Those authorities are general in nature, not limited to specific topics. What is the right balance between principles and metrics? [14] See generally, H.R. 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. As we address these questions, we should keep in mind some additional points. 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. 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. 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. Economic analysis and expert fact-finding and assessments may inform choices about how detailed and what the details should be, and the Commission needs to follow its own economic analysis guidance in arriving at its conclusions, as well as comply with administrative law. During his prior service on the SECs Investor Advisory Committee, he chaired the Investor-as-Owner Subcommittee. Establishing a global framework, however, is complex and raises a number of considerations. John M Coates Mark Gurnell Zoltan Sarnyai Little is known about the role of the endocrine system in financial decision-making. The rest of this post details Points I and II. To be sure, projections are woven into the fabric of business combinations. Companies either do or do not have property, plant and equipment in flood plains. . For example: Instead, the proposed rule would increase the climate-related information provided by public companies to investors. But it remains true that IPOs are understood as a distinct and challenging moment for disclosure. Investments are being held back in the absence of that information. 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. 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. 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. Congress designed the safe harbor generally to permit and even encourage reporting companies to disclose information about future plans and prospects. 9300 Shelbyville Road, Suite1250, Louisville, KY 40222 (502) 327-8589. and lifetime income strategies . 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. Investors need to know about sponsors and their financial arrangements, the procedural protections of the SPAC structure, and what kinds of returns the SPAC is likely to generate for investors absent a de-SPAC transaction or for those who choose to exit before the de-SPAC is completed. 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. 14, 2014) (setting forth special procedures required in mergers involving control shareholders, without which heightened entire fairness must be shown by interested fiduciaries); Olenik v. Lodzinski, 208 A.3d 704 (Del. During my tenure as Acting Director of Corporation Finance, I experienced firsthand the unwavering commitment of the SEC staff, and I look forward to serving in a new role as the Commissions General Counsel., STAY CONNECTED 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. STAY CONNECTED John C. Coates and R. Glenn Hubbard, Competition in the . The plain language could not be clearer in directing the Commission to do what it is proposing to do: specify the details of disclosure appropriate to protect investors, based on its fact-finding and expert judgment. 2019-0100-KSJM, 2019 WL 1313408 (Del.Ch. 5 C.F.R. Letter to the Stakeholders of the Olympic Movement - Olympic News 2 years ago | By John Coates | Olympics.com 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. 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. . The creation of an entire new agency (the Commission) to implement and enforce the laws. An effective ESG disclosure system does not imply a rigid and soon-to-be outdated set of limited disclosures. As discussed in Point II, each attack is mistaken and misleading because the proposed rule is not the critics fictional new rule. [8] Participants and their advisors are used and expect to prepare and disclose projections in acquisitions, including de-SPACs. The financial disclosure that John Coates filed also offered a rare public peek into the costs of corporate compliance monitors. 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. What about the Private Securities Litigation Reform Act? It is not a rule, regulation, or statement of the SEC. Ch. The industry-leading media platform offering competitive intelligence to prepare for today and anticipate opportunities for future success. These investors included individuals and institutions. Finally, it is beyond argument that the Clean Air Act nowhere mentions the Commission much less modifies its disclosure authority. Renee brings deep expertise in corporate governance and securities law to the Division of Corporation Finance. Delaware corporate law, in particular, conventionally applies both a duty of candor and fiduciary duties more strictly in conflict of interest settings, absent special procedural steps, which themselves may be a source of liability risk. The requirements have included disclosures about risks and uncertainties generally, and of information both qualitative (business segments; competitive conditions; management, environmental and other litigation; and contracts) and quantitative (mineral reserve estimates, loan performance statistics, coverage ratios, material transactions, and compensation). Access to additional free ALM publications, 1 free article* across the ALM subscription network every 30 days, Exclusive discounts on ALM events and publications. She received an undergraduate degree from Princeton University and a J.D. Simply put, any such asserted difference seems uncertain at best. Before joining the faculty at Harvard, he was a partner at Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and financial institutions. It means thoughtful engagement by trusted specialists seeking consensus among investors and companies about useful, reliable and comparable disclosures under standards flexible enough to remain relevant. Again, this difference is in keeping with the Commissions focus on investors. It may be time to revisit these issues. They believe climate change is not primarily caused by human activity. In other words, public companies disclosures were expected to go beyond basic financial statements. 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. https://www.law.com/nationallawjournal/2021/03/25/harvard-laws-john-coates-now-at-sec-reveals-consulting-income-clients/. But for the protection of investors, these limits are features, not bugsthey precisely show how the rule adheres to Congresss clear but limited delegation of disclosure specification to the Commission. This blog answers some questions about the changes. 2634.101-805 (see Subparts A-H) Financial disclosure reports are used to identify potential or actual conflicts of interest. 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. 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. 1 Twitter 2 Facebook 3RSS 4YouTube 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. ESG issues are global issues. Introduction. It does not say, for example, annual financial reports, but simply annual reports. As with the 1933 Act, the authority is not unboundedit is limited by the phrase appropriate for the proper protection of investors, with the gloss that the rules also be appropriate to insure fair dealing in the security, a reflection of the fact that the 1934 Act was designed to govern securities that were already trading on securities markets. 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). [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). 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? 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. Graphic Packaging is spending $600 million on the first paperboard line in the U.S. in decades, in part to lower carbon emissions. 28, 2018) (refusing to dismiss claim that Musk controlled Tesla despite owning only 22% of the voting power due to actual domination and control). 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. 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 Court has stressed the structure and design of the 1933 and 1934 Acts reflect an understood need for regulatory flexibility, even in decisions limiting the reach of Commission rules where the precise limits of its authority are less clear, such as Rule 10b-5: Congress recognized that efficient regulation of securities trading could not be accomplished under a rigid statutory program. In numerous cases, the Court and lower courts have held that the federal securities laws are to be construed broadly, not technically and restrictively, but flexibly to effectuate its remedial purposes.. Citing to a 1975 release, the Commission in 2016 noted, non-controversially, that In [the 1975] release, the Commission concluded that, although it is generally not authorized to consider the promotion of social goals unrelated to the objectives of the federal securities laws, it is authorized and required by NEPA [the National Environmental Policy Act] to consider promotion of environmental protection as a factor in exercising its rulemaking authority. This statement denies authority only if disclosure is unrelated to investor protection, protection of market integrity, or the public interest more generally. 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. First, I am not pro- or anti-SPAC. Protecting investors has been the Commissions job since 1934. Under federal securities law, the touchstones for all securities offerings remain what they have long been. 12711-VCS, 2018 WL 1560293 (Del.Ch. De-SPAC transactions also may give rise to liability under state law. John Coates is the John F. Cogan, Jr. (forthcoming 2021); Minmo Gahng, Jay R. Ritter and Donghang Zhang, SPACs, Working Paper (Mar. 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. Our existing system contains some mandatory ESG disclosure requirements (e.g., disclosure of how a companys board considers diversity in identifying director nominees). I think it is only about 30 pages, while the British Companies Act is over 300 pages. 2007) (enjoining a merger because the proxy statement omitted the projections used to render the fairness opinion). The actual rules fit with the goals of environmental activists is poor, and its fit with the goals of investor advocates is tight. LexisNexis and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information. 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. Statement (PDF) . That possibility further calls into question any sweeping claims about liability risk being more favorable for SPACs than for conventional IPOs. John C. Coates is the John F. Cogan, Jr. It does not cap emissions, an approach that would be typical of environmental regulation generally. The proposed rule would not require national banks to consider climate-risks in lending activitiesthat is for banking regulators. 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. This statement creates no new or additional obligations for any person. EPA was created in 1970. No offers may be made or accepted from any resident outside the specific states referenced. Regardless, as long as the disclosures are fairly designed for the protection of investors, a factual assessment of the kind commonly delegated by Congress to regulatory agencies, they would fall within the clear limiting principle of that law. Myriam Robin is a Rear Window columnist based in the Financial Review's Melbourne . 23, 2013) (citing Sawant v. Ramsey, 3:07-CV-980 VLB, 2010 WL 3937403 (D. Conn. Sept. 28, 2010) (holding that otherwise forward-looking statements that contain misrepresentations of current facts are not protected by the safe harbor provision of the PSLRA or the bespeaks caution doctrine); In re Nortel Networks Corp. Sec. 6LinkedIn 8 Email Updates, Accounting and Financial Reporting Guidance, Compliance and Disclosure Interpretations, No-Action, Interpretive and Exemptive Letters, Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (SPACs), SPACs, IPOs and Liability Risk under the Securities Laws, ESG Disclosure Keeping Pace with Developments Affecting Investors, Public Companies and the Capital Markets. Large multinationalseven in the oil and gas or energy sectors, even actively emitting greenhouse gases in the USwould be unaffected if they list no securities in our markets. It does not suggest any limit other than what is in the statutes themselves, including NEPA. About John Coates. In addition to being limited and calibrated to U.S. public companies, the rule does not require disclosure related to non-investor impacts. . In the last 25 years, companies have been able to raise increasingly large sums privately, and even provide some liquidity to shareholders while remaining private. Rather, I hope to highlight some of the issues that in my view policymakers should consider as the debate over ESG disclosures continues. Companies could comply with the rule and say: No debate over the level of risk created by climate change is predetermined or purported to be resolved by the rule. Consistent with the long tradition of disclosure requirements sketched above and in Annex A, the proposed rule specifies disclosure of climate-related financial risks to and opportunities for public companies. John CoatesActing Director, Division of Corporation Finance. The requirements and have specifically included disclosures related to the environment. Another finds that climate risks are reflected (but imperfectly) in out-of-the-money put option prices. In closing, I want to make three final points. 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 legal authorities cited by the Commission in the proposing release are the conventional authorities for disclosure rules over nearly a century. 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. It addresses global climate risks to public companies, and not all climate risks created by domestic activities of all companies, public and private. 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. The brief historical review in Annexes A and B (and much more detail could be added) shows that nothing about the current proposed rules contents (discussed more below) should be legally surprising in any meaningful way, to Congress or to companies or their investors. See also Rodriguez v. Gigamon Inc., 325 F. Supp. 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 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. Statement of John Coates, Harvard Law School . STAY CONNECTED John Coates is the John F. Cogan Professor of Law and Economics at Harvard Law School, where he also serves as the Deputy Dean for Finance and Strategic Initiatives and Research Director of the Center on the Legal Profession. 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. Public companies have a strong incentive to keep abreast of what information their investors would reasonably value. John Coates had copped further backlash for his comments towards . Disclosure means: "To . He has testified before Congress and provided consulting services to the U.S. Department of Justice, the U.S. Department of Treasury, the New York Stock Exchange, and participants in financial markets, including hedge funds, investment banks, and private equity funds. The event, which was organized by the nonprofit consumer advocacy organization Public Citizen, also included speeches by former Harvard Law School []