Professor of Law and Economics Harvard Law School 1875 Cambridge Street Cambridge, MA 02138, United States phone: 617-496-4420 e-mail: jcoates@law.harvard.edu *Corresponding Author Electronic copy available at : http ://ssrn.com /abstract = 2375396 COST-BENEFIT ANALYSIS OF FINANCIAL REGULATION: CASE STUDIES AND IMPLICATIONS About John Coates. 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. In their second stage, SPACs complete a business combination transaction, in which the SPAC, the target (i.e., the private company to be acquired), or a new shell holdco issues equity to target owners, and sometimes to other investors. Rep. No. 1, 2005) (Where the failure to make such disclosure is negligent, an issuer would violate Section 14(a) of the Exchange Act and Rule 14a-9 thereunder). First, while we should be mindful of the costs of new ESG disclosures, we must at the same time acknowledge the costs from the absence of a consensus ESG-focused disclosure system. First, I am not pro- or anti-SPAC. Most public companies could go dark today, if they were prepared to surrender their stock exchange listings. 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. EPA was created in 1970. The National Law Journal Elite Trial Lawyers recognizes U.S.-based law firms performing exemplary work on behalf of plaintiffs. Our regime contains comply or explain requirements (e.g., if a company does not have an audit committee financial expert, it can explain why),[3] where the ability to explain makes the requirement less than rigidly mandatory and for some companies potentially more informative. Congress provided a safe harbor for forward-looking statements made by established, publicly traded, reporting companies. Financial Reports. All Rights Reserved. It is the first time that public investors see the business and financial information about a company. That is, the rules perspective of that of investors and companiestheir strategies, risk management, governance and metricswithout regard to whether a given company independently creates a climate impact that is large or small for the overall environment, or whether it is more or less exposed than other companies to physical risks of climate change. All those sources here align with the 1933 Acts plain, ordinary meaning, and so confirm the above conclusions. Biography. Although the D.C. The Commission has always required information about a U.S. public companys consolidated subsidiarieswherever located. https://www.law.com/nationallawjournal/2021/03/25/harvard-laws-john-coates-now-at-sec-reveals-consulting-income-clients/. Specifically, Section 7 gives the Commission unambiguous authority to specify the contents of disclosure documents used to register securities for sale to the public. 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). However, many legal questions have clear answers. 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. Instead, as summarized by the D.C. Anyone who argues that the Commission should leave the job of climate disclosure to the EPA has to have an answer to how the EPA could possibly protect US investors with information about the large amount of activities of US public companies that are located beyond the reach of the EPAs jurisdiction. Although the rule is more limited than what an impact advocate would want, it is in one important way broader than anything EPA has adopted or is likely to have to power to implement: its geographic reach. New investors buy these shares in the aftermarket or participate in a new offering by the combined entity. S190602 (daily ed. Chevron plans $2.75 billion in carbon-reduction projects, renewables and offset projects. Nothing in law suggests that uncertainty, however reasonable, legally forbids rulemaking. 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. Large multinationalseven in the oil and gas or energy sectors, even actively emitting greenhouse gases in the USwould be unaffected if they list no securities in our markets. The proposed rule would not require national banks to consider climate-risks in lending activitiesthat is for banking regulators. It is not a rule requiring or limiting opinions or controversial speech, and raises no First Amendment concerns. [2] See Ben Scent, Wall Streets $100 Billion SPAC Boom Upends the League Table, Bloomberg Law (Apr. Despite all of this, it may still be thought that the PSLRA offers something for SPACs not available to conventional IPOs. From an environmental policy perspective, prioritizing based on environmental impact might make sense. In 2004 he returned to Cambridge to research the biology of More about John Coates No one at the time of NRDC v. SEC in 1979 argued that the creation of EPA in 1970 had overridden NEPA, or limited the 1933 or 1934 Acts, as the Commission itself would have done (because, recall, it was being sued in the 1970s for not doing enough to require environmental disclosure). If a given climate risk or opportunity is large for a company, then its investors need and would under the rule obtain information about that risk or opportunity, even if (when compared to the overall impact of all human activity on the environment) the risk or opportunity is not large enough to require reporting under some other regime (such as the EPAs greenhouse gas reporting regime). Feedback to SSRN. Modern finance and valuation techniques focus on risk and expected future cash flows. Anyone who sees a role for law to require disclosure of comprehensive information about the sources of greenhouse gas emissions will not be satisfied by this rule. The event, which was organized by the nonprofit consumer advocacy organization Public Citizen, also included speeches by former Harvard Law School [] [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). Section 12 of the 1934 Act conditions exchange-trading privileges unless securities are registered by companies disclosing such information, in such detail, as to the [company] as the Commission may by rules and regulations require, as necessary or appropriate in the public interest or for the protection of investors, in respect of the following: the organization, financial structure, and nature of the business.. Banks and insurance companies are increasingly demanding similar information to make loans or underwrite policies. Thousands more have been filed since the release was proposed, including many from self-identified individual investors. Evidence regarding the clear and present financial materiality of transition risk is discussed below. Second, forward-looking information can of course be valuable. Not a Bloomberg Law Subscriber?Subscribe Now. SPAC shareholders typically have a vote on the so-called de-SPAC transaction, and many investors who purchased securities in the first stage SPAC either sell on the secondary market or have their shares redeemed before or shortly after the de-SPAC. The rule builds on decades-long efforts by public companiessuch as 3M, Abbott Laboratories, Amazon, Apple, Chevron, Fujitsu, IBM, Johnson Controls, Michelin, P&G, Verizon and Walmartto develop practical, decision-useful, consistent, comparable and verifiable ways to report about climate risks and opportunities. Rather than casting disclosure rules in stone, Congress opted to rely on the discretion and expertise of the SEC for a determination of what types of additional disclosure would be desirable. It is true that many companies are spending money to do thisfurther evidence of the importance of the information. [2] Item 407(c)(2)(vi) of Regulation S-K. (Disclosure required of whether, and if so how, the nominating committee (or the board) considers diversity in identifying nominees for director and if the nominating committee (or board) has a policy with regard to the consideration of diversity in identifying director nominees, describe how the policy is implemented, as well as how the nominating committee (or the board) assess the effectiveness of its policy.), STAY CONNECTED What lessons can we learn from earlier examples of evolving risks? 28, 2018) (refusing to dismiss claim that Musk controlled Tesla despite owning only 22% of the voting power due to actual domination and control). . The multiple places the statutes give the Commission authority to go beyond its text (to create exemptions, tailor its requirements, and add to them). The disclosures would consist of facts, not opinions, and raise no First Amendment concern. So, too, for mining companies, asset-backed issuers, and other sectors, as also detailed in Annex A. Rather, as long as the Commission considers that question in good faith and follows appropriate process, Congress has directed that the Commission make that decision, not the courts. With Such Low Win Rates, Should Law Firms Respond to So Many RFPs? 51283 (Mar. Finally, a coordinated global disclosure system has great potential benefits, but achieving one will take careful attention to institutional design. 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. Circuit affirmatively held that the Commission had authority to do that, and, in its judgment, to potentially go further. Dynamically explore and compare data on law firms, companies, individual lawyers, and industry trends. Key points: Coates was a key figure in Brisbane's 1992 Summer Olympics bid, which lost out to Barcelona The IOC has designated Brisbane as the preferred candidate city to host the 2032 Olympics Coates says he is confident Brisbane can keep costs down if it does host the Games [6] SPAC Status by Year of IPO, SPACInsider (last visited Apr. At the end of 2018, the US SIF Foundation identified $11.6 trillion in US-domiciled sustainable, responsible, and impact investment strategy assets, of which $8.6 trillion were managed on behalf of institutional investors and $3.0 trillion were managed on behalf of individual investors. 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. Third, the 1933 Act includes a specific limit to this authority, that it be for the protection of investorsbut no further qualifier. License our industry-leading legal content to extend your thought leadership and build your brand. The United States Securities and Exchange Commission has focused increasingly on SPACs in recent months, and is particularly concerned with conflicts of interest that incentivize a SPAC's sponsors, directors, officers, and affiliates to close a de-SPAC transaction even when doing so is not in the best interests of SPAC shareholders, and whether It addresses global climate risks to public companies, and not all climate risks created by domestic activities of all companies, public and private. The same could be said of most existing disclosure requirements. 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. The requirements have included disclosures about risks and uncertainties generally, and of information both qualitative (business segments; competitive conditions; management, environmental and other litigation; and contracts) and quantitative (mineral reserve estimates, loan performance statistics, coverage ratios, material transactions, and compensation). Companies objectively do or do not have strategies that reflect transition risk or physical risks of climate change. A consortium of public energy companies is raising $1 billion for emissions reductions technology. Some may view these limits as creating incentives for public companies to go private, or for private companies to not go public. 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. This rule would not transform even the portion of the American economy regulated by the Commissionwhich remains investments in and markets for securities of public companies, not privately held companies, and the proposal adds no new companies to its disclosure regime. What about the Private Securities Litigation Reform Act? Nothing at stake in this proposed rule justifies such judicial lawmaking. As companies continue to disclose more in sustainability reports, they should already be evaluating those disclosures in light of existing anti-fraud obligations. 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 . Congress both expanded authorities and limited which and how specific types of companies and transactions are covered by its disclosure regime. Finally, critics sometimes argue that investors do not need protection of mandatory climate-related financial disclosures because companies are already voluntarily making such information available. No offers may be made or accepted from any resident outside the specific states referenced. 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. Proposal on Climate-Related Disclosures Falls Within the SEC's Authority Posted by John C. Coates (Harvard Law School), on Wednesday, June 22, 2022 Comments Off Print E-Mail Tweet Climate change, ESG, Investor protection, Legal history, Materiality, SEC, SEC rulemaking, Securities regulation, Sustainability More from: John Coates When Congress passed the PSLRA, the path to becoming a public company was fairly simple and standardized. Many ESG-related issues are similar to ones we have faced before. With that overview, I would like to focus on legal liability that attaches to disclosures in the de-SPAC transaction. Or they argue without evidence about secret motivations, socialist agendas, and political goals to cripple industries and to reduce our nations energy security. John Coates Coates has served as the SEC's Acting Director of the Division of Corporation Finance since February 2021. It does not impose a carbon tax or create a cap-and-trade regime. It also cut back on liability of disclosure. However, the rule does need to at least be rationally designed for investor protection to be authorized. Second, there may be advantages to providing greater clarity on the scope of the safe harbor in the PSLRA. The directive consolidated authorities and activities spread across six different departments and agencies, ranging from the Department of Agriculture to the Atomic Energy Commission. Even as to the financial system, it does not set out comprehensive climate policy. On April 12, 2021, the Staff of the U.S. Securities and Exchange Commission (SEC), under the signature of Acting Director of the Division of Corporate Finance John Coates and Acting Chief Accountant Paul Munter, released the Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies As a result, the rule will minimize costs and maximize benefits of compliance. 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. Mar. Laws against fraud have always been consistent with the First Amendment. The focus of the actual rule is the impact of climate change on companies, and not vice versa. John Coates, the vice-president of the International Olympic Committee and outgoing president of the Australian National Olympic Committee, said "to a large extent" that Sydney was awarded the . Three of those exclusions are of note: those made in connection with an offering of securities by a blank check company, those made by a penny stock issuer, and those made in connection with an initial public offering. 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. Because the rule is an investor-oriented disclosure rule, it is within the Commissions expertise. These decisions show that the Commissions delegated power is limited, and that the statutory limits (protection of investors and markets) are intelligible and have bite. Nothing at stake in this proposed rule justifies such judicial lawmaking. EPA has authority over private companies, while the Commissions proposed rule covers only public companies. It is also not a rule the EPA or any other regulatory agency has adopted or could legally adopt. Should the SEC reconsider the concept of underwriter in these new transactional paths? Renee brings deep expertise in corporate governance and securities law to the Division of Corporation Finance. Executive compensation is its own, complex and specialized area of management and finance, leading companies to hire expert advisors to develop compensation plans. If the person charged with reviewing an employee's report finds a conflict, he should impose a remedy immediately. Congress in 2012 thus ratified long-standing Commission exercises of the unambiguous authority in 7(a)(1). 2017-0421-KSJM, 2019 WL 2564093 (Del.Ch. 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. If a U.S. public company owns facilities outside the US, as many do, they would be required to provide investors with information about those facilities. The safe harbor only applies in private litigation, and does not prevent the Commission from taking appropriate action to enforce the federal securities laws. 104-369, 43 (November 28, 1995) (Congress created the safe harbor provision to enhance market efficiency by encouraging companies to disclose forward-looking information.). 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. The Securities and Exchange Commission today announced that Renee Jones has been appointed Director of the Division of Corporation Finance. 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. . Site Map, Advertise| It is against this backdrop that I think about the regulation of ESG disclosures. President Thomas Bach. No court has ever found that this long line of exercises of the basic authorities on which the current rule relies were beyond the Commissions authority. Surveys of institutional investors published in peer-reviewed financial journals confirm this evidence. The Commission has authority over disclosure about all activities of a consolidated multinational if it is a US public company, including the 40+% or more of those activities that are located outside the US, as noted above. John C. Coates, Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications, 124 Yale Law Journal 882 (2014-2015). Nor did Congress trim back the Commissions authority whenafter the Commission published climate-related disclosure guidance in February 2010Congress adopted the Dodd-Frank Act four months later, with numerous additions (not subtractions) to the Commissions disclosure authorities.