6LinkedIn 8 Email Updates. A process to create such standards is not likely to be simple, quick or easy. The only limit on companies ability to speak about climate is a long-standing limitnot created by the proposed rulethat they not lie or deceptively omit material information in doing so. It would not affect the way that property insurers underwrite, pool or reserve against climate risksthat is for insurance regulators. They require fact-finding and expert factual judgments about likely effects, costs, benefits and risks of alternatives, including inaction, in the face of investor needs that have led most large companies to publish inconsistent and variable climate-related disclosures. We'll send you a myFT Daily Digest email rounding up the latest Denise Coates news every morning. A draft of what would become the 1933 Act in the Senate included disclosure items directly in the statute, and did not contain the equivalent language later adopted in Section 7, which directs the Commission to go beyond that list (which is separate from the Commissions general rulemaking authority in Section 19). John C. Coates is the John F. Cogan, Jr. Law.com Compass includes access to our exclusive industry reports, combining the unmatched expertise of our analyst team with ALMs deep bench of proprietary information to provide insights that cant be found anywhere else. Litig., 238 F. Supp. 6LinkedIn 8 Email Updates, Accounting and Financial Reporting Guidance, Compliance and Disclosure Interpretations, No-Action, Interpretive and Exemptive Letters, Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (SPACs), SPACs, IPOs and Liability Risk under the Securities Laws, ESG Disclosure Keeping Pace with Developments Affecting Investors, Public Companies and the Capital Markets. In closing, I want to make three final points. It is true that the subject matter of the financial risks and opportunities raised by climate change are complex, and climate experts have specialized knowledge about climate science. The purpose of the disclosure was also to protect markets and market pricing, and improve the resulting allocation of capital. Congressional support for the Commissions clear (but statutorily limited) disclosure authority is shown by the fact that over time, in the face of repeated Congressional amendments and annual budget laws (in which Congress can and has inserted riders further limiting Commission discretion), the Commissions requirements ranged far beyond the limited lists of information in the 1933 and 1934 Acts themselves. Moreover, the landscape is changing rapidly so issues that yesterday were only peripheral today are taking on greater importance. The multiple places the statutes give the Commission authority to go beyond its text (to create exemptions, tailor its requirements, and add to them). The World Meteorological Organization has tracked damage from weather events for the past fifty years; the top five most economically destructive events all occurred since 2005. I am pleased to welcome Renee to the SEC and look forward to working with her., I am excited to join the Division of Corporation Finances team of experienced and dedicated public servants, said Jones. 5, 2021); Priya Cherian Huskins, Why More SPACs Could Lead to More Litigation (and How to Prepare), A.B.A. He had been serving as the independent monitor for the U.S.. Women, Influence & Power in Law UK Awards 2023, Legalweek Leaders in Tech Law Awards 2023, WORKERS COMPENSATION ATTORNEY - Hartford, CT, Offering an Opportunity of a Lifetime for Personal Injury Lawyers, What Does Your Business Agreement Really Mean? The caption to Section 7Information required in registration statementcontains no qualifiers on information. The authorizing language in Section 7(a)(1) is limited by Section 7(a)(2), but only for a designated class of emerging growth companies, and not as to content. But for the protection of investors, these limits are features, not bugsthey precisely show how the rule adheres to Congresss clear but limited delegation of disclosure specification to the Commission. Investments are being held back in the absence of that information. John C. Coates and R. Glenn Hubbard, Competition in the . It is against this backdrop that I think about the regulation of ESG disclosures. Mar. After the de-SPAC, the entity carries on its operations as a public company. The disclosures would consist of facts, not opinions, and raise no First Amendment concern. Biography. The claim that the proposed rules requirements are so unrelated to investor protection as to altogether fall outside the Commissions obligation to specify financial risk disclosures is without merit. An IPO is where the protections of the federal securities laws are typically most needed to overcome the information asymmetries between a new investment opportunity and investors in the newly public company. Where and how should disclosures be globally comparable? Reflected in the PSLRAs clear exclusion of initial public offerings from its safe harbor is a sensible difference in how liability rules created by Congress differentiate between offering contexts. Far from calling for lengthy or complex sustainability reports of the kind most S&P 500 companies already publish, these requirements could be met with relatively succinct disclosure for companies with minimal climate-related risks. In truth, as this Point will detail, the actual proposed rule best fits with what investors need and want, and not what climate activists seeking to reduce climate impacts of business would seek, or even a rule they might write to elicit reporting about those impacts. For questions call 1-877-256-2472 or contact us at [emailprotected], Shearman and Hogan Lovells Call Off Merger Talks, Early Reports: 2023 Am Law 200 Financials, Beyond Excess Capacity, Pooled Services and Automation Expedite Staff Layoffs, Dozens of Law Firms Grew Their Equity Partner Tier, Even as Profits and Demand Plummeted. Funding needs to be reliable and adequate, both now and over a reasonable time period into the future, and should not detract from other essential elements of the system for public company disclosures. If we do not treat the de-SPAC transaction as the real IPO, our attention may be focused on the wrong place, and potentially problematic forward-looking information may be disseminated without appropriate safeguards. Moreover, state law, such as in Delaware, may require disclosure of projections used by the boards or their advisors in these transactions. It is not a transformative surprising regulatory departure, raising such a major question as to justify interpretive methods other than those of a faithful agent of Congress. John Coates, named acting director of the SEC's Division of Corporation Finance on Feb. 1, made the remarks on Thursday during a conference on climate finance hosted by the Institute of. During my tenure as Acting Director of Corporation Finance, I experienced firsthand the unwavering commitment of the SEC staff, and I look forward to serving in a new role as the Commissions General Counsel., STAY CONNECTED The focus of the actual rule is the impact of climate change on companies, and not vice versa. But for purposes of assessing the legal issues raised by the proposed rule, this limit underscores how the rule is investor-oriented and tailored, consistent with the securities laws. If these facts about economic and information substance drive our understanding of what an IPO is, they point toward a conclusion that the PSLRA safe harbor should not be available for any unknown private company introducing itself to the public markets. Empirical studies of financial markets and regulation have always had strong and inherent methodological limits, well-known and not seriously disputed, as well as data limitations. . If markets are currently overly negative about a companys physical risks (e.g., to floods), such disclosures would facilitate a reduction in that companys cost of capital. Companies may chooseas many do nowto go beyond what is required, to convince investors and others that (for example) their strategies are going to succeed. The Commission is charged with protecting investors generally, and even if a subset of investors believe that they do not (or do) want or need particular information, their views should not necessarily control the Commission in the exercise of its expert judgment. Although the rule is more limited than what an impact advocate would want, it is in one important way broader than anything EPA has adopted or is likely to have to power to implement: its geographic reach. The new law creates a process for immediate disclosure for death or serious bodily injury. An extended comment on the 1933 Act published in the Michigan Law Review in March 1934 echoes these points, summarizing the law as having two purposes: (1) that there shall be filed with the Federal Trade Commission a full, accurate and complete statement of all pertinent facts concerning issues of the securities and (2) that instruments of transportation or communication in interstate commerce and the mails shall not be used directly or indirectly to effectuate fraudulent sales. In the nature of corporate investment, investors in multinational US public companies bear climate-related financial risks and have opportunities to profit from their global activities. Mr Coates told Channel 7's Sunrise he "overruled" Ms Palaszczuk after she initially said she would not be among the 1000 or so VIPs to attend the Opening Ceremony, which - like most of the . Aside from the elementary fact that the Commission has no authority to edit Congressionally adopted statutes, the concept release actually says precisely the opposite. The secondemissions datais widely used as measures of transition risk, that is, the risk that energy costs and policy responses by other lawmaking bodies (not the Commission) (some of which are already reflected in treaty commitments or other enacted policies of the US and other countries in which US public companies do business) will force companies to expend money to reduce their emissions or mitigate their impacts. View the profiles of people named John Coates. Our second option allows you to build your bundle and strategically select the content that pertains to your needs. He has testified before Congress and provided consulting services to the U.S. Department of Justice, the U.S. Department of Treasury, the New York Stock Exchange, and participants in financial markets, including hedge funds, investment banks, and private equity funds. Clear statement canons play no role when statutes speak clearly. . Financial Disclosures - Other White House Officials . But for investors in that company, they reasonably could be, because the transition risks (in the form of higher energy costs or potential need for capital expenditures to mitigate their impacts) could be large for that company, depending on its size, capital, liquidity and financial resources. The proposed rule does not itself restrict or limit environmentally harmful activity. Striking down regulations adopted pursuant to clear and limited delegated authority would turn the doctrines purpose against itself, prevent Congress from assigning traditional fact-finding and implementation roles to agencies, turn courts into unelected mini-legislatures, and subvert rather than reinforce the separation of powers. Financial risks importantly include physical risks, such as those arising from severe weather events, such as floods, hurricanes, and wildfires. [10] See infra note 12. Although the content and nature of the disclosure have long been covered by Commission rules, the proposed rules add specificity, detail, and consistency (and require assurance) in ways that existing rules do not. They believe climate risks are minimal for the company, or for the world, for whatever reason, if that is their honest belief. They believe climate change is not primarily caused by human activity. The safe harbor is also not available if the statements in question are not forward-looking. It cannot fairly be argued that losing production or even permanent asset impairments due to weather damage are not financial risks for companies with property, plant and equipment in flood plains or otherwise exposed to climate-related weather events. The long-recognized fact the statutes were remedial laws following the Crash of 29. If the public wants comprehensive disclosures of climate impact that extend beyond impacts on investors, legal authorities other than those used here may need to be usedperhaps by other agencies or Congress itself. Overturning this rule as unauthorized on that basis would wipe out most of the Commissions disclosure rulebook. It addresses global climate risks to public companies, and not all climate risks created by domestic activities of all companies, public and private. As we think about structuring a disclosure system for ESG issues, one question that comes up is whether ESG disclosures should be the subject of mandatory versus voluntary disclosure provisions. The idea that the SEC can go out and do more research on these issues, however, was dismissed by former SEC general counsel John Coates, now a professor at Harvard Law School, who wrote in his. Prior to joining the SEC, John was the John F. Cogan Professor of Law and Economics at Harvard University, where he also served as Vice Dean for Finance and Strategic Initiatives. P.C. Exxon Mobil plans to invest $100 billion in carbon capture infrastructure. But its basic statutory authority does not limit the level of generality at which an otherwise long-required disclosure topic may be addressed. Therefore companies should ensure that any public disclosures of non-GAAP financial measures comply with applicable SEC rules and staff guidance. I will work tirelessly to execute our rules and make sound recommendations that will help the SEC realize its mission.. Evidence regarding the clear and present financial materiality of transition risk is discussed below. As the House Report accompanying the 1934 Act explained: The idea of a free and open public market is built upon the theory that competing judgments of buyers and sellers as to the fair price of a security brings about a situation where the market price reflects as nearly as possible a just price. The Commission has authority over disclosure about all activities of a consolidated multinational if it is a US public company, including the 40+% or more of those activities that are located outside the US, as noted above. On balance, research on the Act's net . [17] But it also is clear that investors at the time of the initial SPAC filing cannot understand all aspects of the long-term value proposition of the offering, precisely because a SPAC does not have operations or a business plan beyond a search for a target. John Coates, Keeping Pace with ESG Disclosure Developments Affecting Investors, Public Companies and the Capital Markets, . The complete publication, including footnotes and annex, is available here. John C. Coates is the Acting Director of the SECs Division of Corporation Finance. Going forward, I believe SEC policy on ESG disclosures will need to be both adaptive and innovative. Executive compensation is its own, complex and specialized area of management and finance, leading companies to hire expert advisors to develop compensation plans. Another finds that climate risks are reflected (but imperfectly) in out-of-the-money put option prices. Congress created the Commission as an expert agency with the capacity to address significant problems affecting the nations securities markets. The subject of a disclosure is new, when the nature of business and investment is dynamic. Public Statement on ESG Disclosure On March 11, 2021, the SEC published a statement by John Coates, acting director of the SEC's Division of Corporation Finance, in connection with remarks given at the 33 rd Annual Tulane Corporate Law Institute (available here ). As discussed in Point II, each attack is mistaken and misleading because the proposed rule is not the critics fictional new rule. If useful for the protection of investors, disclosure was not limited to the four corners of, or even commentary on, financial statements. At an athletics meet in Melbourne early this year, he ran into John Wylie, the investment banker who chairs the Australian Sports Commission. No one at the time of NRDC v. SEC in 1979 argued that the creation of EPA in 1970 had overridden NEPA, or limited the 1933 or 1934 Acts, as the Commission itself would have done (because, recall, it was being sued in the 1970s for not doing enough to require environmental disclosure). That information may play a role in affecting the kinds of opportunities and risks that public companies can pursue with other peoples (investors) money, and how investors price those opportunities and risks, and use whatever governance or liquidity rights they have to respond to corporate behavior. Statements about current valuation or operations have been viewed as outside the safe harbor by some courts, even if they are derived from or linked to forward-looking projections or statements. To be effective, he said, new SEC rules "must produce results that are useful, consistent, and comparable." To view this content, please continue to their sites. I fear, though, that participants may not have thought through all the legal implications of these statements under the circumstances of these transactions. It is not clear that claims about the application of securities law liability provisions to de-SPACs provide targets or anyone else with a reason to prefer SPACs over traditional IPOs. These claims raise significant investor protection questions. That request elicited massive amounts of public input on potential climate-related disclosure, and gave anyone skeptical about the project ample notice that it was on the Commissions agenda, and ample time to adduce evidence against it. This is exactly how the Commission has taken on similar issues in the past, as detailed in Annex A. In the Clean Air Act amendments of 1970, Congress gave EPA authority to require disclosures relating to the environment. What is proposed is to not to add new subject matters to public company disclosures, but to refine the mode and detail of already-required disclosures. Although courts have increasingly applied the First Amendment to disclosure obligations over time, critics are able to cite no case law supporting the notion that simply because facts may inform or be relevant to a political debate, requirements calling for disclosure of those facts are subject to heightened scrutiny, much less violate the First Amendment. [6] SPAC Status by Year of IPO, SPACInsider (last visited Apr. The Commission has always required information about a U.S. public companys consolidated subsidiarieswherever located. The status quo is costly for companies, and increasingly so over time. What is the upshot of this? If the SPAC fails to find and acquire a target within a period of two years, the promote is forfeited and the SPAC liquidates. In contrast to the specific mentions of these other federal agencies, the authorizing document, Reorganization Plan No. The legal authorities cited by the Commission in the proposing release are the conventional authorities for disclosure rules over nearly a century. It is not a rule, regulation, or statement of the SEC. The Biden administrations new acting head of a key component of the U.S. Securities and Exchange Commission reported earning more than $2.5 million in law school income and consulting fees paid by financial firms and major U.S. companies, according to a newly released financial statement. Rather, they are faced with numerous, conflicting and frequently redundant requests for different information about the same topics. Critiques on legal grounds fall far short of what would be needed for a court to overturn the rule. Over that time, as noted above, the SEC proposed and adopted rules requiring environmental disclosures, in part to satisfy its obligations under NEPA. Business Law Today (June 25, 2020); Ellison Ward Merkel et al., Litigation Risk in the SPAC World, Quinn Emanuel Trial Laws. John Coates may be the most influential figure in the Olympic movement after I.O.C. Congress expected the Commission to use expert judgment to update disclosure over time, as new or newly identified risks emerge. This post is based on his recent comment letter. Chevron plans $2.75 billion in carbon-reduction projects, renewables and offset projects. The Securities and Exchange Commission today announced that Renee Jones has been appointed Director of the Division of Corporation Finance. For example, the Commission could use the rulemaking process to reconsider and recalibrate the applicable definitions, or the staff could provide guidance explaining its views on how or if at all the PSLRA safe harbor should apply to de-SPACs. Terms of Service. Asbestos-related disclosure is a great example. All Rights Reserved. Don't miss the crucial news and insights you need to make informed legal decisions. Shareholder Litig. But we do have a provision that permits the Commission to set up rules and regulations which will have the effect of law. As detailed above, the proposed rule could not fairly be viewed as embodying climate change policy generally. The rule is also calibrated to companies, not the environment. Numerous other disclosure requirements adopted by the Commission over the years are similar in applying to specialized areas of expertise primarily existing outside the agency. It does not cap emissions, an approach that would be typical of environmental regulation generally. As such, there is no one set of metrics that properly covers all ESG issues for all companies. Duke Energy is investing $52 billion in transitioning to lower carbon resources. June 21, 2019) (refusing to dismiss case challenging merger approved by shareholders on ground that disclosure prior to vote was inadequate); Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. This heightened scrutiny for a companys first introduction to the public market applies in other contexts as well such as a companys first registration of a class of securities under the Securities Exchange Act of 1934 or an A/B exchange offer. Funding, governance and public accountability are all critical elements of a reliable, trusted disclosure system. Both options are priced the same. [14], But, lest the safe harbor swallow the entire securities disclosure regime, the PSLRA specifically excludes from the safe harbor statements made in connection with specified types of securities offerings. John Coates had copped further backlash for his comments towards . During his prior service on the SECs Investor Advisory Committee, he chaired the Investor-as-Owner Subcommittee. Third and finally, one of the more interesting and challenging aspects of recent SPAC transactions is that the investors in the SPACs first public capital raise often redeem or sell their shares around the time of the business combination. Congress wanted and authorized the Commission to require disclosure to protect investors despite these limits, based on its expert judgment about what its experience and qualitative evidence showed it, supplemented by whatever science can add. The ways investors may use the information are not predetermined by the rule, nor would the rule itself limit how companies speak about whether (for example) climate risks are currently being overestimated or producing excessive disinvestment. Investors should have access to that information and then be allowed to make their own decisions about how to invest or vote. That possibility further calls into question any sweeping claims about liability risk being more favorable for SPACs than for conventional IPOs. In only two months, Ive come to rely upon Johns deep expertise and judgment, traits that are essential in the role of General Counsel, said Chair Gensler. Finally, a coordinated global disclosure system has great potential benefits, but achieving one will take careful attention to institutional design. People often think of mandatory disclosure in a way that suggests that there is nothing more than an on/off switch between mandatory and voluntary disclosure. In their second stage, SPACs complete a business combination transaction, in which the SPAC, the target (i.e., the private company to be acquired), or a new shell holdco issues equity to target owners, and sometimes to other investors. Not surprisingly, disclosure about these risks did not initially show up in SEC filings, but there too they went from invisible to increasingly disclosed. "John is widely recognized as an expert on corporate governance, corporate transactions, and compliance and disclosure processes," Lee said in a statement. Because the rule is an investor-oriented disclosure rule, it is within the Commissions expertise. For example, it does not call for disclosure of a companys climate-related impacts on employees or customers or communities, except to the extent those impacts result in overall financial or business risks or opportunities (which do impact investors). If arguments of that kind could limit rulemaking authority, the Commission could never have adopted any disclosure rules. Donilon - 278.pdf Robert Downing - 278.pdf Travis Dredd - 278.pdf Anita Dunn - 278.pdf Stacy Eichner - 278.pdf John Elias . Currently, EPA does not purport to require disclosures about greenhouse gas emissions from facilities located outside the US, even if they are owned by US companies. Copyright 2023 ALM Global, LLC. Section 12 of the 1934 Act conditions exchange-trading privileges unless securities are registered by companies disclosing such information, in such detail, as to the [company] as the Commission may by rules and regulations require, as necessary or appropriate in the public interest or for the protection of investors, in respect of the following: the organization, financial structure, and nature of the business.. An effective ESG disclosure system does not imply a rigid and soon-to-be outdated set of limited disclosures. Should the SEC reconsider the concept of underwriter in these new transactional paths? What lessons can we learn from earlier examples of evolving risks? The statute refers to the Commissions rules defining blank check company and to the Exchange Acts definition of penny stock.[15], By contrast, however, the PSLRAs exclusion for initial public offering does not refer to any definition of initial public offering. No definition can be found in the PSLRA, nor (for purposes of the PSLRA) in any SEC rule. 12 January, 2022 By John Coates John Coates, interim chief executive of Local Authority Recycling Advisory Committee (LARAC), looks at the development of the sector in 2022 This area is reserved. As noted above, this claim is wrong because the securities laws already limit the Commissions power in two ways, to the use of disclosure (versus merits review) as a regulatory tool, and to the use disclosure for the protection of investors. These claims are further belied by a string of decisions in which courts have rejected attempts by the Commission to rely on disclosure and anti-fraud authority to engage in substantive regulation of corporate transactions or corporate mismanagement.

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