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. 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. 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. One study worth highlighting, now published in a leading finance journal, finds that climate disclosures are already actively if imperfectly priced in the capital markets, effects confirmed in other published articles. President Thomas Bach. Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst. The commentary distinguishes between the full disclosure purpose of the 1933 Act from its separate, anti-fraud purpose. John, Joel. 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. It does not impose a carbon tax or create a cap-and-trade regime. But just as important is the recognition of the costs associated with not having ESG disclosure requirements. But it remains true that IPOs are understood as a distinct and challenging moment for disclosure. I am unaware of any relevant case law on the application of the IPO exclusion. When Congress passed the PSLRA, the path to becoming a public company was fairly simple and standardized. ESG issues are global issues. Congress also created the Commission as an agency that could thoughtfully address problems too politically charged to be easily resolved on Capitol Hill. 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. This statement does not alter or amend applicable law and has no legal force or effect. 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. Often these requirements have been specific and prescriptive in nature. 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. Statement of John Coates, Harvard Law School . The Helpful Hand Guiding Brisbane's Olympic Victory. 2020) (breach of duty of candor due to failure to disclose conflict of interest in merger); Chester County Emp.s Ret. Mar. Robust public disclosure has been a hallmark of effective securities regulation since the 1930s, said SEC Chair Gary Gensler. In this regard, the work of the IFRS Foundation to establish a sustainability standards board appears promising. 3d 1041, 1049-50 (N.D. Cal. 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. . 30, 2021). Finally, a coordinated global disclosure system has great potential benefits, but achieving one will take careful attention to institutional design. In closing, I want to make three final points. Where and how should disclosures be globally comparable? He chairs the faculty committee on executive education and teaches contracts, corporations, corporate governance and financial regulations. It is true that many companies are spending money to do thisfurther evidence of the importance of the information. Exxon Mobil plans to invest $100 billion in carbon capture infrastructure. "He has spent the last three decades deeply engaged with our capital markets as a scholar, practitioner, and member of the SEC's Investor Advisory Committee. 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. 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. They of course help sell the deal, but they can also be a key component for boards and other participants in negotiating and understanding the economics indeed, the fairness of the transaction. The proposed rule does not itself restrict or limit environmentally harmful activity. Her leadership will be invaluable as the Division facilitates disclosure under our current rules and undertakes rule modernization to meet the challenges of today. 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. 3 The sweep of regulatory change has reignited criticism for failure to base the changes . Anyone who argues that the Commission should leave the job of climate disclosure to the EPA has to have an answer to how the EPA could possibly protect US investors with information about the large amount of activities of US public companies that are located beyond the reach of the EPAs jurisdiction. The Commission has neither approved nor disapproved its content. About John Coates. All Rights Reserved. Copyright 2023 ALM Global, LLC. Equally clear is that any material misstatement or omission in connection with a proxy solicitation is subject to liability under Exchange Act Section 14(a) and Rule 14a-9, under which courts and the Commission have generally applied a negligence standard. Laws against fraud have always been consistent with the First Amendment. Some but far from all practitioners and commentators have claimed that an advantage of SPACs over traditional IPOs is lesser securities law liability exposure for targets and the public company itself. Rather, it calls for specific disclosures that investors in US public companies need to evaluate and price climate-related financial risks and opportunities. 2003) (holding that statements encompassing forward-looking and present or historical components were not entitled to safe harbor protection where the [c]omplaint alleges that the Defendants had no basis for their optimistic statements and already knew (allegedly) that certain risks had become reality and notably where plaintiffs adequately pled scienter). Renee brings deep expertise in corporate governance and securities law to the Division of Corporation Finance. No case is the contrary, and critics of the Commissions proposed rule cite none. [1] This statement represents the views of the Acting Director of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC or Commission). (Sept. 30, 2020). 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. He was in his eighties. As to motivations, the long and extensive record leading to the proposal of the rule can be reviewed in its entirety and nowhere will any evidence be found that the purpose of the rule is other than to protect investors. A consortium of public energy companies is raising $1 billion for emissions reductions technology. Biography. However, the rule does need to at least be rationally designed for investor protection to be authorized. 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 always required information about a U.S. public companys consolidated subsidiarieswherever located. 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. 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 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. The proposed rule specifies the details of disclosure, just as Congress directed the Commission to do. He had been serving as the independent monitor for the U.S. Justice Department in the prosecution of Boston-based State Street Corp. The rule does not require them to use particular words, or characterize their own conduct in any controversial way. The complete publication, including footnotes and annex, is available here. Critics of Coates say he has too . Duke Energy is investing $52 billion in transitioning to lower carbon resources. 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. The multiple places the statutes give the Commission authority to go beyond its text (to create exemptions, tailor its requirements, and add to them). Governance needs to ensure the independence and expertise of any individuals involved in the setting of ESG disclosure standards, and allow for a rigorous, inclusive and transparent process for developing standards. Growing Mineola firm with national practice seeks associate (with 3-6 years experience) to handle complex general liability matters.Competit CASH KRUGLER & FREDERICKS LLC is Celebrating Our 20th Anniversary & Newest Partners! Posted by John C. Coates (Harvard Law School), on, Harvard Law School Forum on Corporate Governance, on Proposal on Climate-Related Disclosures Falls Within the SECs Authority, The Illusory Promise of Stakeholder Governance, by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum, Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy A Reply to Professor Rock, Stakeholder Capitalism in the Time of COVID, Corporate Purpose and Corporate Competition, Congress created and in plain words authorized the Commission to protect investors by specifying public company disclosures of information about financial risks and. That is, the rules perspective of that of investors and companiestheir strategies, risk management, governance and metricswithout regard to whether a given company independently creates a climate impact that is large or small for the overall environment, or whether it is more or less exposed than other companies to physical risks of climate change. We will also need to be open to and supportive of innovation in both institutions and policies on the content, format and process for developing ESG disclosures. Financial Disclosure Reports include information about the source, type, amount, or value of the incomes of Members, officers, certain employees of the U.S. House of Representatives and related offices, and candidates for the U.S. House of Representatives. Based on a review of current sustainability reports that cover the same topics as would be required by the proposed rule, companies with material climate risks could create compliant disclosure that would take up a relatively small share of a typical annual report. : John Dowling Coates 1950 57 - . Circuit affirmatively held that the Commission had authority to do that, and, in its judgment, to potentially go further. 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. Rather than casting disclosure rules in stone, Congress opted to rely on the discretion and expertise of the SEC for a determination of what types of additional disclosure would be desirable. That there are limits on the limits is also clear from prior decisions. The disclosures would consist of facts, not opinions, and raise no First Amendment concern. The long-recognized fact the statutes were remedial laws following the Crash of 29. 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. On the issue of global comparability, in the first instance, arguments in favor of a single global ESG reporting framework are persuasive. In simple terms, the PSLRA excludes from its safe harbor initial public offerings, and that phrase may include de-SPAC transactions. The Commissions authority to adopt the actual proposed rule remains intact, and clear. If a company would benefit from climate-mitigation policies adopted by other agencies, that information would be no less useful to investors than information about transition risk. 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. 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. 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. They point to a footnote in a 2016 Concept release to support this claim. Another peer-reviewed, published study finds that exposure to sea level rises and flooding is causally reducing property values, consistent with physical risk already being actively if imperfectly priced in property markets, which in turn expose investors in public companies that own real estate to related financial risks. Rec. Annex A contains just a samplingmany more additions and refinements have been adopted in the decades since 1933. Companies in the defense industry report in their Commission-required filings using technical, specialized industry jargon on government procurement, budgets, military strategy, products and market dynamics about which staff at the Department of Defense have far more detailed knowledge than the Commission. Coates, recently finished work on a follow-up to the 1982 film to celebrate its . John CoatesActing Director, Division of Corporation Finance. 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 part, that is because of one of the key limits on the Commissions authorityit is delegated the job of specifying information for disclosure, not the job of merits review, which would require it to have far more substantive expertise in those specialized areas. Because the rule is an investor-oriented disclosure rule, it is within the Commissions expertise. Congressional ratification has been repeated and affirmativenot mere inaction. Evidence regarding the clear and present financial materiality of transition risk is discussed below. Access to additional free ALM publications, 1 free article* across the ALM subscription network every 30 days, Exclusive discounts on ALM events and publications. However, many legal questions have clear answers. 5, 2021); Priya Cherian Huskins, Why More SPACs Could Lead to More Litigation (and How to Prepare), A.B.A. Although some are reluctant to consider legislative history or expert contemporaneous commentary in interpreting statutes, it is useful to do so briefly here for a simple reason. Congress provided a safe harbor for forward-looking statements made by established, publicly traded, reporting companies. Liability risk is an important feature of the conventional IPO process. If the American people, through their representatives, wish to remediate climate change, or fulfill climate-related treaty obligations, this rule will not do those jobs. A topic of a disclosure is political, or controversial, or is not uncontroversially for investor protection, any of which would only invite interest groups to politicize a topic in the hopes of later arguing it should be off limits for the Commission to address. Before joining the faculty at Harvard, he was a partner at Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and financial institutions. But we do have a provision that permits the Commission to set up rules and regulations which will have the effect of law. Authority for disclosure under the 1934 Act addressed more than the need for protection of the initial investor acquiring securities. John C. Coates is the John F. Cogan, Jr. 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. What lessons can we learn from earlier examples of evolving risks? 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. Is guidance needed about how projections and related valuations are presented and used in the documents for any of these paths? But critics claim that EPA authority repealed the Commissions authority is even more basically addressed by noting the significant differences in the two agencies organic statutes as applied to climate-related financial risk. But to develop and apply a disclosure rule of the kind proposed here does not require the same level of climate expertise as held by EPA (or, for climate changes impact on weather, the National Oceanic and Atmospheric Administration), and those agencies lack the expertise in finance, accounting and investment that is also necessary for any investor-oriented disclosure rule that addresses climate-related financial risk. That does not make those rules unduly burdensome or costly. Forum on Corp. Gov. John C. Coates is the Acting Director of the SEC's Division of Corporation Finance. These decisions underscore the need for the Commission to have broad rulemaking authority to protect investors on the disclosure side of the firebreak between federal securities law and state corporate law. 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.