ESG problems are global problems that need global solutions for our global markets. As detailed above, the proposed rule could not fairly be viewed as embodying climate change policy generally. The disclosures would consist of facts, not opinions, and raise no First Amendment concern. Many legal issues are open to reasonable debate. Over that time, as noted above, the SEC proposed and adopted rules requiring environmental disclosures, in part to satisfy its obligations under NEPA. If a U.S. public company owns facilities outside the US, as many do, they would be required to provide investors with information about those facilities. Financial Disclosures | The White House 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. John, Joel. 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. Law.com Compass delivers you the full scope of information, from the rankings of the Am Law 200 and NLJ 500 to intricate details and comparisons of firms financials, staffing, clients, news and events. The commentary distinguishes between the full disclosure purpose of the 1933 Act from its separate, anti-fraud purpose. 9300 Shelbyville Road, Suite1250, Louisville, KY 40222 (502) 327-8589. and lifetime income strategies . Mar. Nothing at stake in this proposed rule justifies such judicial lawmaking. Renee brings deep expertise in corporate governance and securities law to the Division of Corporation Finance. Financial reporting quality appears to have gone up after SOX but research on causal attribution is weak. Our existing system contains some mandatory ESG disclosure requirements (e.g., disclosure of how a companys board considers diversity in identifying director nominees). It would not itself force any company to shut down greenhouse-gas-emitting factories. A process to create such standards is not likely to be simple, quick or easy. 1, 2021, 4:10 PM). In fact, its basic disclosure authorities (in Section 7 of the 1933 Act and Sections 12 and 13 of the 1934 Act) are augmented by additional specific authority to to prescribe the form or forms in which required information shall be set forth. If the Commission after fact-finding reasonably believes more detail is needed to protect investors about a concededly authorized topic, it is legally authorized to require more detail, as it has done through both rules and disclosure review since 1933. They point to a footnote in a 2016 Concept release to support this claim. 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. With that overview, I would like to focus on legal liability that attaches to disclosures in the de-SPAC transaction. Denise Coates, the quiet queen of online betting from Stoke | Financial (forthcoming 2021); Minmo Gahng, Jay R. Ritter and Donghang Zhang, SPACs, Working Paper (Mar. 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. It also illustrates the pace of ESG developments. The information, including financial statements, relevant to evaluating the investment changes dramatically in the de-SPAC because the private target has operations unlike the SPAC; and initial SPAC investors commonly have the right to and do sell or have their shares redeemed. 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. 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. 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 status quo is costly for companies, and increasingly so over time. Rather, as long as the Commission considers that question in good faith and follows appropriate process, Congress has directed that the Commission make that decision, not the courts. John Coates - Penguin Random House Speakers Bureau That does not make those rules unduly burdensome or costly. 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. 6LinkedIn 8 Email Updates, What a SPAC Believer Thinks of SPAC Mania. In the budget rider, Congress made no mention of any other agency, nor can the text of that law be reasonably interpreted to displace any agencys authority. 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. He also served on the SECs Investor Advisory Committee, for which he chaired the Investor-as-Owner Subcommittee. He is a former Research Fellow in Neuroscience and Finance at the University of Cambridge, and previously traded derivatives for Goldman Sachs and ran a trading desk for Deutsche Bank. Most companies now includeand sometimes are required to include industry- or firm-specific key performance indicators in their Commission filings, which require industry- or firm-specialized knowledge to understand and evaluate. Climate-affecting companies owned by individuals, governments, families, or private equity funds would not be directly affected. To make their case, they distort the proposed rule beyond any fair reading, into a new, fictional rule that addresses environmental concerns rather than investor concerns. Regulation -- the Investment Company Act is one of the most successful disclosure laws . Coates asked some of his former colleagues in London's City financial district to give him some time, and some spit. Over time, the Commission has used its authorities under the 1933 Act and the 1934 Act to specify the details of required disclosures about a range of matters, both in and outside corporate financial statements, as illustrated in detail in Annex A to this post. Few of the requirements in Annex A directly involved current or even near-term financial cash flows of the kind required to be reflected in financial statements, such as reserves for contingent liabilities or non-cash commitments to invest in the future. 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. Instead, basic principles of statutory interpretation support the Commissions authority to adopt the proposed rule. 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). It does not cap emissions, an approach that would be typical of environmental regulation generally. STAY CONNECTED John Coates - Keynote Speaker | London Speaker Bureau 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. The rule builds on decades-long efforts by public companiessuch as 3M, Abbott Laboratories, Amazon, Apple, Chevron, Fujitsu, IBM, Johnson Controls, Michelin, P&G, Verizon and Walmartto develop practical, decision-useful, consistent, comparable and verifiable ways to report about climate risks and opportunities. 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. Important and challenging questions must be addressed, such as: These are questions that the SEC should be a key part of answering. 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 . Statement of John Coates, Harvard Law School . Information should be cost-effective and reliable, and not materially misleading, in every securities transaction. Coates received his Bachelor of Arts with highest distinction from the University of Virginia and his law degree from New York University Law School. When Congress passed the PSLRA, the path to becoming a public company was fairly simple and standardized. [14] See generally, H.R. No. He previously worked for Goldman Sachs and ran a trading desk for Deutsche Bank in New York. The creation of an entire new agency (the Commission) to implement and enforce the laws. 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. Private equity fund investors are already and increasingly demanding climate-related information and commitments from the funds or their advisors. 2021 Financial Disclosure Statements | Arizona Secretary of State - AZ SOS It would have a relatively modest impact on the economy as a whole, and basically levels up disclosure requirements to disclosures already made by the majority of large companies. John Coates named fellow of American College of Governance Counsel Instead, as summarized by the D.C. About Us| As John Coates steps down, two things make him 'very proud' In the first stage, it registers the offer and sale of redeemable securities for cash through a conventional underwriting, sells them primarily to hedge funds and other institutions, and places the proceeds in a trust for a future acquisition of a private operating company. All those sources here align with the 1933 Acts plain, ordinary meaning, and so confirm the above conclusions. John Coates is a senior research fellow at the University of Cambridge. It does not impose a carbon tax or create a cap-and-trade regime. More than thirty years later, EPA had not applied its authority to require emissions disclosures to greenhouse gas emissions. She received an undergraduate degree from Princeton University and a J.D. This statement creates no new or additional obligations for any person. 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. E.g., Jeff Montgomery, SPAC Investor Sues in Chancery Over MultiPlans Stock Drop, Law360 (Mar. 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. 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. The major questions doctrine has no role to change the plain text of the 1933 and 1934 Acts. For example: Instead, the proposed rule would increase the climate-related information provided by public companies to investors. 1993) (To rebut the [business judgment] rule [presumption], a shareholder plaintiff assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary dutygood faith, loyalty or due care.); In re Transkaryotic Therapies, Inc., 954 A.2d 346, 357-63 (Del.Ch. For years, asbestos-related risks were invisible, and information about asbestos would likely have been called non-financial. Over time, those risks went from invisible to visible to extremely clear, and clearly financial. In plain unambiguous text, they encompass financial risks and opportunities related to any source. He has been the . The new law creates a process for immediate disclosure for death or serious bodily injury. If arguments of that kind could limit rulemaking authority, the Commission could never have adopted any disclosure rules. Simply put, any such asserted difference seems uncertain at best. John Coates is author of the financial bestseller The Hour Between Dog and Wolf: How Risk-Taking Transforms Us, Body and Mind. They believe climate risks are minimal for the company, or for the world, for whatever reason, if that is their honest belief. Earnings statements, analyst call scripts, investor presentations, and the regular flows of press releases, investor relations communications and other ways companies supplement disclosure requirements are commonly longer or more complex than anything required by the Commissions rules. Three points about this text are worth emphasizing. 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. It also cut back on liability of disclosure. 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. This post is based on his recent comment letter. 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). 2020) (breach of duty of candor due to failure to disclose conflict of interest in merger); Chester County Emp.s Ret. SEC Focuses on Potential Updates to U.S. Climate Change Disclosure In the National Environmental Policy Act (NEPA), Congress made environmental considerations part of the SECs substantive mission. That statutestill on the booksprovides (among other things): The Congress recognizes that each person should enjoy a healthful environment and that each person has a responsibility to contribute to the preservation and enhancement of the environment. 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. This legislative choicedisclosure, but not merit reviewis an important and real intelligible principle limiting the Commissions general authority, along with the specific, and limited purpose for those disclosures, that they be those appropriate for the protection of investors. These limits explain why further restrictions on the Commissions authority to specify disclosures to protect investors were not needed to constitutionally cabin Congresss delegation to the Commission under the 1933 Act. 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. 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. 1 Twitter 2 Facebook 3RSS 4YouTube Robust public disclosure has been a hallmark of effective securities regulation since the 1930s, said SEC Chair Gary Gensler. 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. 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. A public company might have a large amount of transition risk due to many different emission sources, each of which is below EPA thresholds. Where do we go from here? 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. But most SPACs since 2009 have gone on to identify acquisition candidates. SEC Signals ESG Initiatives with Two Picks for Senior Positions [4] SPACs What You Need To Know, Investor.gov (Dec. 10, 2020). 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. About 1,020 U.S. companies voluntarily disclosed their Scope 3 emissions last year.. 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 [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. Although the D.C. S190602 (daily ed. Because the rule is an investor-oriented disclosure rule, it is within the Commissions expertise. Multiple paths to dispersed ownership now exist, including not only SPACs, but also direct listings and dual-track IPO/M&A processes. Three of those exclusions are of note: those made in connection with an offering of securities by a blank check company, those made by a penny stock issuer, and those made in connection with an initial public offering. Renee Jones to Join SEC as Director of Corporation Finance; John Coates The Commission has neither approved nor disapproved its content. The safe harbor was intended to provide a defense against such suits and provide grounds for summary dismissal. When the only dissenting Commissioners primary basis for dissenting is that the Commission has already addressed the topic in prior rulemakings upheld by courts, courts have no basis for using one discretionary canon to apply personal policy judgments on a topic within the Commissions conventional and textually clear statutory authority. "John is widely recognized as an expert on corporate governance, corporate transactions, and compliance and disclosure processes," Lee said in a statement. That is true for companies being acquired, as well as for companies going public. 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. 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. 12711-VCS, 2018 WL 1560293 (Del.Ch. This is exactly how the Commission has taken on similar issues in the past, as detailed in Annex A. If you need immediate assistance, call 877-SSRNHelp (877 777 6435) in the United States, or +1 212 448 2500 outside of the United States, 8:30AM to 6:00PM U.S. Eastern, Monday - Friday. That there are limits on the limits is also clear from prior decisions. [15] The PSLRAs exclusion for blank check companies overlaps the exclusion for penny stock issuers. 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. 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. If comprehensive, economy-wide disclosure of climate impacts of all types of business is to be required by regulation, doing so will require more than the Commissions authority. Congress designed the safe harbor generally to permit and even encourage reporting companies to disclose information about future plans and prospects. 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. First, and most directly, all involved in promoting, advising, processing, and investing in SPACs should understand the limits on any alleged liability difference between SPACs and conventional IPOs. The rule proposes disclosures of information about financial risks and opportunities that are reasonably understood as appropriate for the protection of investors. They sometimes specifically point to the Private Securities Litigation Reform Act (PSLRA) safe harbor for forward-looking statements, and suggest or assert that the safe harbor applies in the context of de-SPAC transactions but not in conventional IPOs. 1 Twitter 2 Facebook 3RSS 4YouTube The National Law Journal Elite Trial Lawyers recognizes U.S.-based law firms performing exemplary work on behalf of plaintiffs. Second, forward-looking information can of course be valuable. As stressed by Justice Alito, when he was a Judge on the Third Circuit: Because the materiality standards for Rule 10b-5 [the Commissions primary anti-fraud rule] and SK-303 [an affirmative disclosure requirement for known trends and uncertainties, among other things] differ significantly, the demonstration of a violation of the disclosure requirements of Item 303 does not lead inevitably to the conclusion that such disclosure would be required under Rule 10b-5.. Image: Getty. The purpose of the disclosure was also to protect markets and market pricing, and improve the resulting allocation of capital. The safe harbor only applies in private litigation, and does not prevent the Commission from taking appropriate action to enforce the federal securities laws. 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. Voluntary, unassured disclosures are more likely to include greenwashing, impairing investors ability to assess and price risk, and undermining honest companies ability to communicate with investors and build confidence; some greenwashing rises to the level of fraud, while other disclosures or omissions may not rise to the level of actionable fraud with proof of scienter. Again, this language is not limited to what is necessary to protect investors, but gives the Commission discretion to specify what information is appropriate to protect investors and markets, based on its fact-finding and expert application of the statutes goals to evolving investor needs. Such a conclusion should hold regardless of what structure or method it used to do so. Are current liability protections for investors voting on or buying shares at the time of a de-SPAC sufficient if some SPAC sponsors or advisors are touting SPACs with vague assurances of lessened liability for disclosures?