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. 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). The disclosures would consist of facts, not opinions, and raise no First Amendment concern. 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. . Credit quality of loan portfolios requires expertise to understand in detail, which is typically found in bank regulatory agencies. The staff at the Securities and Exchange Commission are continuing to look carefully at filings and disclosures by SPACs and their private targets. In contrast, proposals to give the Commission discretion to approve or disapprove of the soundness of stock offerings was rejected by Congressthe 1933 Act in the end embraced full and fair disclosure as the method to protect investors. Feedback to SSRN. Clear statement canons play no role when statutes speak clearly. These decisions show that the Commissions delegated power is limited, and that the statutory limits (protection of investors and markets) are intelligible and have bite. Yet the Commission nonetheless has long protected investors in bank holding companies by requiring detailed disclosure beyond the financial statement for such companies, as noted in Annex A. [17] See Division of Corporation Finance, Disclosure Guidance: Topic No. Rather, it calls for specific disclosures that investors in US public companies need to evaluate and price climate-related financial risks and opportunities. The National Law Journal Elite Trial Lawyers recognizes U.S.-based law firms performing exemplary work on behalf of plaintiffs. [14] See generally, H.R. An effective ESG disclosure system does not imply a rigid and soon-to-be outdated set of limited disclosures. John Jenkins, SPACs: Is the PSLRA Safe Harbor Driving the Boom?, Deal Lawyers.com (Feb. 3, 2021); Bruce A. Ericson, Ari M. Berman and Stephen B. Amdur, The SPAC Explosion: Beware the Litigation and Enforcement Risk, Harv. 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 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. Site Map, Advertise| As a result, depending on current capital market pricing, the rule could increase climate-impacting activities. But it is also clear that companies are not doing so consistently, comparably, or reliably. The D.C. Circuits decision, moreover, was premised in part on a representation by the Commission that the Commission would continue to reevaluate the need for such [new disclosure] requirements from time to time. The climate disclosure rule now proposed by the Commission is precisely in keeping with that long-standing commitment by the Commission. In those rules and regulations we expected them, in drafting their forms, to go more into detail with regard to requirements. John Coates Named Acting Director of the Division of Corporation Finance FOR IMMEDIATE RELEASE 2021-19 Washington D.C., Feb. 1, 2021 The Securities and Exchange Commission announced today that John Coates will serve as Acting Director of the agency's Division of Corporation Finance. 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. 2021; 2020; 2019; 2018; 2017; 2016; 2015; 2014; 2013; . Letter to the Stakeholders of the Olympic Movement - Olympic News 2 years ago | By John Coates | Olympics.com Going forward, I believe SEC policy on ESG disclosures will need to be both adaptive and innovative. The rest of this post details Points I and II. Moreover, is it appropriate that the choice of how to go public may determine or be determined by liability rules? Many legal issues are open to reasonable debate. Congress designed the safe harbor generally to permit and even encourage reporting companies to disclose information about future plans and prospects. Traditionally, and as it has been used by the Supreme Court to date, the major questions doctrine is one of many canons that courtsas faithful agents of the Constitution and the Congressuse to interpret statutes, not rewrite them. A SPAC is a shell company with no operations. I thank Michael Conley for his service as Acting General Counsel, and I look forward to continuing to work with Michael and John on critical matters before the Commission., I am honored to continue to help advance the SECs mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, said Coates. Circuit Court of Appeals in 1979: the Commission has been vested by Congress with broad discretionary powers to promulgate (or not to promulgate) rules requiring disclosure of information beyond that specifically required by statute. [15] The PSLRAs exclusion for blank check companies overlaps the exclusion for penny stock issuers. Because, finally, the disclosures are financial and do not extend to the large part of the economy owned by private companies, they would not constitute general climate change policy, such as a carbon tax or emissions cap-and-trade scheme. Companies either do or do not have property, plant and equipment in flood plains. Investments are being held back in the absence of that information. It would not itself force any company to shut down greenhouse-gas-emitting factories. 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. 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.. The Securities and Exchange Commission won't wait long to act after the June 13 end of a public comment period on potential ESG regulations, John Coates, acting director of the SEC's Division of Corporation Finance, said Friday. Fund v. KCG Holdings, Inc., No. But Congress has never cut back on the Commissions general obligation to specify the contents of its disclosure regime, such as by editing or reversing prior disclosure specifications. About John Coates. John Coates, the vice-president of the International Olympic Committee and outgoing president of the Australian National Olympic Committee, said "to a large extent" that Sydney was awarded the . Rec. This list contains the names for all officeholders. Some may view these limits as creating incentives for public companies to go private, or for private companies to not go public. One need not believe any of these studies is the final word on the subject to believe that collectively, they provide sufficient evidence to believe, reasonably, that verified, consistent climate-related financial disclosures would be useful to protect investors. 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. He has been the . 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). But as some critics do ignore the plain language of the statute, it should be emphasized that they find no more support for the notion that the Commission lacks authority in the legislative history, or in generations of legislative, executive, and judicial understanding of the statutes meaning. 2019-0100-KSJM, 2019 WL 1313408 (Del.Ch. 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 requires no disclosure from privately held unlisted companies. . ': ABA Rejects Proposal to Make Law School Admissions Tests Optional, 'A Very Virginia Spin': Businesses Must Establish Internal Appeals Process Under New State Consumer Data Privacy Laws, Read the Document: DOJ Urges Court to Deny Trump Immunity in Jan. 6 Appeal, Paul Clement Says Tribalism at Law Schools Hurts Judicial Legitimacy, Law.com Editors and Analysts Offer Top Trends to Watch for 2023. 2020) (breach of duty of candor due to failure to disclose conflict of interest in merger); Chester County Emp.s Ret. As a result, Congress, markets, analysts, and the SEC staff typically treat these introductions differently from other kinds of capital raising transactions. The American College of Governance Counsel is a professional, educational, and honorary association of lawyers widely recognized for their achievements in the field of governance. The Commissions proposed rule relies upon a traditional role for regulatory agenciesto find facts and use the facts so found to implement Congresss direction to require disclosures for a stated purposethe protection of investors. My remarks here do not attempt to answer those or the multitude of other questions about ESG disclosures. 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. [7] This, such observers assert, is the reason that sponsors, targets, and others involved in a de-SPAC feel comfortable presenting projections and other valuation material of a kind that is not commonly found in conventional IPO prospectuses. Congress also recognized that full and fair disclosure would enhance investor confidence. Evidence that such targets are at least partly serious can be easily compiled from public sources, some cited in the proposing release: A list of massivefar beyond materialbets being won or lost with public investor capital driven by climate risk could be significantly longer without being exhaustive. 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. In sum, throughout its history, and consistently, the Commission has fulfilled its statutory mandate to specify required disclosure of information that was not directly financial in nature, but posed risks about a future financial impacts, often indirect, contingent or both. 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? It is not a rule, regulation, or statement of the SEC. Our existing disclosure regime, however, is already more nuanced than that, and there is no reason an ESG disclosure system would need to be less nuanced. Congress also created the Commission as an agency that could thoughtfully address problems too politically charged to be easily resolved on Capitol Hill. Without such confidence, Congress astutely observed: Easy liquidity of the resources in which wealth is invested is a danger rather than a prop to the stability of [the market] system. For example, they point to the broader ESG movement and claim the fictional new rule requires disclosure about ESG, or about environmental impacts not relevant to investors. Financial Reports. Asbestos-related disclosure is a great example. The text, the ordinary meaning of its key words (that is, other and information), and their context (the title and relevant headings of the Commissions organic statutes), as analyzed above, are clear as to the Commissions ability to require the proposed disclosures for the protection of investors. In simple terms, the PSLRA excludes from its safe harbor initial public offerings, and that phrase may include de-SPAC transactions. Economically, and practically, the private target of a SPAC is a different organization than the SPAC itself. EPA is charged by Congress to have a concern for the environment, not for investors. The rule would create a framework for reliable disclosures of climate-related information that is potentially positive for investors, such as opportunities, and is not limited to risks. As stressed by Commissioner Peirce in her dissenting statement, the proposed disclosures called for by the rule are in line with prior Commission-required disclosures, as detailed in Annex A. 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. 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, Lindsey. One need not be a strong believer in the efficient market hypothesis to believe that disclosure often aligns market prices with investment risk and returns, albeit sometimes with delays and errors, which makes ongoing refinements in disclosure requirements all the more important to healthy markets. With the large pool of private capital available and the increase in Exchange Act Section 12(g) registration thresholds, a company can remain private and grow significantly without going through a traditional IPO. 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. 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. These higher costs can be particularly burdensome for smaller and more capital constrained companies, and yet if these companies do not provide ESG disclosures, they risk higher costs of capital. Forum on Corp. Gov. He chairs the faculty committee on executive education and teaches contracts, corporations, corporate governance and financial regulations. 3:09-CV-01740 VLB, 2013 WL 1188050 (D. Conn. Mar. John C. Coates is the Acting Director of the SEC's Division of Corporation Finance. The United States Securities and Exchange Commission has focused increasingly on SPACs in recent months, and is particularly concerned with conflicts of interest that incentivize a SPAC's sponsors, directors, officers, and affiliates to close a de-SPAC transaction even when doing so is not in the best interests of SPAC shareholders, and whether The proposed rule does not call for opinion or controversial speech of the kind that raises First Amendment concerns. 12711-VCS, 2018 WL 1560293 (Del.Ch. Professor Coates served as General Counsel and as Acting Director for the Division of Corporation Finance for the SEC. [4] With the unprecedented surge has come unprecedented scrutiny, and new issues with both standard and innovative SPAC structures keep surfacing. Congress provided a safe harbor for forward-looking statements made by established, publicly traded, reporting companies. 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. John Coates, acting director of the SEC's Division of Corporation Finance, similarly stated in a recent speech that the "SEC should help lead the creation of an effective ESG disclosure system so companies can provide investors with information they need in a cost effective manner," noting in particular the task of adapting existing rules and In sum, each attack succeeds only as applied to a fictional new rule. US Steel abandoned plans to expand its Mon Valley Works in Pennsylvania, because it had expanded our understanding of steelmakings future in a rapidly decarbonizing world, resulting in $56 million write-off in 2021. ESG issues are global issues. It would not affect the way that property insurers underwrite, pool or reserve against climate risksthat is for insurance regulators. If arguments of that kind could limit rulemaking authority, the Commission could never have adopted any disclosure rules. With Such Low Win Rates, Should Law Firms Respond to So Many RFPs? EPA has no authority over disclosures about physical risks, or the financial risks of climate change to companies (and investors). Critiques on legal grounds fall far short of what would be needed for a court to overturn the rule. Changes came as part of an omnibus criminal law Session Law 2021-138, Part XXI. Some claim the Commission has acknowledged or adopted limits on its disclosure authorities, beyond limits in the text of the statutes. 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. 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? But nothing in the 1933 Act or the 1934 Act imposes limits on the Commissions authority to refine the mode, detail, format, method, or specificity of required disclosures. Letting companies determine for themselves what is material in a given context can be a reasonable way to implement Congresss choice of full and fair disclosure as a policysometimes, companies exercise such discretion well enough to generate enough information to protect investors; but particularly as applied to risks that are new, or which raise difficult management challenges, and where there are limited sources of external scrutiny relevant to the judgments, companies predictably fail to comply with their requirements. 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 SEC is well equipped to lead and facilitate a discussion on when and how ESG risks and data must be disclosed, and how to create and maintain an effective ESG-disclosure system that would promote the disclosure of decision-useful, reliable and, where appropriate, globally comparable ESG information. Coates asked some of his former colleagues in London's City financial district to give him some time, and some spit. (IOC) (AOC) 2020IOC ICAS . 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. Finally, a coordinated global disclosure system has great potential benefits, but achieving one will take careful attention to institutional design. First, the 1933 Act itself required disclosure not only of specified financial items, but also qualitative, open-ended information, such as the general character of the companys business, compensation, and material contracts, and reinforced its breadth by referring not only to opinions of accountants and appraisers but also engineers and other professionals, such as lawyers oras under the present proposalexperts on greenhouse gas accounting. Shareholders stunned virtually everyone, including ExxonMobils management, when they elected dissident directors pledged to change the companys climate policy with 62% of the vote, while shareholders voted for emissions disclosure proposals at ConocoPhillips and Chevron. That is true for companies being acquired, as well as for companies going public. John C. Coates is the Acting Director of the SECs Division of Corporation Finance. It does not cap emissions, an approach that would be typical of environmental regulation generally. [13] Nor is the safe harbor available unless forward-looking statements are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. John M Coates Mark Gurnell Zoltan Sarnyai Little is known about the role of the endocrine system in financial decision-making. Even as to the financial system, it does not set out comprehensive climate policy. That possibility further calls into question any sweeping claims about liability risk being more favorable for SPACs than for conventional IPOs. For example, the famous phrase full and fair disclosure is in the full title to the 1933 Act, and so part of its statutory meaning. A company in possession of multiple sets of projections that are based on reasonable assumptions, reflecting different scenarios of how the companys future may unfold, would be on shaky ground if it only disclosed favorable projections and omitted disclosure of equally reliable but unfavorable projections, regardless of the liability framework later used by courts to assess the disclosures. Among them were Alliance-Bernstein, Neuberger-Berman, Schroder and Wellington, as well as BlackRock and State Street. If an officeholder has filed their annual financial disclosure statement, then a pdf of the filing will be posted. 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. In this way, SPACs offer private companies an alternative pathway to go public and obtain a stock exchange listing, a broader shareholder base, status as a public company with Exchange Act registered securities, and a liquid market for its shares. 6LinkedIn 8 Email Updates. But beyond academic research, hardest for any neutral observer to challenge as evidence of the financial risks related to climateand the reasonableness of climate-related financial disclosures to protect investorscomes from public companies themselves. Important and challenging questions must be addressed, such as: These are questions that the SEC should be a key part of answering. 51283 (Mar. The safe harbor is also not available if the statements in question are not forward-looking. Professor of Law and Economics at Harvard Law School. Here, the proposal frames difficult, subsidiary choices, which divide reasonable observers. 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. 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. John Coates is a senior research fellow in neuroscience and finance at the University of Cambridge. Despite this clear authority, critics argue the Commission lacks authority to move forward with the proposal. Sixty percent of the Fortune 500 have announced climate targets, typically stated with reference to emissions data, including 17% with net-zero targets, yet 72% of investors lack confidence companies are serious about these targets. 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. Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst. The focus of those amendments, however, was the creation of national air quality standardswhat we generally call pollutionand the enforcement of those standards on a set schedule. After completing his Ph.D., Coates traded derivatives for Goldman Sachs and Merrill Lynch, and then ran a trading desk for Deutsche Bank in New York. Protecting investors has been the Commissions job since 1934. It also cut back on liability of disclosure. 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. But we do have a provision that permits the Commission to set up rules and regulations which will have the effect of law. Recognition of the need for exercises of delegated disclosure authority can be found in other court decisions. The context for the authorizing sections of those statutes supports the Commissions authority: Canons against ineffectiveness and in favor of validity, and the general terms canon all caution against courts making up their own limits on textual authority, particularly on grounds such as: For the Commission programmatically to refuse to protect investors due to concerns about politics would itself be a political and controversial policy position. STAY CONNECTED 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. 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. 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. The rule as proposed would provide a framework for companies to inform investors about all of the effectsprofitable and loss-causingthat climate risks may have on a company. It would not affect how mutual funds and other collective investment vehicles market themselves, even as to the climate risks in their portfoliosthat topic is within the Commissions authority, but it is not addressed in this proposed rule.
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