There remains substantial debate over the precise contents and details of what ESG disclosures might or should encompass. [12] Cede & Co. v. Technicolor Inc., 634 A.2d 345, 361 (Del. 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. Not a Bloomberg Law Subscriber?Subscribe Now. The proposed rule does not itself restrict or limit environmentally harmful activity. On the issue of global comparability, in the first instance, arguments in favor of a single global ESG reporting framework are persuasive. 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 Constitution, and Congress, have given the Commissionand not the courtsauthority to make those judgments. Sydney Olympics were bought 'to a large extent', said Australian ESG issues are global issues. This is exactly how the Commission has taken on similar issues in the past, as detailed in Annex A. Large asset managers are already having to comply with similar requirements in Europe (regardless of where their portfolio investments are located). Rather, I hope to highlight some of the issues that in my view policymakers should consider as the debate over ESG disclosures continues. Aircraft manufacturers essentially have their own specialized program accounting, due to the unusually long and complex capital investment process they follow. Her leadership will be invaluable as the Division facilitates disclosure under our current rules and undertakes rule modernization to meet the challenges of today. Where and how can disclosures be aligned with information companies already use to make decisions. To be clear, the Commission has also routinely added required disclosures that do affect the financial statements, too. John Coates Archives - Corporate Governance 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. Even if one has a strong belief in the value of the major questions doctrine as an important tool for enforcing the constitutional principle of separation of powers, there is no role for a clear statement principle when the text and context of a statute are as clear and consistent as the 1933 and 1934 Acts are. On March 22, 2021, the SEC launched a new page on its website bringing together all things ESG including agency actions and the latest information on ESG investing. Simply put, any such asserted difference seems uncertain at best. STAY CONNECTED John Coates - Keynote Speaker | London Speaker Bureau This statement creates no new or additional obligations for any person. Under federal securities law, the touchstones for all securities offerings remain what they have long been. 25, 2021); Jennifer Bennett, Canoo Faces Investor Suits Over Post-SPAC Deal Focus Changes, Bloomberg Law (Apr. ESG Disclosure - Keeping Pace with Developments Affecting Investors 1 Twitter 2 Facebook 3RSS 4YouTube The status quo is costly for companies, and increasingly so over time. "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 . Financial risks importantly include physical risks, such as those arising from severe weather events, such as floods, hurricanes, and wildfires. Law Offices of Gary Martin Hays & Associates [4] With the unprecedented surge has come unprecedented scrutiny, and new issues with both standard and innovative SPAC structures keep surfacing. John C. Coates is the John F. Cogan, Jr. John C. Coates and R. Glenn Hubbard, Competition in the . 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. 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. 6LinkedIn 8 Email Updates. The proposed rule is a rule that specifies details of disclosure requirements. 30, 2021). . Third, the 1933 Act includes a specific limit to this authority, that it be for the protection of investorsbut no further qualifier. These include (for example) asbestos and other sources of tort liability, contract and other kinds of commercial litigation, and cybersecurity and other kinds of technology risks. 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. 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.. To view this content, please continue to their sites. VIA EMAIL: coatesjo@sec.gov John Coates, Acting Director Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street NE Washington, DC 20549 April 14, 2021 Re: Guidance Needed to Issuers on the Presentation of Shareholder Proposals Dear Director Coates: I am writing to urge the Division of Corporation Finance to issue 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. 2021; 2020; 2019; 2018; 2017; 2016; 2015; 2014; 2013; Because it is an investor-focused disclosure rule, and in no plausible way advances a general policy on climate, it raises no new major question of that kind, that might theoretically justify a departure from standard methods of statutory interpretation. The Commissions authority, to reiterate, includes discretion to promulgate rules governing corporate disclosure. He was in his eighties. Reflected in the PSLRAs clear exclusion of initial public offerings from its safe harbor is a sensible difference in how liability rules created by Congress differentiate between offering contexts. 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. He had been serving as the independent monitor for the U.S. Justice Department in the prosecution of Boston-based State Street Corp. 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. 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. It is not clear that claims about the application of securities law liability provisions to de-SPACs provide targets or anyone else with a reason to prefer SPACs over traditional IPOs. He previously worked for Goldman Sachs and ran a trading desk for Deutsche Bank in New York. 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). Disclosures - FEDERAL RESERVE BANK of NEW YORK Credit quality of loan portfolios requires expertise to understand in detail, which is typically found in bank regulatory agencies. Yet no one has ever successfully argued that the Commission should not develop, adapt or apply disclosure rules to banks, mining companies, asset-backed issuers, airlines or defense contractors, despite the specialized knowledge that a full understanding of those companies would require, and despite the fact that the Commission does not have full-time staff who are themselves experts of the same kind that other regulators may have, or which companies hire to provide them with advice about such topics. 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. Proposal on Climate-Related Disclosures Falls Within the SEC's Authority 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. However, many legal questions have clear answers. 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. To do so would turn the doctrines purpose against itself, turn courts into unelected mini-legislatures, and subvert rather than reinforce the separation of powers. Private equity fund investors are already and increasingly demanding climate-related information and commitments from the funds or their advisors. S190602 (daily ed. In sum, each attack succeeds only as applied to a fictional new rule. That ESG no longer needs to be explained illustrates how important these issues have become to todays investors, public companies and capital markets. 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. 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? Congress designed the safe harbor generally to permit and even encourage reporting companies to disclose information about future plans and prospects. The National Law Journal Elite Trial Lawyers recognizes U.S.-based law firms performing exemplary work on behalf of plaintiffs. Your article was successfully shared with the contacts you provided. EPA did not use its authority to develop greenhouse gas emission disclosure requirements until 2009, and did so only after being directed to do so by Congress in an annual budget appropriations rider. Join National Law Journal now! The safe harbor was intended to provide a defense against such suits and provide grounds for summary dismissal. Business Law Today (June 25, 2020); Ellison Ward Merkel et al., Litigation Risk in the SPAC World, Quinn Emanuel Trial Laws. The multiple places the statutes give the Commission authority to go beyond its text (to create exemptions, tailor its requirements, and add to them). 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). To be sure, projections are woven into the fabric of business combinations. I write to comment on legal authority. 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. Duke Energy is investing $52 billion in transitioning to lower carbon resources. Most public companies could go dark today, if they were prepared to surrender their stock exchange listings. Three points about this text are worth emphasizing. AOC's annual report details $40,000 pay rise for John Coates - the Guardian 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. 3:09-CV-01740 VLB, 2013 WL 1188050 (D. Conn. Mar. In simple terms, the PSLRA excludes from its safe harbor initial public offerings, and that phrase may include de-SPAC transactions. 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. Previously, she represented private and public companies on corporate and securities matters at Hill & Barlow law firm. Mar. 6, 2021). Because the items listed in the statutes themselves could not reasonably be understood to cover all pertinent facts, the final language in the statute also reflected an expectation that Commission regulations would be needed to augment the statute itself. 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. Where do we go from here? Nor has the major questions doctrine ever been used to overturn authority unambiguously granted by the plain text of a statute. 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. About John Coates. If the public wants comprehensive disclosures of climate impact that extend beyond impacts on investors, legal authorities other than those used here may need to be usedperhaps by other agencies or Congress itself. [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. 6LinkedIn 8 Email Updates. 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. 'What Are We Fixing? See also Rodriguez v. Gigamon Inc., 325 F. Supp. It does not cap emissions, an approach that would be typical of environmental regulation generally. He chairs the faculty committee on executive education and teaches contracts, corporations, corporate governance and financial regulations. 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. Again, this limit may leave some climate advocates disappointed. Apr. Another finds that climate risks are reflected (but imperfectly) in out-of-the-money put option prices. Terms of Service. The financial effects of physical risks are large and growing. For EPA, those emissions may not be a priority. For example: Instead, the proposed rule would increase the climate-related information provided by public companies to investors. [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. About 1,020 U.S. companies voluntarily disclosed their Scope 3 emissions last year.. The U.S. Supreme Court has repeatedly and recently emphasized that the fundamental purpose of the 1934 Act [was] to substitute a philosophy of full disclosure for the philosophy of caveat emptor . [9] I am far from alone in noting the litigation risk attached to SPACs. Congress could not have predicted the wave of SPACs in which we find ourselves. 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. 6, 2021) (showing that there have been 26 total liquidations as of Apr. 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. [13] See, e.g., In re Quality Systems, Inc. Securities Litigation, 865 F.3d 1130, 1142, (9th Cir. A company in possession of multiple sets of projections that are based on reasonable assumptions, reflecting different scenarios of how the company's 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 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. 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. 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. 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. SEC is scrutinizing SPAC projections, seeks clearer disclosures - CNBC He observed first-hand the powerful emotions driving traders. And earlier this month, Bloomberg reported that John Coates, the SEC's Acting Director of the Division of Corporation Finance, indicated that new disclosure requirements would focus on three areas: diversity, equity and inclusion; climate change; and human capital management. All those sources here align with the 1933 Acts plain, ordinary meaning, and so confirm the above conclusions. John C. Coates, IV, Lucian A. Bebchuk, John C. Coffee, Bernard S. Black, . As we think about structuring a disclosure system for ESG issues, one question that comes up is whether ESG disclosures should be the subject of mandatory versus voluntary disclosure provisions. 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. Congress in 2012 thus ratified long-standing Commission exercises of the unambiguous authority in 7(a)(1). Most large public companies report much climate information, albeit in a non-comparable and inconsistent way. [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. 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. 2, 2021). Specifically, Section 7 gives the Commission unambiguous authority to specify the contents of disclosure documents used to register securities for sale to the public. 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. 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. 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. Climate-affecting companies owned by individuals, governments, families, or private equity funds would not be directly affected. This is for the obvious reason that investors in the parent company face the consequences of all economic results created by that company. Far from calling for lengthy or complex sustainability reports of the kind most S&P 500 companies already publish, these requirements could be met with relatively succinct disclosure for companies with minimal climate-related risks. SEC Signals ESG Initiatives with Two Picks for Senior Positions Our existing system contains some mandatory ESG disclosure requirements (e.g., disclosure of how a companys board considers diversity in identifying director nominees). Volkswagen announced $180 billion of investments in electronic vehicles. 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. Therefore companies should ensure that any public disclosures of non-GAAP financial measures comply with applicable SEC rules and staff guidance. 5, 2021); Priya Cherian Huskins, Why More SPACs Could Lead to More Litigation (and How to Prepare), A.B.A. 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. He has been the . The proposed rule specifies the details of disclosure, just as Congress directed the Commission to do. 'Horrendous enemy, terrific friend': What drives AOC head John Coates? Still another study finds that mutual fund managers are misestimating climate risks based on current, inconsistent and unreliable disclosures. But forward-looking information can also be untested, speculative, misleading or even fraudulent, as reflected in the limitations on the PSLRAs liability protections, even when the safe harbor applies. Banks and insurance companies are increasingly demanding similar information to make loans or underwrite policies. Congress also recognized that full and fair disclosure would enhance investor confidence. An effective ESG disclosure system does not imply a rigid and soon-to-be outdated set of limited disclosures. 11, 2019) (refusing to apply deferential review where special conflict of interest procedures were not applied ab initio); FrontFour Capital Group LLC v. Taube, No. 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. Do particular disclosures, procedures, and liability rules reduce the all-in costs of capital? 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 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. John Coates, Former Wall Street Trader, Studies Neuroscience Behind Recommendation from the Investor-as-Owner Subcommittee of the SEC 12711-VCS, 2018 WL 1560293 (Del.Ch. The industry-leading media platform offering competitive intelligence to prepare for today and anticipate opportunities for future success. If the person charged with reviewing an employee's report finds a conflict, he should impose a remedy immediately. SEC.gov | John Coates Appropriate liability should attach to whatever claims it is making, or others are making on its behalf. I think it is only about 30 pages, while the British Companies Act is over 300 pages. [7] See, e.g., Chris Bryant, Why Chamath Palihapitiya Loves SPACs So Much, Bloomberg Opinion (January 28, 2021) (citing Haystack, Alignment Summit Chats: SPACS (w/ Chamath Palihapitiya), YouTube (Dec. 2, 2020) (statement of Chamath Palihapitiya) (Because the SPAC is a merger of companies, youre all of a sudden allowed to talk about the future. 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. 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. 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. 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. As detailed in Annex B to this post, not only has the Commission repeatedly specified more than the minima in the 1933 Act itself, it has repeatedly had its augmented disclosure rules acknowledged, accepted and ratified by Congress, through multiple amendments to its organic statutes. Economically, and practically, the private target of a SPAC is a different organization than the SPAC itself. Surveys of institutional investors published in peer-reviewed financial journals confirm this evidence. The disclosures would consist of facts, not opinions, and raise no First Amendment concern. Site Map, Advertise| 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. John Coates does not need much of an introduction.