As customary, and in keeping with the Division of Corporation Finances ordinary practices, staff are reviewing these filings, seeking clearer disclosure, and providing guidance to registrants and the public. Liability risk is an important feature of the conventional IPO process. It addresses global climate risks to public companies, and not all climate risks created by domestic activities of all companies, public and private. Rather, they are faced with numerous, conflicting and frequently redundant requests for different information about the same topics. 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. The Commissions authority, to reiterate, includes discretion to promulgate rules governing corporate disclosure. Such a conclusion should hold regardless of what structure or method it used to do so. John C. Coates, IV, Lucian A. Bebchuk, John C. Coffee, Bernard S. Black, . The proposed rule specifies the details of disclosure, just as Congress directed the Commission to do. Or they argue without evidence about secret motivations, socialist agendas, and political goals to cripple industries and to reduce our nations energy security. That request elicited massive amounts of public input on potential climate-related disclosure, and gave anyone skeptical about the project ample notice that it was on the Commissions agenda, and ample time to adduce evidence against it. If that risk drives choices about what information to present and how, it should not in my view be different in the de-SPAC process without clear and compelling reasons for and limits and conditions on any such difference. To view this content, please continue to their sites. The Constitution, and Congress, have given the Commissionand not the courtsauthority to make those judgments. [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. Only at that time did EPA take the position its 1970 authority over air pollution gave it authority to require climate-related disclosures. It would not affect the way that property insurers underwrite, pool or reserve against climate risksthat is for insurance regulators. Annex A contains just a samplingmany more additions and refinements have been adopted in the decades since 1933. For example: Instead, the proposed rule would increase the climate-related information provided by public companies to 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. Where and how should disclosures be globally comparable? Currently, EPA does not purport to require disclosures about greenhouse gas emissions from facilities located outside the US, even if they are owned by US companies. The Securities and Exchange Commission won't wait long to act after the June 13 end of a public comment period on potential ESG regulations, John Coates, acting director of the SEC's Division of Corporation Finance, said Friday. John Coates had copped further backlash for his comments towards . [2] See Ben Scent, Wall Streets $100 Billion SPAC Boom Upends the League Table, Bloomberg Law (Apr. Asbestos-related disclosure is a great example. Duke Energy is investing $52 billion in transitioning to lower carbon resources. But the Commissions authorities go further, precisely because Congress recognized that investors need information beyond the moment of initial offer and sale, which are addressed by the 1933 Act. 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 D.C. 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. These reports are filed with the Clerk of the House as required by Title I of the Ethics . 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). . John Coates, Keeping Pace with ESG Disclosure Developments Affecting Investors, Public Companies and the Capital Markets, . It would not affect how mutual funds and other collective investment vehicles market themselves, even as to the climate risks in their portfoliosthat topic is within the Commissions authority, but it is not addressed in this proposed rule. Finally, companies generally are mandated to make disclosures as needed to prevent other disclosures from being materially misleading. John Jenkins, SPACs: Is the PSLRA Safe Harbor Driving the Boom?, Deal Lawyers.com (Feb. 3, 2021); Bruce A. Ericson, Ari M. Berman and Stephen B. Amdur, The SPAC Explosion: Beware the Litigation and Enforcement Risk, Harv. However, it is also commonly understood that it is the de-SPAC and not the initial offering by the SPAC that is the transaction in which a private operating company itself goes public, i.e., engages in its initial public offering. 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. LONDON, Oct 10 (Reuters) - When John Coates was on a winning streak during his days as a trader at Deutsche Bank and Goldman Sachs, the narcotic-like "high" he experienced was so powerful he was determined to find out more. 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. All those sources here align with the 1933 Acts plain, ordinary meaning, and so confirm the above conclusions. Image: Getty. Disclosure reduces paranoia, and moderates reactions. On the issue of global comparability, in the first instance, arguments in favor of a single global ESG reporting framework are persuasive. I am unaware of any relevant case law on the application of the IPO exclusion. This is exactly how the Commission has taken on similar issues in the past, as detailed in Annex A. As detailed above, the proposed rule could not fairly be viewed as embodying climate change policy generally. 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. With all these changes, the appeal of understanding and developing law around economic substance over form may be greater than ever. At the time, companies were thought by some to be reluctant to provide forward-looking information at least in part due to the prevalence of so-called strike suits which, irrespective of the merits of the claim, were usually less costly to settle than to fight in court. In this way, SPACs offer private companies an alternative pathway to go public and obtain a stock exchange listing, a broader shareholder base, status as a public company with Exchange Act registered securities, and a liquid market for its shares. 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. Finally, even if the major questions doctrine were thought relevant here, the contents of the proposal areas discussed at length above and in Annex Adirectly in keeping with the way that the Commission has functioned since inception. As a result, Congress, markets, analysts, and the SEC staff typically treat these introductions differently from other kinds of capital raising transactions. The information, including financial statements, relevant to evaluating the investment changes dramatically in the de-SPAC because the private target has operations unlike the SPAC; and initial SPAC investors commonly have the right to and do sell or have their shares redeemed. . Again, this difference is in keeping with the Commissions focus on investors. 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. A SPAC is a shell company with no operations. [3] E.g., Andrew Ross Sorkin et al., What a SPAC Believer Thinks of SPAC Mania, N.Y. Times (Mar. How should the SEC, its staff, and private actors weigh the capital-formation costs and benefits of disclosures, procedures, and liability rules? It specifies disclosure of facts, in neutral language. If useful for the protection of investors, disclosure was not limited to the four corners of, or even commentary on, financial statements. John CoatesActing Director, Division of Corporation Finance. These investors included individuals and institutions. He had been serving as the independent monitor for the U.S. Justice Department in the prosecution of Boston-based State Street Corp. "John is widely recognized as an expert on corporate governance, corporate transactions, and compliance and disclosure processes," Lee said in a statement. STAY CONNECTED Its creation was accomplished by Presidential directive, subsequently approved by Congress in 1984. Professor Coates served as General Counsel and as Acting Director for the Division of Corporation Finance for the SEC. In the nature of corporate investment, investors in multinational US public companies bear climate-related financial risks and have opportunities to profit from their global activities. 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. 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. 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. John Coates Acting Director, Division of Corporation Finance March 11, 2021 Statement Published in Connection with Remarks at the 33rd Annual Tulane Corporate Law Institute [1] Not long ago, the title of this statement would have needed to unpack "ESG" into Environmental, Social and Governance. The industry-leading media platform offering competitive intelligence to prepare for today and anticipate opportunities for future success. The proposed rule is a rule that specifies details of disclosure requirements. Nothing at stake in this proposed rule justifies such judicial lawmaking. These claims raise significant investor protection questions. 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. If we do not treat the de-SPAC transaction as the real IPO, our attention may be focused on the wrong place, and potentially problematic forward-looking information may be disseminated without appropriate safeguards. 11, Special Purpose Acquisition Companies (December 22, 2020). This blog answers some questions about the changes. 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. 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. She received an undergraduate degree from Princeton University and a J.D. [11] Any material misstatement or omission in connection with a tender offer is subject to liability under Exchange Act Section 14(e). What is the right balance between principles and metrics? How much standardization can be achieved across industries? That possibility further calls into question any sweeping claims about liability risk being more favorable for SPACs than for conventional IPOs. Congress could not have predicted the wave of SPACs in which we find ourselves. EPA, by contrast, focuses on conduct in the United States. Said plainly, many investors in the SPACs own initial offering are not the investors in the ultimate public companys ongoing business operations. Neither EPA nor any other federal agency has authority to elicit the full range of information about financial risks that would be provided to investors under this rule. Financial reporting quality appears to have gone up after SOX but research on causal attribution is weak. The financial disclosure that John Coates filed also offered a rare public peek into the costs of corporate compliance monitors. Not a Bloomberg Law Subscriber?Subscribe Now. About John Coates. But just as important is the recognition of the costs associated with not having ESG disclosure requirements. 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). 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). The proposed rule is reasonably designed to address these inconsistencies, give investors comparable information, and make it more reliable. He chairs the faculty committee on executive education and teaches contracts, corporations, corporate governance and financial regulations. First, the 1933 Act itself required disclosure not only of specified financial items, but also qualitative, open-ended information, such as the general character of the companys business, compensation, and material contracts, and reinforced its breadth by referring not only to opinions of accountants and appraisers but also engineers and other professionals, such as lawyers oras under the present proposalexperts on greenhouse gas accounting. Coates, recently finished work on a follow-up to the 1982 film to celebrate its . Its greenhouse gas emission disclosure elements are aligned with the EPAs existing requirements for US emission sources, which in turn are aligned with the widely used and privately developed Greenhouse Gas Protocol, which was a joint product of companies, investors and other organizations. Congress also created the Commission as an agency that could thoughtfully address problems too politically charged to be easily resolved on Capitol Hill. [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. Many legal issues are open to reasonable debate. If a major shift in owners is in fact occurring in most or all SPACs as they progress through a de-SPAC, it is the de-SPAC as much as any other element of the process on which we should focus the full panoply of federal securities law protections including those that apply to traditional IPOs. 3 of 1970, nowhere mentions the Securities and Exchange Commission. The PSLRA was passed by Congress in 1995 to stem what was considered to be a rising tide of frivolous or unwarranted securities lawsuits aimed at operating companies filing routine annual and quarterly reports under the Exchange Act. Instead of the resulting input showing the idea would be a bad one, or not reasonably designed to protect investors, the request generated substantial evidence that climate-related disclosures would be valued by investors. 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. That is because it is true that the Commissions authority does not run so far as to require disclosures for any reason, or for reasons not specified in its organic statutes. The same could be said of most existing disclosure requirements. It is not a rule requiring or limiting opinions or controversial speech, and raises no First Amendment concerns. 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 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. 2021; 2020; 2019; 2018; 2017; 2016; 2015; 2014; 2013; Previously, Coates was a partner at Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and financial institutions. The result is a continuously adjusted, detailed system of disclosure specifications, reflecting the Commissions fact-finding and expertise. 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. The disclosures would consist of facts, not opinions, and raise no First Amendment concern. It does not impose a carbon tax or create a cap-and-trade regime. 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. I think it is only about 30 pages, while the British Companies Act is over 300 pages. Law Offices of Gary Martin Hays & Associates The National Law Journal Elite Trial Lawyers recognizes U.S.-based law firms performing exemplary work on behalf of plaintiffs. With that overview, I would like to focus on legal liability that attaches to disclosures in the de-SPAC transaction. 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. As discussed in Point I, critics of the rule cannot plausibly attack premise one. 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. New Corp Fin Director John Coates is fully on-board, making speeches and otherwise being vocal in his support of ESG centered disclosures. 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. The title of the 1933 Act states its purpose as creating a regime of full and fair disclosure.. Surveys of individual investors by firms such as Morgan Stanley confirm this evidence. Funding, governance and public accountability are all critical elements of a reliable, trusted disclosure system. 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. Join National Law Journal now! The requirements and have specifically included disclosures related to the environment. Because, finally, the disclosures are financial and do not extend to the large part of the economy owned by private companies, they would not constitute general climate change policy, such as a carbon tax or emissions cap-and-trade scheme. So, too, for mining companies, asset-backed issuers, and other sectors, as also detailed in Annex A. Bare claims that a later-in-time-statute addressing a different agency and a different set of legislative purposes are ever viewed by courts as silently trumping earlier statutes if their content overlaps in any way, or if the later one is in some way more specific than the earlier one, are wrong as a matter of law. Nor does the proposal purport to be authorized by a newly discovered power in the securities lawsthe power is disclosure, as it has been for nearly a century. The safe harbor is also not available if the statements in question are not forward-looking. It does not suggest any limit other than what is in the statutes themselves, including NEPA. See also Rodriguez v. Gigamon Inc., 325 F. Supp. Forum on Corp. Gov. 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 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. John C. Coates, Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications, 124 Yale Law Journal 882 (2014-2015). John Coates, the Divisions current Acting Director, has been named SEC General Counsel. Here, we survey research on steroid hormones and their cognitive. Just as artificial manipulation tends to upset the true function of an open market, so the hiding and secreting of important information obstructs the operation of the markets as indices of real valueThe disclosure of information materially important to investors may not instantaneously be reflected in market value, but despite the intricacies of securities values truth does find relatively quick acceptance on the market. The release cites a number of studies to this effect. Third, the 1933 Act includes a specific limit to this authority, that it be for the protection of investorsbut no further qualifier. 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. Section 13(a)(2) of the 1934 Act goes further still, and requires companies to disclose, under rules the Commission: may prescribe as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security such annual reports and such quarterly reports as the Commission may prescribe. 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. 2018) (CFO's statement about corporation's large deferred service, healthy product backlog, and consistent quarterly linearity, which was a statement made with another statement as to expected earnings for an upcoming quarter, were non-forward-looking statements and were not protected by the PSLRA's safe-harbor; statement included facts regarding the present state of the corporation, not assumptions); NECA-IBEW Health & Welfare Fund v. Pitney Bowes Inc., No. A public company might have a large amount of transition risk due to many different emission sources, each of which is below EPA thresholds. We can and should continue to adapt existing rules and standards to the realities of climate risk, for example, and the fact that investors increasingly are asking for ESG information to help them make informed investment and voting decisions. Where do we go from here? In the National Environmental Policy Act (NEPA), Congress made environmental considerations part of the SECs substantive mission. That statutestill on the booksprovides (among other things): The Congress recognizes that each person should enjoy a healthful environment and that each person has a responsibility to contribute to the preservation and enhancement of the environment. 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. 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. The legislative history includes statements that the safe harbor was meant for seasoned issuers with an established track-record.[16]. In sum, each attack succeeds only as applied to a fictional new rule. Even if the safe harbor clearly applies, its procedural and substantive provisions do not protect against false or misleading statements made with actual knowledge that the statement was false or misleading. It is not a transformative surprising regulatory departure, raising such a major question as to justify interpretive methods other than those of a faithful agent of Congress. John C. Coates is the Acting Director of the SEC's Division of Corporation Finance. In that section, companies are required to disclose a specified list of financial disclosure and documents set out in Schedule A, to obtain consents from any accountant, engineer, or appraiser or other professional identified in the disclosures, andin a separate sentenceto disclose such other information, and be accompanied by such other documents, as the Commission may by rules or regulations require as being necessary or appropriate for the protection of investors..

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