Late last year, the Securities and Exchange Commission (SEC) adopted amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make according to Regulation S-K.  An important component of these updates was the new requirement in Item 101 (Description of Business) of Regulation S-K to require registrants to make certain human capital disclosures to the extent material to an understanding of its business as a whole.

The new rule amended Item 101(c) to require registrants to provide “a description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business.” The disclosure is only required to the extent such information is material to the registrant’s business as a whole, and the SEC in the adopting release stated that each registrant’s disclosure “must be tailored to its unique business, workforce, and facts and circumstances.”

As a result of these amendments, along with disclosing the number of employees, companies must also consider how to comply with the new principle-based rule. The SEC intentionally did not define “human capital,” reasoning that the term “may evolve over time and may be defined by different companies in ways that are industry specific.” The adopted rule states that the required disclosures may include “measures or objectives that address the development, attraction and retention of personnel.” But the SEC made clear that these are just “examples of potentially relevant subjects, not mandates.” Thus, companies have broad discretion in deciding which human capital measures to disclose.

Continue Reading A Survey of Recent SEC Comment Letters on Human Capital Disclosures

On July 28, Securities and Exchange Commission (SEC) Chair Gary Gensler delivered remarks at the Principles for Responsible Investment’s Climate and Global Financial Markets Webinar.  In his remarks, he offered a glimpse of responses received by SEC Commissioner Allison Herren Lee to her March 2021 call for input on climate change disclosures.  (See our recent blog post summarizing recent efforts by the Biden administration.) Chairman Gensler also covered some of the items he has asked the Staff to consider as part of its proposal for mandatory climate risk disclosure to be developed by the end of this year.

Chairman Gensler noted that more than 550 unique comment letters were submitted in response to Commissioner Lee’s statement on climate disclosures in March. He pointed out that three out of every four of these responses supported mandatory climate disclosure rules.

The demand for climate risk disclosure is strong and supports Chairman Gensler’s simple rationale for the SEC’s recent focus on climate risk disclosure – “So why am I talking about climate risk? Simple: because investors are . . . Investors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their needs.”  Required climate risk disclosure might help bring the clarity and consistency that investors have been seeking in this regard.

Continue Reading A Glimpse into Required Climate Risk Disclosure Considerations by the SEC

On June 28, Commissioner Allison Herren Lee delivered the Keynote Address at the 2021 Society for Corporate Governance National Conference.  In it, she spoke on the ever-increasing role a company’s board of directors has within the environmental, social and governance (ESG) space. Notably, she provided some “key steps” for boards seeking to embrace their growing role in ESG matters and capitalize on the opportunities they present.  Some of these key steps are highlighted below:

Enhance Board Diversity for New Perspectives

Despite the plentiful evidence that makes clear the important role that ESG plays in a company’s long-term growth and capital raising opportunities, Commissioner Lee referred to some evidence that suggests directors have been relatively slow to appreciate the need to integrate ESG into governance practices. In her view, board refreshment introduces opportunities to put new directors on boards, and prioritizing diversity helps increase the chance that new directors will bring new perspectives. This, in turn, may facilitate more up-to-date and proactive approaches to ESG governance by a company’s board.

Continue Reading “You Cannot Direct the Wind, But You Can Adjust Your Sails.” – The SEC Speaks on a Board’s Role in ESG Matters

We’ve seen the many efforts by the Securities and Exchange Commission (SEC) to regulate environmental, social and governance (ESG) disclosure on the domestic front (see here for our blog post that summarizes recent activity).  Alongside these efforts, the SEC has not overlooked support for global ESG standards to address this global matter.

Earlier this year, then-acting SEC Corporation Finance Director John Coates (and as of June 21, 2021, SEC General Counsel) expressed interest in developing global ESG disclosure standards, stating that the SEC “should help lead the creation of an effective ESG disclosure system.”

The rationale for a global standard was simple – in his words:

ESG issues are global issues. ESG problems are global problems that need global solutions for our global markets. It would be unhelpful for multiple standards to apply to the same risks faced by the same companies that happen to raise capital or operate in multiple markets.

In particular, Coates showed support for the work of the International Financial Reporting Standards (IFRS) Foundation to establish a sustainability standards board. The IFRS Foundation is an international nonprofit organization that has been steadily working on creating global sustainability reporting standards.

Continue Reading ESG, SEC and the World Around Us

While we have seen an increased focus on environmental, social and governance (ESG) disclosure the last few years, there has been a whirlwind of activity during the last six months by President Biden, Congress and the Securities and Exchange Commission (SEC) in this regard.

In March 2021, the SEC’s 2021 Examination Priorities Report included ESG-related matters. The same month the SEC also announced the creation of the Climate and ESG Task Force within the Division of Enforcement to focus on climate-related disclosure by U.S. public companies under existing rules and issued a public statement considering far-reaching changes to the SEC’s existing disclosure rules regarding climate change (public comments were due by June 13, 2021).

In April, President Biden announced a new target for the United States to achieve a 50-52% reduction from 2005 levels in economy-wide net greenhouse gas pollution in 2030 to help “tackle the climate crisis.” In May 2021, SEC Chairman Gensler confirmed the Staff was working on recommendations for proposed rules regarding issuer disclosure of climate-related risks and human capital alongside President Biden’s May 2021 Executive Order on Climate-Related Financial Risk.  Among other things, the Executive Order contemplates a government-wide strategy to mitigate climate-related financial risk and calls for assessment of risks that climate change presents to the financial system.

Continue Reading Potential Federal Regulation of ESG Disclosure: A Whirlwind of Activity

The number of frameworks and standards in the environmental, social and governance (ESG) space can be overwhelming.  While various organizations have set up different standards and frameworks, last year five of them — the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), the Global Reporting Initiative (GRI), the Climate Disclosure Standards Board (CDSB), and the Carbon Disclosure Project (CDP) — announced plans to harmonize their standards and frameworks to provide more consistency. (See our blog post for additional information on this initiative).

In December 2020, this “group of five” published a prototype climate-related financial disclosure standard that illustrates how the concepts from their joint paper can be applied to climate disclosure and consolidates content and metrics into a single, practical guide.  Notably, the publication of the prototype coincided with the fifth anniversary of the Paris Agreement.

SASB and IIRC

SASB and the IIRC also announced plans to combine under the oversight of a new organization to be called the Value Reporting Foundation.  The official merger was formalized just this month.  The merger of two entities focused on enterprise value creation represents meaningful progress toward simplifying ESG reporting.

Continue Reading ESG Organizations: The Journey Toward Consolidation and Collaboration Continues

It should come as no surprise to readers of our blog that public companies often expend significant resources each year on managing litigation matters.  As a result, perhaps it is natural that some companies might want to convey financial results that exclude (or adjust out) these litigation expenses from their GAAP results as they arguably do not relate to the core performance of the company’s business.

When considering whether to include an adjustment for litigation expenses in non-GAAP measures, companies should be mindful of how they identify and disclose such expenses (e.g., outside of the ordinary course of business (non-recurring)).  In monitoring recent Securities and Exchange Commission (SEC) comment letters, we found a letter exchange that we believe demonstrates the principal disclosure considerations at issue.

Background

As background, Item 10(e) of Regulation S-K provides that a registrant must not “adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years.” (Emphasis added.)

Continue Reading Adjusting for Litigation Expenses in a Non-GAAP Financial Measure

The market has seen a boom in the last two years for emerging companies going public through the use of special-purpose acquisition companies (SPACs).  SPACs are attractive vehicles for allowing a private company to gain quicker access to public capital and avoid the traditional initial public offering (IPO) process.  A SPAC starts as a public company through a traditional IPO but has no operations.  The SPAC raises public funds under the premise that it will use those funds to find a target private company in which to invest.  Once the target is identified, the SPAC goes through a business combination transaction (called a de-SPAC transaction) whereby the SPAC and private target engage in a merger transaction, with the result being the target survives as a public company.

The recent dramatic increase in using SPACs, however, has faced increased scrutiny.  More recently, this trend has raised the attention of the U.S. Securities and Exchange Commission (SEC) along with plaintiff stockholder class action law firms.  Directors and officers (D&O) insurance carriers are also adjusting their premiums and policy terms to account for these increased risks in using SPACs.  Such rising concerns are only heightened by recent news reports of gaps in certain deals between returns for insiders versus later investors who suffer losses after a company becomes public via a SPAC.

This post highlights recent SPAC-related issues raised by the SEC and litigation filings, including potential conflicts with SPAC sponsors, accounting controls for targets, and the financial projections companies use when attracting support for a SPAC transaction.  SPAC sponsors and potential SPAC target companies should be aware of these developments as they consider the booming SPAC market.  Notwithstanding these headwinds, it is likely the SPAC market (particularly the de-SPAC market) will continue to be strong in 2021 as valuations continue to be attractive and given the reality that so many SPACs are in the market competing for targets.

Continue Reading Hot SPAC Market Increases SEC Scrutiny and Litigation Risks

I, along with Delta Air Lines Assistant General Counsel Stephanie Bignon, recently authored an article for Corporate Compliance Insights addressing the latest developments impacting SEC periodic reporting disclosure practices.

“Public companies have been monitoring and rapidly adapting to a wide array of developments impacting periodic reporting disclosure practices over the last year,” we wrote in the article.

In addition to various SEC rules changes that have been adopted over the last year, we provided an extensive overview of four key areas which are anticipated to impact periodic reporting for the remainder of 2021:

Continue Reading Periodic Reporting for Public Companies in 2021: What Lies Ahead

Yesterday, the Senate, in a vote largely along party lines, approved the nomination of Gary Gensler to be the new chair of the Securities and Exchange Commission (SEC).  Gensler, a former Goldman Sachs executive who also ran the Commodities Futures Trading Commission during the Obama administration, is expected to lead the SEC in a different direction from that of former chair Jay Clayton.

Gensler’s appointment as the chair of the SEC breaks the 2-2 deadlock that resulted when Clayton stepped down following the presidential election in 2020. Somewhat interestingly, Gensler’s appointment was approved only for the remaining portion of Clayton’s term – which ends June 5, 2021, though under existing rules, he may remain in the position without further Senate approval for up to 18 months following the end of that term.  I don’t believe this signals that Gensler’s term will be a short one though, as the Senate has already calendared a vote on his appointment through June 5, 2026, and the Senate Banking Committee has approved him serving through that date also.

Continue Reading Gary Gensler Will Be New Securities and Exchange Commission Chair