Welcome to the summer edition of Securities Quarterly Update, a publication that provides updates and guidance on securities regulatory and compliance issues. In this edition, we look at the SEC’s updated regulatory agenda, recent updates to SEC electronic filing requirements, guidance on potential disclosure obligations relating to Russia’s invasion of Ukraine, proposed climate and other ESG-related disclosures, and recent ESG-related enforcement activity.
SEC Releases Spring 2022 Reg-Flex Agenda
In June, the Securities and Exchange Commission (SEC) released its Spring 2022 Regulatory Agenda (Reg-Flex Agenda). While the Reg-Flex Agenda is not binding, it provides some indication of when the SEC may propose or finalize various rules. Among other rules, the SEC is targeting October 2022 both for finalizing the rules relating to climate change disclosure, stock repurchases, proxy voting advice (by proxy advisory firms such as ISS and Glass Lewis), clawbacks and pay versus performance disclosure and for proposing new rules relating to human capital disclosure, stockholder proposals, definition of securities held of record, Regulation D and Rule 144. The final rules relating to insiders’ Rule 10b5-1 stock trading plans, cybersecurity risk disclosure and beneficial ownership reporting, and proposed rules relating to board diversity, are currently scheduled for April 2023. The SEC will hold an open meeting on July 13 to consider amendments to proxy voting advice rules and stockholder proposal rules.
SEC Updates Electronic Filing Requirements
On June 3, the SEC announced it had adopted amendments to require electronic submission of certain forms that are currently permitted to be submitted in paper format, such as affiliates’ notices on Form 144 of proposed sales of company stock. The amendments also mandate the use of Inline eXtensible Business Reporting Language (iXBRL) for plan annual reports on Form 11-K. The amendments became effective July 11, 2022 and include the following transition periods:
- Beginning January 11, 2023: Filers are required to electronically submit their “glossy” annual reports to security holders on EDGAR (such reports were previously allowed to solely be posted on filers’ websites), as well as electronically file certain other filings by paper filers who would be first-time electronic filers, other than for Form 144.
- Beginning six months after the date of publication in the Federal Register of the SEC release adopting an updated version of the EDGAR Filer Manual addressing updates to Form 144: Filers are required to file Form 144 electronically. SEC staff expects the SEC to consider adoption of the relevant EDGAR Filer Manual in September 2022.
- Beginning July 11, 2025: Financial statements and schedules to Form 11-K are required to be filed using iXBRL.
SEC Provides Guidance Regarding Disclosures Relating to Russia’s Invasion of Ukraine and Related Supply Chain Issues
On May 3, the SEC’s Division of Corporation Finance issued a sample comment letter outlining public company disclosure requirements relating to the business impact of Russia’s invasion of Ukraine and the international response. Staff specifically noted that, to the extent material or otherwise required under the SEC’s disclosure framework, companies should provide tailored disclosure relating to:
- their direct or indirect exposure to Russia, Belarus and/or Ukraine, whether through operations, employees, investments, sanctions, or legal or regulatory uncertainty associated with operating in or exiting business in Russia or Belarus;
- direct or indirect reliance on goods or services sourced in Russia, Ukraine and, as applicable, in countries supportive of Russia;
- actual or potential supply chain disruptions and volatility related to commodity prices;
- related cybersecurity risks;
- business relationships in, connections to, or assets in, Russia, Belarus and Ukraine; and
- the quantitative and qualitative impact on their financial statements of any related impairment of assets, changes in inventory valuation, deferred tax asset valuation allowance, dispositions, de‑consolidations, business exits, fluctuations in exchange rates and changes in contracts with customers or the ability to collect consideration, as well as any non-GAAP measures adjusting for amounts relating to Russia, Belarus and/or Ukraine operations.
The SEC’s staff also drew attention to the evaluation of the effectiveness of disclosure controls and procedures and internal control over financial reporting, as well as the oversight role of the board of directors, including oversight of whether to continue or to cease activity in Russia and/or Belarus. When reviewing company filings, staff is likely to continue issuing these types of comments, and may ask for additional detail and discussion, relating to these issues.
Proposed Climate and Other ESG-Related Disclosure Requirements Are Rapidly Expanding
The proliferation of proposed environmental, social and governance (ESG) reporting standards is accelerating, both in the United States and abroad, including, for example:
- The SEC’s climate disclosure rules proposed in March 2022;
- The International Sustainability Standards Board’s (ISSB) draft climate and sustainability standards, intended to be finalized in 2022, but which would be subject to adoption by any countries, agencies, etc., that so elect;
- The EU’s Corporate Sustainability Reporting Directive (CSRD), which would also apply to large U.S. companies with significant activity in Europe;
- U.S. banking regulators’ proposed climate-related financial risk management principles, including:
- The Office of the Comptroller of the Currency’s (OCC) Principles for Climate-Related Financial Risk Management for Large Banks proposed in December 2021; and
- The Federal Deposit Insurance Corporation’s (FDIC) Statement of Principles for Climate-Related Financial Risk Management for Large Financial Institutions proposed in March 2022;
- The National Association of Insurance Commissioners’ (NAIC) redesigned survey relating to Task Force on Climate-related Financial Disclosures (TCFD) aligned reporting of climate-related risks by insurance companies adopted in March 2022; and
- Additional ESG-related activity in the United Kingdom, Germany, and around the world.
Companies should prepare for increased ESG disclosure requirements, including assessing and building up, as necessary, their internal controls and procedures relating to ESG disclosures.
For more information about the SEC’s proposed climate disclosure rules, please see Thompson Hine’s March 2022 ESG Collaborative Update.
In addition, ESG-related requirements for funds, including the proposed requirements discussed below, increase and, in some cases, accelerate ESG-related informational demands on companies.
However, as proposed ESG-related disclosures increase, so does pushback. For instance, in the United States, some states have begun implementing laws intended to reduce, limit, or penalize companies for engaging in certain ESG activities. On June 30, the U.S. Supreme Court issued an opinion that effectively weakens the U.S. Environmental Protection Agency’s ability to establish environmental regulations targeting climate change. It seems likely that litigation brought against any climate-related rules adopted by the SEC will reference this decision in their opposition.
SEC Proposes Additional ESG Disclosures by Certain Investment Advisers and Investment Companies
On May 25, the SEC proposed amendments to the rules and reporting forms under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 that would require certain covered funds to provide more information regarding their ESG investment practices. The proposed amendments would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies, which, in turn, would likely lead to additional requests for ESG-related information from portfolio companies.
The amendments aim “to create a consistent, comparable, and decision-useful regulatory framework for ESG advisory services and investment companies,” intended to help investors make informed decisions as they compare different ESG investments.
The amount of disclosure required would vary based on how central ESG factors are to a fund’s strategy and would require “layered” disclosure (consisting of a shorter overview, followed by more detailed disclosure elsewhere in the documents). The proposed rules identified three types of ESG funds and outlined different obligations for each type:
- Integration Funds: These funds integrate ESG factors alongside non-ESG factors in investment decisions. The covered funds would be required to describe how ESG factors are incorporated into their investment process. Integration funds that consider greenhouse gas (GHG) emissions would be required to disclose additional information about how GHG emissions are considered, including the methodology and data sources used.
- ESG-Focused Funds: These funds include ESG factors as a significant or main consideration and would be required to provide detailed disclosures, including a standardized ESG strategy overview table. Certain ESG-focused funds that use proxy voting or engagement with companies as a significant means of implementing their ESG strategy would also be required to provide information about their proxy voting or engagements, if applicable. ESG-focused funds that consider environmental factors in their investment strategies would be required to disclose additional information about the GHG emissions associated with their portfolio, specifically the portfolio’s carbon footprint and weighted average carbon intensity.
- Impact Funds: These are a subset of ESG-focused funds that seek to achieve a particular ESG impact. An impact fund would be required to disclose how it measures progress on its ESG objective.
For a more detailed analysis of the proposed rules, please see Thompson Hine’s June 2022 Investment Management Update.
Recent ESG-Related Enforcement and Investigation Actions
SEC Brings ESG Disclosure Charges
In an action arising from the activities of the Climate and ESG Task Force in the SEC’s Division of Enforcement, on April 28, the SEC charged a Brazilian mining company with making false and misleading claims about the safety of its dams. In January 2019, one of the company’s dams collapsed, killing 270 people. The company lost more than $4 billion in market capitalization.
According to the complaint, the company allegedly altered multiple dam safety audits, obtained fraudulent stability certificates, and regularly misled local authorities and communities about the safety of the dam through its ESG disclosures. The complaint also alleges that the company knew the dam did not meet internationally recognized dam safety standards, but stated in its public filings that the company adhered to the “strictest international practices” in evaluating dam safety and that all its dams were certified as stable.
The SEC’s complaint charges the company with violating antifraud and reporting provisions of federal securities laws and seeks injunctive relief, disgorgement plus prejudgment interest, and civil penalties.
“Greenwashing” Probe
On May 31, German prosecutors raided the offices of a German bank and its asset management subsidiary as part of an investigation into allegations that the subsidiary marketed investment products as more environmentally friendly than they really were, also known as “greenwashing.” Prosecutors said that investigators found sufficient indications that ESG standards were applied only in a minority of investments, and “were not taken into account at all in a large number of investments,” which contradicted statements in the subsidiary’s fund sales prospectuses. The next day, the subsidiary’s CEO resigned.
SEC Launches Investigation into ESG Investments
On June 10, it was reported that the SEC had launched an investigation into an investment bank’s asset management group regarding its ESG investment funds; in particular, the SEC is reportedly focused on the mutual funds division. This investigation follows the SEC’s May 2022 settlement with another bank’s investment advisory division over charges relating to ESG claims.
These actions serve as a reminder to exercise caution with ESG-related practices and disclosures, to invest in the development of ESG-related policies, controls and procedures, and to ensure consistency in ESG disclosures, including consistency with board materials. At the same time, when implementing ESG programs, companies should also monitor for laws that may limit, or require additional tailoring of, ESG efforts, such as a bill in West Virginia intended to restrict financial institutions from receiving state banking contracts if they are found to be boycotting fossil fuel-based energy companies and similar legislation in a few other states; court decisions finding California’s diversity laws unconstitutional; and Florida’s “Stop WOKE Act” (effective July 1, 2022), which, among other things, prohibits companies (with operations or employees in Florida and with more than 15 employees overall) from holding diversity, equity, and inclusion (DEI) training that includes, or providing any instructional materials on, topics that make employees uncomfortable. Litigation is pending.
Human Rights: Forced Labor – Supply Chain Due Diligence
Effective June 21, 2022, the Uyghur Forced Labor Prevention Act (UFLPA) establishes a rebuttable presumption that all goods produced, mined, or manufactured in the Xinjiang region of China or by certain entities designated to the UFLPA Entity List are produced from forced labor and prohibited from being imported into the United States. For more information, please see Thompson Hine’s June 2022 International Trade Update, which provides guidance on how companies can prepare for supply chain due diligence requirements, supply chain tracing, and supply chain management.
Public Company Reminders: 2023 Filer Status, 10-Q Updates and Other Considerations
2023 Filer Status
As June 30, 2022 just passed, it’s a good time for public companies with a December 31 fiscal year-end to calculate their public float to determine their filing status for 2023 and, if needed, start preparing for any additional required disclosures. Among other considerations:
- Non-accelerated filers transitioning into accelerated or large accelerated filers should prepare to include an auditor’s attestation report on their internal control in their 2022 Form 10-K and to meet shorter filing deadlines for their 2022 Form 10-K and 2023
Form 10-Qs. - Companies that no longer qualify as a smaller reporting company (SRC) will need to include three years of audited financial statements in their 2022 Form 10-K and prepare much more detailed compensation disclosures, as well as other disclosures previously omitted or pared down under the SRC scaled disclosure requirements.
- Companies should also assess whether they continue to qualify as an emerging growth company (EGC) and, if not, prepare for any additional disclosures that may be required (such as the auditor attestation on internal control and additional financial statements).
Third Quarter Form 10-Q Considerations
Companies should consider whether to include new or additional disclosures relating to the impact of current events on their business and operations, including the effects of supply chain and logistics challenges, which could include microchip-related supply issues, inflation, changing interest rates, cybersecurity intrusions or breaches, labor and employment issues, and the Russia-Ukraine crisis. Among other things, companies should review their prior disclosures, particularly in their risk factors, forward-looking statements, and management’s discussion and analysis, for any changes.
Nasdaq Board Diversity Matrix
The first element of Nasdaq’s board diversity rules is effective this year – the board diversity matrix. Nasdaq permits companies to provide the matrix by either including it in their proxy statement or on their website (in which case a Company Event Form must be submitted to Nasdaq within one business day of posting).
The initial deadline to provide the matrix is coming up – for most companies, the matrix is required to be publicly disclosed by the later of August 8, 2022 or the date they file their 2022 proxy statement. Any companies that previously filed their proxy statements without the matrix will need to ensure they post the matrix online and notify Nasdaq.
Frequency of Say-on-Pay
Companies that held a vote on the frequency of their say-on-pay votes at their annual stockholders’ meeting this year and did not include the board’s determination on the Form 8-K reporting the meeting results should remember to file an amendment to the Form 8-K within 150 calendar days of the meeting reporting the say-on-pay frequency adopted by their board of directors.
FOR MORE INFORMATION
For more information, please contact:
Jurgita Ashley
216.566.8928
Jurgita.Ashley@ThompsonHine.com
Julia Miller
216.566.5831
Julia.Miller@ThompsonHine.com
or another member of our Securities, Capital Markets & Corporate Governance team. For ESG matters, please contact a member of our ESG Collaborative.
Kellie R. Tomin (Loyola University Chicago School of Law, class of 2023) contributed significantly to this article. Kellie is a Thompson Hine summer associate; she is not admitted to the practice of law. Please contact Julia Zerman to learn more about our summer program.
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