of the decision, the NCPPR petitioned the Fifth Circuit for review. Now, the National Association of Manufacturers has requested, and been granted, leave to intervene in the case, claiming that neither the federal securities laws nor the First Amendment allows the SEC to use Rule 14a-8 to compel companies to speak about contentious political or social issues, such as abortion, climate change, diversity or gun control, that are “unrelated to its core business or the creation of shareholder value.” That is, NAM isn’t just arguing about Corp Fin’s greenlighting of the exclusion of NCPPR’s proposal—in fact, NAM agrees that “Kroger should not be forced to include petitioners’ policy proposal in Kroger’s proxy statement.” Rather, NAM is upping the ante considerably by challenging whether the SEC has any business “dictat[ing] the content of public company proxy ballots and the topics on which shareholders are required to cast votes.” According to NAM’s Chief Legal Officer, “[m]anufacturers are facing an onslaught of activists seeking to hijack the proxy ballot to advance narrow political agendas, and the SEC has become a willing partner in the effort. The corporate proxy ballot is not the appropriate venue for policy decisions better made by America’s elected representatives, and manufacturers are regularly caught in the middle as activists on the left and the right bring fights from the political arena into the boardroom.”
Nasdaq simplifies “confusing” timing requirements for board diversity rules
A new rule change designed to simplify the rules regarding the timing of compliance with the Nasdaq board diversity listing rules has been filed by Nasdaq and declared immediately effective. As you probably remember, on August 6, 2021, the SEC approved Nasdaq’s proposal for new listing rules regarding board diversity and disclosure, along with a proposal to provide free access to a board recruiting service. The 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 in a matrix format. (See this PubCo post.) Now, Nasdaq acknowledges that the formulation of the compliance deadlines, which were tied to the approval date of the proposal by the SEC, is “confusing and unnecessarily complicated.” Not Nasdaq’s fault though—it meant well! At the time of filing of the proposal, “Nasdaq and listed companies could not know when the proposal would be approved,” and Nasdaq “wanted to assure that listed companies had at least one year from the approval of the rules, or until their next annual meeting, to take necessary actions to satisfy the requirements” of the rules. Nasdaq is now making technical changes to several rules to address that problem by eliminating complicated references to the SEC approval date, and instead requiring compliance by December 31st of the applicable year (which, according to Nasdaq, is the fiscal year-end for approximately 80% of Nasdaq-listed companies subject to the rules).
Happy Holidays!
Texas court jettisons NAM challenge to SEC’s proxy advisor rules
Is it ok for an agency to change its mind? The Federal District Court for the Western District of Texas seems to think so—at least if the agency’s decision is “reasonable and reasonably explained.” So says this Order granting summary judgment to the SEC and Chair Gary Gensler and denying summary judgment to the National Association of Manufacturers and the Natural Gas Services Group in the litigation surrounding the SEC’s adoption in 2022 of amendments to the rules regarding proxy advisory firms, such as ISS and Glass Lewis. Those 2022 rules reversed some of the key controversial provisions governing proxy voting advice that were adopted by the SEC in July 2020 and favored by NAM. In July of this year, NAM filed a complaint asking that the 2022 rules be set aside under the Administrative Procedure Act and declared unlawful and void, and, in September, NAM filed its motion for summary judgment, characterizing the case as “a study in capricious agency action.” The Court begged to differ. But, no surprise, we haven’t heard the last of this matter—NAM has already filed its notice of appeal.
SEC adopts final rules on compensation clawbacks in the event of financial restatements—“Big R” and “little r” [UPDATED]
[This post revises and updates my earlier post primarily to reflect in greater detail the contents of the adopting release. For a discussion of the comments and criticisms of the SEC Commissioners at the open meeting at which the rules were adopted, see my earlier post.]
At an open meeting last week, the SEC adopted, by a vote of—surprise—3 to 2, rules to implement Section 954 of Dodd-Frank, the clawback provision. Clawback rules were initially proposed by the SEC back in 2015, but were relegated to the long-term agenda, until they suddenly reemerged on the SEC’s short-term agenda in 2021 (see this PubCo post) with a target date for a re-proposal of April 2022. Instead of a re-proposal, however, a year ago, the SEC simply posted a notice announcing that it was re-opening the comment period and posing a number of questions for public comment. (See this PubCo post.) One possible change suggested by the SEC’s questions was a potential expansion of the concept of “restatement” to include not only “reissuance,” or “Big R,” restatements (which involve a material error and an 8-K), but also “revision” or “little r” restatements. Then, in June of this year, DERA issued a new staff memorandum addressing in part the restatement question, which led the SEC to once again re-open the comment period. Finally, the SEC concluded that, after more than seven years, the proposal had marinated long enough. Time to serve it up. The new rules direct the national securities exchanges to establish listing standards requiring listed issuers to adopt and comply with a clawback policy and to provide disclosure about the policy and its implementation. The clawback policy must provide that, in the event the listed issuer is required to prepare an accounting restatement—including a “little r” restatement—the issuer must recover the incentive-based compensation that was erroneously paid to its current or former executive officers based on the misstated financial reporting measure. Commissioners Hester Peirce and Mark Uyeda dissented, contending that, among other problems, the rule was too broad and too prescriptive. According to SEC Chair Gary Gensler, the key word here is “erroneously,” that is, the rule requires recovery of compensation to which the officers were never entitled in the first place. In his statement at the meeting, Gensler indicated that he believes “that these rules will strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors….Through today’s action and working with the exchanges, we have the opportunity to fulfill Dodd-Frank’s mandate and Congress’s intention to prevent executives from keeping compensation received based on misstated financials.”
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