[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. They argue that because the fictional new rule requires disclosure of environmental impact, the Commissions authority was silently removed when Congress authorized the Environmental Protection Agency (EPA) to address that impact. A movement is afoot to impose cost-benefit analysis (CBA) on financial regulation (CBA/FR). 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. Many legal issues are open to reasonable debate. 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. When everything everyone owns can be sold at once, there must be confidence not to sell. It cannot fairly be argued that losing production or even permanent asset impairments due to weather damage are not financial risks for companies with property, plant and equipment in flood plains or otherwise exposed to climate-related weather events. For centuries, it has been a cardinal rule that repeals by implication are not favored. Indeed, a standard reference on statutory interpretation by Antonin Scalia and Bryan Garner goes further, makes the rule one of its black-letter canons, and emphasizes it, writing: Repeals by implication are disfavoredvery much disfavored. It also offers a sensible explanation for the canon: A doctrine of readily implied repealer would repeatedly place earlier enactments in doubt.. 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. 2634.101-805 (see Subparts A-H) Financial disclosure reports are used to identify potential or actual conflicts of interest. In this regard, the work of the IFRS Foundation to establish a sustainability standards board appears promising. In addressing this research, it is insufficient for critics to gesture generically at the fact that correlation is not necessarily causation, or that no single such study can definitively prove a causal effect of climate on financial returns. However, the rule does need to at least be rationally designed for investor protection to be authorized. 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. 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? 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. 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. 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. Dynamically explore and compare data on law firms, companies, individual lawyers, and industry trends. 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. However, many legal questions have clear answers. 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. 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. 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. [10] See infra note 12. The secondemissions datais widely used as measures of transition risk, that is, the risk that energy costs and policy responses by other lawmaking bodies (not the Commission) (some of which are already reflected in treaty commitments or other enacted policies of the US and other countries in which US public companies do business) will force companies to expend money to reduce their emissions or mitigate their impacts. "The staff at the Securities and Exchange Commission are continuing to look carefully at filings and disclosures by SPACs and their private targets," John Coates, the SEC's acting director of corporate finance, said in an April 8 statement . Rather, they are faced with numerous, conflicting and frequently redundant requests for different information about the same topics. Congress wanted and authorized the Commission to require disclosure to protect investors despite these limits, based on its expert judgment about what its experience and qualitative evidence showed it, supplemented by whatever science can add. Those limits were even more acute in 1933 (or even in 1996 when the Commission was first statutorily tasked with considering efficiency in some of its rulemakings). 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. https://www.law.com/nationallawjournal/2021/03/25/harvard-laws-john-coates-now-at-sec-reveals-consulting-income-clients/. Anyone who sees a role for law to require disclosure of comprehensive information about the sources of greenhouse gas emissions will not be satisfied by this rule. And to be yet more clear, the Commission has not simply expanded or added to required disclosures over timeit has cut, compressed, and consolidated as well, in step with the needs of investors over time. The same could be said of most existing disclosure requirements. Renee brings deep expertise in corporate governance and securities law to the Division of Corporation Finance. 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. Banks and insurance companies are increasingly demanding similar information to make loans or underwrite policies. [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). 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. Companies either do or do not engage in activities that result in the emission of greenhouse gases. Coates has served as the SECs Acting Director of the Division of Corporation Finance since February 2021. But its basic statutory authority does not limit the level of generality at which an otherwise long-required disclosure topic may be addressed. 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. That legal questionwhether the proposed disclosures could reasonably be viewed in good faith by the Commission as beneficial for investor protectionis easy to answer in the affirmative, based on the record before the Commission when it voted to propose them. Rep. No. In its overall framework, the proposed rule builds on the Task Force on Climate Related Financial Disclosure (TCFD), whose leadership includes the CFO of Unilever, the General Manager of Mitsubishi, and the former CAO of HSBC, and whose work has been supported by Bank of America, Barrick Gold, Dupont, Hewlett Packard, and Pepsico, among scores of other companies. 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. Congress both expanded authorities and limited which and how specific types of companies and transactions are covered by its disclosure regime. Introduction. Those choices I do not here address. Its creation was accomplished by Presidential directive, subsequently approved by Congress in 1984. 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. Some claim the Commission has acknowledged or adopted limits on its disclosure authorities, beyond limits in the text of the statutes. This statement does not alter or amend applicable law and has no legal force or effect. [5] For studies of SPACs, see, e.g., Michael Klausner, Michael Ohlrogge and Emily Ruan, A Sober Look at SPACs, Yale J. Reg. 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. 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. 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. During his prior service on the SECs Investor Advisory Committee, he chaired the Investor-as-Owner Subcommittee. [14], But, lest the safe harbor swallow the entire securities disclosure regime, the PSLRA specifically excludes from the safe harbor statements made in connection with specified types of securities offerings. As such, there is no one set of metrics that properly covers all ESG issues for all companies. That ESG no longer needs to be explained illustrates how important these issues have become to todays investors, public companies and capital markets. The rest of this post details Points I and II. John C. Coates, IV, Lucian A. Bebchuk, John C. Coffee, Bernard S. Black, . 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. The Commissions authority to adopt the actual proposed rule remains intact, and clear. 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. Rec. John Coates does not need much of an introduction. 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. Gain access to some of the most knowledgeable and experienced attorneys with our 2 bundle options! Or they argue without evidence about secret motivations, socialist agendas, and political goals to cripple industries and to reduce our nations energy security. The National Law Journal Elite Trial Lawyers recognizes U.S.-based law firms performing exemplary work on behalf of plaintiffs. 12711-VCS, 2018 WL 1560293 (Del.Ch. 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. Not long ago, the title of this statement would have needed to unpack ESG into Environmental, Social and Governance. 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. John C. Coates is the John F. Cogan, Jr. When Congress passed the PSLRA, the path to becoming a public company was fairly simple and standardized. 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. Finally, a coordinated global disclosure system has great potential benefits, but achieving one will take careful attention to institutional design. The Constitution, and Congress, have given the Commissionand not the courtsauthority to make those judgments. Not long after Denise Coates convinced her family to bet big on internet gambling, the first . About John Coates. The D.C. Over the past six months, the U.S. securities markets have seen an unprecedented surge in the use and popularity of Special Purpose Acquisition Companies (or SPACs). Previously, Coates was a partner at Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and financial institutions. Reporting requirements regarding emissions of all kinds were a subsidiary authority given to EPA to supplement the more direct, substantive power to regulate the amount and type of emissions. The limitations in 7(a)(2) were imposed in 2012, by which time (as detailed below and in Annex A), the Commission had repeatedly relied upon the language in Section 7(a)(1) to require disclosures of all kinds, including non-financial disclosures, environmental disclosures and climate-change related disclosures. 5, 2021); Priya Cherian Huskins, Why More SPACs Could Lead to More Litigation (and How to Prepare), A.B.A. Here, the proposal frames difficult, subsidiary choices, which divide reasonable observers. The economic essence of an initial public offering is the introduction of a new company to the public. But the proposing release goes beyond the numerous supportive investor comments in the March comment file to note at length many kinds of additional evidence showing ways in which more, more comparable, and more reliable information would protect investors by improving their ability to assess and price climate-related financial risks and opportunities, both at the time of initial stock investments and in secondary market trading. Contrary to some critics, letters from individuals also supported climate-related disclosures and were cited several times in the proposing release. With all these changes, the appeal of understanding and developing law around economic substance over form may be greater than ever. As the proposing release notes, half of all public companies already make some climate disclosures in their SEC reports, and the Chamber of Commerce reports that more than half of surveyed companies publish sustainability reports. . Second, there may be advantages to providing greater clarity on the scope of the safe harbor in the PSLRA. 25, 2021); Jennifer Bennett, Canoo Faces Investor Suits Over Post-SPAC Deal Focus Changes, Bloomberg Law (Apr. 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. These data, again, are thus directly relevant to financial risks and opportunities for public companies. Before joining the SEC, he served as the John F. Cogan Professor of Law and Economics at Harvard University, where he also was Vice Dean for Finance and Strategic Initiatives. "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. John CoatesActing Director, Division of Corporation Finance. John Coates bowed out as Australian Olympic Committee president at the Darling Harbour Sofitel in Sydney. For investors, despite an abundance of ESG data, there is often a lack of consistent, comparable, and reliable ESG information available upon which to make informed investment and voting decisions.