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. This blog answers some questions about the changes. Three points about this text are worth emphasizing. If the Commission or staff pursue that route, however, it would be important to keep the practicalities of SPACs in mind, in addition to other aspects of SPAC structures, relative to conventional IPOs as well as to other forms of achieving dispersed ownership, such as direct listings. As discussed in Point I, critics of the rule cannot plausibly attack premise one. [1],[2] Shareholder advocates as well as business journalists and legal and banking practitioners, and even SPAC enthusiasts themselves[3] are sounding alarms about the surge. The president's financial disclosure reports are extensively reviewed for potential or actual conflicts of interest and compliance with applicable laws and policies by the Chief Compliance and Ethics Officer of the Bank, and the Chairman of the Bank's board of directors. Even if some may find resistance to the rule (or new regulation generally) to be appealing from a policy standpoint, doing that here has no basis whatsoever in the statutes text.. Congress repeatedly amended and expanded the Commissions disclosure regime, including by adding to the authorities relied upon for the present proposed rule. . The rule is also calibrated to companies, not the environment. 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. No court has ever found that this long line of exercises of the basic authorities on which the current rule relies were beyond the Commissions authority. Information should be cost-effective and reliable, and not materially misleading, in every securities transaction. So, my background is, my introduction alluded to it, is the corporate and financial market side and I was blissfully ignorant of and happy to ignore everything that Specifically, for the largest companies, the proposed rule would require three types of specific disclosures: Of these, the first and third are inarguably about financial risks and opportunities related to climate change. LexisNexis and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. Second, there may be advantages to providing greater clarity on the scope of the safe harbor in the PSLRA. Bloomberg reports that, according to Coates, the new disclosure requirements will focus on three topics: diversity, equity and inclusion; climate change; and human capital management. SPAC shareholders typically have a vote on the so-called de-SPAC transaction, and many investors who purchased securities in the first stage SPAC either sell on the secondary market or have their shares redeemed before or shortly after the de-SPAC. The Commission has neither approved nor disapproved its content. In 2004 he returned to Cambridge to research the biology of More about John Coates That climate risks overall have been overstated by climate activists. With that overview, I would like to focus on legal liability that attaches to disclosures in the de-SPAC transaction. Disclosure reduces paranoia, and moderates reactions. STAY CONNECTED Customer Service| 5 . John Coates, Keeping Pace with ESG Disclosure Developments Affecting Investors, Public Companies and the Capital Markets, . Existing rules already cover material climate risks is the first point she makes. Indeed, the actual proposed rule requires disclosure about subject matters long covered by indisputably authorized disclosure requirementsthe first point made by Commissioner Peirce in her dissent. The 1933 Act does not limit additional disclosures to those that are related or similar to the items in Schedule A, or material, or financial, despite the fact that Congress frequently used those very qualifiers elsewhere in the statute. To be sure, an IPO is generally understood to be the initial offering of a companys securities to the public, and the SPAC shell company initially offers redeemable equity securities to the public when it first registers to raise funds in order to look for and later acquire a target. The PSLRA was passed by Congress in 1995 to stem what was considered to be a rising tide of frivolous or unwarranted securities lawsuits aimed at operating companies filing routine annual and quarterly reports under the Exchange Act. Jones is a member of the American Law Institute and has served as the Co-Chair of the Securities Law Committee of the Boston Bar Association. 5, 2021); Priya Cherian Huskins, Why More SPACs Could Lead to More Litigation (and How to Prepare), A.B.A. Jones most recently served as Professor of Law and Associate Dean for Academic Affairs at Boston College Law School, where she taught courses in corporations, securities regulation, startup company governance, and financial regulation. 2021; 2020; 2019; 2018; 2017; 2016; 2015; 2014; 2013; Although Congress gave the Commission power to conduct temporary testing programs to evaluate the effectiveness of disclosures in the Dodd-Frank Act, in neither that statute nor the original 1933 and 1934 Acts did it suggest the Commission use polling or surveys to establish the content of disclosures appropriate to protect investors. 1 The housing and financial crises of 2008 led to the Dodd-Frank Act, 2 which restructured the financial regulatory agencies, mandated more than 200 new rules, and required changes to many older rules. The Commission has always required information about a U.S. public companys consolidated subsidiarieswherever located. It is the first time that public investors see the business and financial information about a company. To recap what is discussed above, EPAs authority is both materially broader and narrower than the Commissions, even as to the subpart of the Commissions rule addressing greenhouse gas emissions: In sum, EPA could not duplicate (or even approximate) the proposed investor-oriented rule, and the Commission could not duplicate (or even approximate) EPAs greenhouse gas disclosure rules. These include (for example) asbestos and other sources of tort liability, contract and other kinds of commercial litigation, and cybersecurity and other kinds of technology risks. 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). Moreover, is it appropriate that the choice of how to go public may determine or be determined by liability rules? Site Map, Advertise| 2009) (There is no required state of mind for a violation of section 14(a); a proxy solicitation that contains a misleading misrepresentation or omission violates the section even if the issuer believed in perfect good faith that there was nothing misleading in the proxy materials); Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on Potential Exchange Act Section 10(b) and Section 14(a) Liability, Exchange Act Release No. Congress, having made a fundamental policy judgment to require full and fair disclosure to protect investors, directed the Commission to make ongoing subsidiary choices of precisely what details of disclosure to require and when, after engaging in fact-finding and analysis that Congress chose not to try to do itself. It would not affect the way that property insurers underwrite, pool or reserve against climate risksthat is for insurance regulators. Feedback to SSRN. With Such Low Win Rates, Should Law Firms Respond to So Many RFPs? The fact-finding for this rule, and the financial and accounting expertise on which it is based, is in keeping with the long tradition in which the Commission and its staff have applied expert knowledge about general risk/return, accrual and related concepts to an array of different source of risk and potential liability. The focus of the actual rule is the impact of climate change on companies, and not vice versa. These data, again, are thus directly relevant to financial risks and opportunities for public companies. Changes came as part of an omnibus criminal law Session Law 2021-138, Part XXI. It has never been EPAs job. The long-recognized fact the statutes were remedial laws following the Crash of 29. Public companies are already subject to more regulation, however, and if the requirements of the Sarbanes-Oxley Act did not drive a wave of going private transactions (and they did not), the marginal additions to disclosure required by this rule is highly unlikely to do so. What Joseph L. Rini Knows, Attorney Rachel Y. Marshall A Pillar of Strength for the Community, SpotDraft Raises $26 Million in Series A Funding for AI-Powered Legal Software. Statement (PDF) . Not long after Denise Coates convinced her family to bet big on internet gambling, the first . 2008) (identifying a breach of fiduciary duties for failure to disclose material facts to stockholders before stockholder vote on merger); City of Fort Myers Gen. Emp.s Pension Fund v. Haley, 235 A.3d 702 (Del. At hearings on what became the 1933 Act, the Senate heard testimony advocating longer or shorter periods of time for financial statements, specific proposals for additions to or eliminations from the list of disclosure items, arguments about whether audits should be done by reference to industry peers, and how expensive audits would be. An increasing number of US public companies are making major capital expenditures to pursue climate-related strategies, raising financial risks to pursue opportunities for their investors. They point to a footnote in a 2016 Concept release to support this claim. . Some critics argue that investor demand should not be equated with investor protection, and it is true that the Commission has not (for good reason) attempted to survey investors in setting its own rulemaking agenda. Asbestos-related disclosure is a great example. As such, there is no one set of metrics that properly covers all ESG issues for all companies. In closing, I want to make three final points. So, instead, like a cuckoo putting its eggs into anothers nest, critics have resorted to mischaracterizing the proposal, and inventing their own, fictional rulenot actually proposedto attack premise two, and claim the Commission lacks authority for their fictional new rule. Coates, recently finished work on a follow-up to the 1982 film to celebrate its . If those targets are simply greenwashing, the proposed rules will reduce their potential to harm investors caused by fraud or misleading disclosure short of fraud. Specifically, the Commission relied upon wide-ranging and deep engagement over more than a year, gathering input from public comments, in public discussions, and meetings with and through letters from companies, investors, trade groups, climate specialists, EPA and other experts regarding corporate environmental and climate reporting, to craft its proposed rule, just as it has done in other areas. 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. Neither EPA nor any other federal agency has authority to elicit the full range of information about financial risks that would be provided to investors under this rule. Do current liability provisions give those involved such as sponsors, private investors, and target managers sufficient incentives to do appropriate due diligence on the target and its disclosures to public investors, especially since SPACs are designed not to include a conventional underwriter at the de-SPAC stage? It requires no disclosure from privately held unlisted companies. As a result: As a result of these limits, climate advocates appropriately view the rule as incomplete, and from the point of view of environmental protection, the rule could not reasonably be viewed as complete or effective at addressing climate change. As noted above, subsequent to the initial passage of the securities laws, but after the passage of the initial Clean Air Act and in the same year EPA was created (1970), Congress directed the Commission (along with all other agencies of the federal government) to consider environmental protection in its rulemakings. Surveys of individual investors by firms such as Morgan Stanley confirm this evidence. The Commissions authority is plain in its organic statutes, legislative history, in long-standing precedent, in both court decisions and its own rules, and repeatedly accepted by Congress through amendments of the statutory bases for those rules. Therefore companies should ensure that any public disclosures of non-GAAP financial measures comply with applicable SEC rules and staff guidance. This statement creates no new or additional obligations for any person. The actual rules fit with the goals of environmental activists is poor, and its fit with the goals of investor advocates is tight. Renee brings deep expertise in corporate governance and securities law to the Division of Corporation Finance. In short, disclosure authority extends beyond what would constitute fraud at common law, and has long been used by the Commission to specify disclosure of what would not necessarily be material for that purpose. What is the right balance between principles and metrics? Second, the 1933 Act makes clear that Congress expected and directed the Commission to go beyond content specified in the Act, and granted authority to go beyond what is necessary to include what the Commission concludes is appropriate for the protection of investors. Going forward, I believe SEC policy on ESG disclosures will need to be both adaptive and innovative. EPA is charged by Congress to have a concern for the environment, not for investors. 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. Terms of Service. John F. Cogan, Jr. Only at that time did EPA take the position its 1970 authority over air pollution gave it authority to require climate-related disclosures. [16] Debate in Senate to Override President's Veto, 141 Cong. With this subscription you will receive unlimited access to high quality, online, on-demand premium content from well-respected faculty in the legal industry. Finally, it is beyond argument that the Clean Air Act nowhere mentions the Commission much less modifies its disclosure authority. Second, in thinking about ESG disclosures, we should not view ourselves as forced into a stark choice between voluntary and mandatory disclosure. To be sure, projections are woven into the fabric of business combinations. 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? [15] The PSLRAs exclusion for blank check companies overlaps the exclusion for penny stock issuers. Duke Energy is investing $52 billion in transitioning to lower carbon resources. Some claim that the statutory limits on the Commissions disclosure authority have no real meaningbecause one can pretend that anything is for protection of investors, no real limiting principle exists in the 1933 and 1934 Acts on the Commissions authority, so either it impermissibly delegates or further limits need to be invented to make the statutes constitutional. It does not address how to measure or use the social cost of carbon, as is done by other agencies. Is guidance needed about how projections and related valuations are presented and used in the documents for any of these paths? Importantly, supporting letters came from many public companies (e.g., Adobe; Bank of America; BNP Paribas; Chevron; Dow Credit Suisse; Etsy; Microsoft; Paypal; Salesforce.com). He steps down from the AOC on Saturday, less than 12 months after helping Australia win its third Games bid, this time in Brisbane in 2032, but retains his exalted IOC status. The proposed rule does not itself restrict or limit environmentally harmful activity. The major questions doctrine has no role to change the plain text of the 1933 and 1934 Acts. No case is the contrary, and critics of the Commissions proposed rule cite none. Not long ago, the title of this statement would have needed to unpack ESG into Environmental, Social and Governance. Because (they claim) the fictional new rule reflects climate change policy, and because climate change is new and important, the plain text of the Commissions statutory authority cannot really mean what it says. US public companies (e.g., the S&P 500) derive 40% of their revenues on average from non-US operations, and many have larger shares of their activities located offshore. No offers may be made or accepted from any resident outside the specific states referenced. More than thirty years later, EPA had not applied its authority to require emissions disclosures to greenhouse gas emissions. All Rights Reserved. Securities Act Rule 419 (which predated passage of the PSLRA) limits its definition of blank check company to one that issues penny stock. Most SPACs, however, avoid meeting the definition of penny stock issuer and are therefore neither a blank check company nor a penny stock issuer as those terms are defined. Annex A contains just a samplingmany more additions and refinements have been adopted in the decades since 1933. The guidance on potential conflicts of interest in the context of the initial public offering of a SPAC is divided into five categories: (1) insiders' competing fiduciary or contractual obligations to other entities, (2) the specified timeframe to complete an initial business combination, (3) deferred underwriter compensation, (4) economic terms 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. [6] SPAC Status by Year of IPO, SPACInsider (last visited Apr. 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. . The Commission does, but has no investor-protection authority over climate impacts more generally, such as those on communities or habitats, beyond impacts that are important to investors decision-making. This rule would not transform even the portion of the American economy regulated by the Commissionwhich remains investments in and markets for securities of public companies, not privately held companies, and the proposal adds no new companies to its disclosure regime. It does not impose regulatory control over millions of small greenhouse gas sources. Even as a disclosure rule, it only calls for a subset of the climate-related disclosures from a subset of companies that affect climate change. 'What Are We Fixing? Congress did not direct the Commission to protect investors through disclosure only when it is politically non-controversial to do so. The Securities and Exchange Commission today announced that Renee Jones has been appointed Director of the Division of Corporation Finance. The title of the 1933 Act states its purpose as creating a regime of full and fair disclosure.. One of the primary purposes of the 1934 Act was to augment the 1933 Act by giving the Commission authority to require ongoing reports by companies whose securities were traded on stock exchanges. These reports are filed with the Clerk of the House as required by Title I of the Ethics . Again, this limit may leave some climate advocates disappointed. If an officeholder has filed their annual financial disclosure statement, then a pdf of the filing will be posted. He had been serving as the independent monitor for the U.S.. [12] Cede & Co. v. Technicolor Inc., 634 A.2d 345, 361 (Del. Protecting investors has been the Commissions job since 1934. 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. John Coates, the Divisions current Acting Director, has been named SEC General Counsel. [2] See Ben Scent, Wall Streets $100 Billion SPAC Boom Upends the League Table, Bloomberg Law (Apr. He served as a Department of Justice-appointed independent monitor for a large, systemically important financial institution and as an independent consultant to the SEC in one of the first Fair Fund distributions. But companies will not be limited by the rule itself in how they and their investors respond to climate change. Those choices I do not here address. Executive compensation is its own, complex and specialized area of management and finance, leading companies to hire expert advisors to develop compensation plans. It also cut back on liability of disclosure. I will work tirelessly to execute our rules and make sound recommendations that will help the SEC realize its mission.. Chevron plans $2.75 billion in carbon-reduction projects, renewables and offset projects. Its creation was accomplished by Presidential directive, subsequently approved by Congress in 1984. Our Team Account subscription service is for legal teams of four or more attorneys. As detailed above, the proposed rule could not fairly be viewed as embodying climate change policy generally. 2d 613, 629 (S.D.N.Y. Critics of Coates say he has too . ESG issues are global issues. As a result, Congress, markets, analysts, and the SEC staff typically treat these introductions differently from other kinds of capital raising transactions. The reason is simple: the public knows nothing about this private company. After the de-SPAC, the entity carries on its operations as a public company. The safe harbor was intended to provide a defense against such suits and provide grounds for summary dismissal. New investors buy these shares in the aftermarket or participate in a new offering by the combined entity. Indeed, the texts are so clear thatin contrast to the many times the Commission has been challenged on anti-fraud rulemakings, where authority has been interpreted as limited by common law anti-fraud principlesfew attempts have been made to challenge the Commissions use of its basic disclosure authorities to require disclosure. John C. Coates, Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications, 124 Yale Law Journal 882 (2014-2015). Overturning this rule as unauthorized on that basis would wipe out most of the Commissions disclosure rulebook. There remains substantial debate over the precise contents and details of what ESG disclosures might or should encompass. It would be unhelpful for multiple standards to apply to the same risks faced by the same companies that happen to raise capital or operate in multiple markets. 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. Third, the 1933 Act includes a specific limit to this authority, that it be for the protection of investorsbut no further qualifier. It is also not a rule the EPA or any other regulatory agency has adopted or could legally adopt. At the same time, the risk of misuse of such information should also be carefully evaluated in light of the economic realities of the capital formation process. Private equity fund investors are already and increasingly demanding climate-related information and commitments from the funds or their advisors. The event, which was organized by the nonprofit consumer advocacy organization Public Citizen, also included speeches by former Harvard Law School [] These claims raise significant investor protection questions. VIA EMAIL: [email protected] John Coates, Acting Director Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street NE Washington, DC 20549 April 14, 2021 Re: Guidance Needed to Issuers on the Presentation of Shareholder Proposals Dear Director Coates: I am writing to urge the Division of Corporation Finance to issue 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. Efforts by critics to dismiss these votes ignore the fact that most shareholder proposals fail due to well-known collective action problems affecting public company governance. Rep. No. 51283 (Mar. 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. On March 11, Acting Director of the SEC Division of Corporation Finance, John Coates, published a statement in connection with remarks he delivered at the 33rd Annual Tulane Corporate Law Institute, noting how important ESG issues have become to investors, public companies and capital markets, while at the same time acknowledging that As a result, the rule will minimize costs and maximize benefits of compliance. That there are limits on the limits is also clear from prior decisions. Letter to the Stakeholders of the Olympic Movement - Olympic News 2 years ago | By John Coates | Olympics.com The Commissions authority to adopt the actual proposed rule remains intact, and clear. The disclosures would consist of facts, not opinions, and raise no First Amendment concern. Critiques on legal grounds fall far short of what would be needed for a court to overturn the rule. 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. From a legal authority point of view, company- and investor-based calibration is in keeping with the Commission focusing on investors, rather than on environmental priorities. Appropriate liability should attach to whatever claims it is making, or others are making on its behalf. The purpose of the disclosure was also to protect markets and market pricing, and improve the resulting allocation of capital. The directive consolidated authorities and activities spread across six different departments and agencies, ranging from the Department of Agriculture to the Atomic Energy Commission.

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