At last week's PLI program, SEC Speaks, Corp Fin Director Renee Jones and crew discussed a number of topics, among them disclosure of emerging risks, recent rulemakings, staff focus on Part III disclosures, shareholder proposals and MD&A disclosures. But there's no denying that the most entertaining moments came from the caustic side commentary provided by former SEC Commissioner Paul Atkins, whose perspective on current trends is, hmmm, distinctly at odds with the zeitgeist currently prevailing at the SEC.

[Based on my notes, so standard caveats apply.]

Jones began by discussing Corp Fin's active agenda and heavy workload—the decline in IPO filings notwithstanding. Obviously, the recent climate disclosure proposal has drawn an enormous number of comments—over 4,000 unique comments—a number of perhaps historic proportion. The proposed requirements to disclose GHG Scope 3 metrics and the proposed metrics disclosures in the financial statements have drawn the most comments, she said. Generally, she reported, investors have been supportive and companies have articulated challenges to the scope of data required and timing, among other issues. Atkins added that, from his perspective, the new climate proposal represented a "takeover of Reg S-K by ESG." He also inquired whether the staff had taken into account SCOTUS's new decision in West Virginia v EPA? Jones replied that they had in fact given a lot of thought to the implications of the case on the proposed climate rule. Atkins later also rejected the SEC's goal of providing "decision-useful" information to investors. He advocated elimination of the term. "Decision-useful" is not equivalent to "material," he said, and the SEC's authority is to require "material" information.


West Virginia v EPA came to SCOTUS as the attorney generals of West Virginia and other states and entities sued EPA, questioning its authority to issue broad systemic regulations governing GHG emissions from power plants—a practice referred to as "generation shifting"— under the 1970 Clean Air Act. In the majority opinion, SCOTUS declared that the case was "a major questions case," referring to a judicially created doctrine holding that courts must be "skeptical" of agency efforts to assert broad authority to regulate matters of "vast economic and political significance," and requiring, in those instances, that the agency "point to 'clear congressional authorization' to regulate.'" In addition to dealing a blow to climate regulation, the case, and especially the major questions doctrine, is widely expected to be brandished regularly against the SEC's climate disclosure proposal and other significant agency regulations across the board. As reported by Reuters, when asked by Bloomberg TV about the impact of the decision on other agencies, Senator Patrick Toomey "singled out the SEC rule," claiming that the SEC is "attempting to impose this whole climate change disclosure regime...with no authority from Congress to do that." (See this PubCo post.) (See this article, this article, this article and this article, for discussions of whether the new Inflation Reduction Act removes the roadblock to EPA action erected by the case.)

Jones also noted that she had asked the staff, in their filing reviews, to focus on disclosures about emerging risks, such as supply chain issues, the war in Ukraine and the impact of inflation, as well as Part III disclosures; based on later presentations at the program, that appears to involve, at least, a particular focus on the aspects of Reg S-K that address board leadership structure and board risk oversight (Item 407(h)).

One panelist discussed a number of SEC proposals, including the SPAC proposal, where commenters expressed concern about the investment company safe harbor, and the proposal for cybersecurity disclosures, where commenters had raised concerns about the level of detail, timing and the requirement for disclosure of incidents. (See this PubCo post.) Atkins inquired about the potential national security concerns regarding the disclosure mandate—had the staff consulted with other government agencies about this issue? The answer was yes.

Another panelist began by announcing two new offices for disclosure review: one for crypto and one for industrial applications and services, which would cover the agricultural, chemical, medical technology and health-care delivery industries, inheriting some areas previously serviced by the life sciences office, but excluding pharma, biotech and medicinal products companies. (See this press release.) Her presentation focused on disclosure of emerging risks, such as Ukraine, supply chain issues and inflation. With regard to disclosure regarding the impact of the war in Ukraine, she pointed to Corp Fin's sample comment letter to companies about potential disclosure obligations arising out of the Russian invasion of Ukraine, the international response to it and related supply chain issues. She stressed that, as explained in the letter, even if companies do not have significant operations in or dealings with Russia, Belarus or Ukraine, they could still experience a substantial spillover impact. For example, in the letter, Corp Fin observed that "many companies have experienced heightened cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the trading prices of commodities regardless of whether they have operations in Russia, Belarus, or Ukraine that warrant disclosure." (See this PubCo post.) With respect to supply chain issues, many of these concerns may have originated with COVID, but even now may be continuing because, for example, of labor shortages or distribution issues. With regard to inflation, she suggested, among other things, that companies pay attention, in addition to inflated costs, to the impact that inflation might have on the company's product pricing and any related decline in demand. Atkins commented on the stunning growth of risk factors disclosure since the requirement was first initiated during his tenure. There seemed to be a lot of risk factor disclosure about "fanciful risks," he said, and companies were providing an increased level of detail. He advocated restoring the original concept.

The panelist reminded companies to avoid boilerplate and focus on material risks as applied to the company period to period and to revisit risk factors to ensure that they do not portray as hypothetical risks that have already occurred (see this PubCo post and this PubCo post). Finally, she advised that the staff was currently examining disclosures regarding board leadership structure and role in risk oversight—principles-based disclosures that were originally mandated in 2009 under S-K Item 407(h)). Reviewing the responsive disclosures, the staff had found that they were not sufficiently tailored to reflect individual circumstances. The recent staff comments in this area were primarily "futures" comments and did not require companies to submit proposed disclosure responsive to the comments to the staff in advance. She suggested that companies may want to look at the original adopting release for the enhanced 407(h) governance disclosure for more insight into the types of specific disclosure that could be warranted. (See this Cooley News Brief.)


Under the release adopting Item 407(h), to provide increased transparency about board functions, each company was required to disclose the structure of its board leadership—essentially, whether and why it had chosen to combine or separate the principal executive officer and board chair positions—and the reasons why the company believed that its board leadership structure was most appropriate for that company (at the time of the filing). If the roles of principal executive officer and board chair were combined, the company was required to disclose whether and why the company had a lead independent director, as well as the specific role the lead independent director played in the leadership of the board. (If the company had identified responsibilities that it viewed as critical to empowering a lead independent director, such as the authority to chair executive sessions of the board, ability to call meetings and approve agendas and responsibility to act as a liaison between the board chair and the independent directors, the company may want to consider discussing that authority. For a discussion of recent trends toward independent board chairs and lead independent directors, see this PubCo post and this PubCo post.)

In addition, the adopting release indicated that disclosure was required about the board's role in oversight of the company's risk management process, including risks such as credit risk, liquidity risk and operational risk. According to the release, the SEC believed that "disclosure about the board's involvement in the oversight of the risk management process should provide important information to investors about how a company perceives the role of its board and the relationship between the board and senior management in managing the material risks facing the company." Disclosure about the board's approach to risk oversight might address how the board administers its risk oversight function—such as through the whole board, or through a separate risk committee or the audit committee or whether the board's standing committees support the board by addressing risks inherent in their respective areas of oversight. The disclosure should also address whether the individuals who supervise the day-to-day risk management responsibilities report directly to the board as a whole or to a committee (or how the board or committee otherwise receives information from these individuals), and how these functions are coordinated.

In prior speeches, both former Commissioner Allison Herren Lee and former Corp Fin Director William Hinman have addressed the need for disclosure regarding board oversight of risk in the context of climate and sustainability. (See this PubCo post and this PubCo post.) Hinman noted that board risk oversight, including the relationship between the board and senior management in managing material risks, is a disclosure requirement under Item 407(h) of Reg S-K and Item 7 of Schedule 14A. Accordingly, Hinman advised, "[t]o the extent a matter presents a material risk to a company's business, the company's disclosure should discuss the nature of the board's role in overseeing the management of that risk." Hinman suggested that the SEC's cybersecurity guidance may provide useful parallels to sustainability and other emerging risks. (See this PubCo post.)

Another panelist discussed shareholder proposals, which declined slightly from last year in terms of the number of SEC submissions (235 compared to 254 last year). Proposals related to corporate governance and the environment were the most common. Atkins inquired about the number of exclusions permitted under no-action responses, given that the SEC had "eviscerated the exclusions."

Another panelist discussed the new universal proxy CDIs, proxy advisory firm regulation (particularly, the importance of treating the advice as a solicitation subject to liability), and, under the beneficial ownership proposal, the filing deadlines and definition of a "group." Atkins suggested that the SEC address the issue of conflict of interest in connection with universal proxy. With regard to beneficial ownership, he expressed concern about "cabals" of institutional investors advocating changes related to the environment, but indicating that they had no control intent and filing a Schedule 13G. The panelist agreed that 13G was inappropriate where the beneficial owner had control intent and referred to a recent enforcement action involving a de-SPAC transaction.

In the separate Corp Fin workshop session, one of the panelists provided discussion of areas of focus for MD&A, underscoring the importance of tailored disclosure. Initially, he advised that, in discussing revenue fluctuations, if the fluctuations were attributable to multiple reasons, companies should quantify and discuss the incremental impact of each. He also emphasized a number of risk areas, such as climate, the Ukraine war, COVID, supply chains, inflation and the strong dollar. With regard to inflation, he noted that, although the specific requirement to discuss the effect of inflation had been eliminated, a discussion of the impact of inflation would still be required on a principles basis if material. Companies should consider how inflation has changed their outlook or business goals, the impact on various line items, liquidity, product prices, raw materials and other costs, as well as the impact of the strong dollar on international sales and the effect of hyperinflation abroad. Companies should also consider the effect of financing issues, such as interest rate increases and whether they will be passed on to customers. Companies should review their risk factors and other disclosures to make sure that the discussion of inflation was not presented as hypothetical.

With regard to supply chain issues, he pointed to Disclosure Guidance Topic No. 9 and Disclosure Guidance: Topic No. 9A (see this PubCo post and this PubCo post), addressing material operational changes made in response to COVID-19, which included supply chain and distribution adjustments and supply chain finance programs (see this PubCo post). Some of the issues surrounding supply chain problems, such as the Ukraine war, Covid and climate (see this article in Saturday's NYT), may overlap, but he advised describing their impact separately. Companies should consider discussing how the disruption has affected outlook, margins, backlog, customer needs, employees, equipment and data security risks and fluctuating energy costs as well as mitigation efforts, including risks associated with new suppliers, such as product quality and regulatory approval.

He also observed that, notwithstanding the specific direction to discuss trends, companies were not providing much in the way of trend disclosure. Topics might include consumption trends, inflation, supply production, shifting resources and upstream and downstream drivers. He recommended creating a separate subsection on trends with a distinct heading. He also noted that the SEC has observed that material topics that are discussed on earnings calls (or in other public documents not filed with the SEC) are sometimes not discussed in MD&A; companies might see comments in that regard.

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