SEC adopts rules governing climate disclosure, challenges lead to temporary stay of the rules

On March 6, 2024, the Securities and Exchange Commission (SEC) voted at an open meeting to adopt final rules that mandate climate-related disclosure by public companies. The long-awaited rules will require qualitative disclosure on climate risk, risk management, governance and targets, as well as quantitative emissions reporting under certain circumstances. Initial disclosures for large accelerated filers under the final rules will be due in 2026, with emissions and financial expenditures disclosures due in 2027. Longer phase-in periods will be available for other filers. 

In a departure from the proposed rules, almost all of the new disclosure requirements will be subject to a materiality determination, in line with other parts of Regulation S-K. Notably, the final rules limit Scopes 1 and 2 greenhouse gas emissions reporting to material emissions and generally link climate expenditure, strategy, transition plans and targets disclosures to material risks and impacts. The final rules do not include Scope 3 emissions reporting requirements and allow for significant phase-in periods for attestations of Scopes 1 and 2 emissions. For many US companies, the SEC rules supplement climate disclosure obligations in California and the European Union starting in 2026, which may include full Scopes 1, 2 and 3 emissions obligations. As a result, many companies planning for disclosure under the SEC rules will need to prepare for parallel California and EU disclosures – some of which may be more comprehensive and due earlier. More details about the final rules are available in this Cooley key facts and considerations one-pager. For additional information about the rules, please visit our environmental, social and governance (ESG) resources page, which houses longer-form alerts and webinars discussing the full scope of the rules.

As expected, several lawsuits have been filed in six different federal circuit courts regarding the recently adopted rules. Due to the number of lawsuits, the Judicial Panel on Multidistrict Litigation used a lottery system to determine which circuit court would hear the consolidated pending challenges to the rules. The US Court of Appeals for the Eighth Circuit won the lottery and will hear the consolidated challenges. In response to the challenges, the SEC issued an order on April 4, 2024, determining that it will exercise its discretion to stay the final climate disclosure rules “pending the completion of judicial review of the consolidated Eighth Circuit petitions.” For more information regarding the decision, refer to this PubCo blog post.

SEC and Forbes find 8-K cybersecurity disclosure lacking

On January 5, 2024, the SEC issued its first comment letter on Item 1.05 of Form 8-K disclosure. In the letter, the SEC found that the company disclosed an incident that had and was reasonably likely to continue to have a material impact on the company’s business operations, but did not describe the potential effect on the company’s financial condition or results of operation. The SEC’s comment letter instructed the company to expand its discussion on the scope of operations that were impacted by the incident, in addition to describing the known material impact that the incident had and that is likely to continue. In considering material impacts, the SEC stated that all material impacts should be considered – including vendor relationships and reputational harm stemming from an event.

Following this, on March 4, 2024, Forbes reported that many cybersecurity incident disclosures made under Item 1.05 of Form 8-K may not be compliant with the SEC’s rules. The article argued that the reports reviewed by Forbes are lacking disclosure around the qualitative and quantitative descriptions of material impacts, or reasonably likely material impacts, of the cybersecurity incident. Further, while the disclosures included qualitative information about the incident, most did not offer much additional information about the actual impact of the incident. While companies are permitted to file an amended 8-K to report additional information if not all material information is known at the time of the initial filing, companies that choose this option must include a statement in the initial 8-K filing that not all material information is known at the time and an additional filing will be made. Whether the SEC will begin issuing comment letters to more companies with respect to disclosure deficiencies is yet to be seen.

SEC approves Nasdaq proposal for additional amendments related to reverse stock splits

On March 14, 2024, the SEC approved Nasdaq’s proposal to further amend its listing standards with respect to notification and disclosure of reverse stock splits. The amendments clarify Nasdaq’s recent reverse stock split amendments (as covered in our November One-Minute Reads) by more clearly outlining:

• Nasdaq’s process of using its material news halt to stop trading when an issuer effects a reverse stock split without meeting the reverse stock split listing standards in Nasdaq Rules 5250(b)(4) and (e)(7).
• Nasdaq’s policy that a new CUSIP must be obtained and made Depositary Trust Company-eligible prior to the submission of the Company Event Notification Form.

SEC charges Skechers with failure to disclose related party transactions

On March 7, 2024, the SEC agreed to settle charges with Skechers for failing to disclose payments for the benefit of its executives and their immediate family members. Skechers agreed to pay a $1.25 million civil penalty to settle the SEC’s charges that it violated reporting and proxy solicitation provisions of the Exchange Act. These charges stem from Skechers’ failure to disclose:

• The employment of two relatives of its executive officers.
• A consulting relationship with a person sharing a household with an executive officer.
• Arrangements whereby two of its executive officers each owed more than $120,000 to the company for personal expenses.

According to the SEC order, the disclosure failure persisted from 2019 through 2022. For further reading on this topic, see this March 2024 PubCo Post.

ISS reports that governance proposals are back while sustainability proposals recede

On February 29, 2024, ISS-Corporate released a paper examining key themes, trends and notable shareholder proposals that are likely to shape the 2024 proxy season. Among its findings, ISS reported that:

• Shareholder proposals looking to enhance board accountability increased from 2020 to 2023 and are expected to keep increasing throughout 2024.
• Support for directors continues to decrease, especially for more senior board members.
• Anti-ESG proposals have steadily increased from 2020 to 2023.
• Fund investors are getting more choice in how to cast their votes.

This post from TheCorporateCounsel.net also notes that the Carpenters Pension Fund has been submitting proposals seeking to “amend the companies’ director resignation policies to tighten the consequences of a director failing to receive a majority vote,” and that these proposals are being sent to a broad swath of companies – not just companies with poor director voting results.

SEC confirms share repurchase disclosure requirements

On February 9, 2024, the SEC confirmed that the disclosure requirements of Item 703 of Regulation S-K that were in effect prior to the effective date of the recently vacated Share Repurchase Modernization Rules are the disclosure requirements that currently govern. For additional background regarding the adoption of the rules and subsequent court challenges, see this February 12 PubCo post.

SEC chair warns of AI-related challenges

Speaking at Yale Law School on February 13, 2024, SEC Chair Gary Gensler noted that although artificial intelligence brings opportunities, it “also raises a host of issues that aren’t new but are accentuated by it.” Some of these issues, in Gensler’s view, include that “AI models’ decisions and outcomes are often unexplainable, AI also may make biased decisions because the outcomes of its algorithms may be based on data reflecting historical biases … [and] the ability of these predictive models to predict doesn’t mean they are always accurate.” In these remarks, Gensler also outlined three different types of harm that he believes may be caused by AI – including programmable harm, predictable harm and unpredictable harm.

Gensler emphasized that he believes predictable harm may be the most relevant for companies incorporating AI models into their business, as predictable harm involves a “reckless or knowing disregard of the foreseeable risk of your actions.” Given this view, companies evaluating potential risks should be asking: Did the actor act reasonably to prevent its AI model from illegal actions, such as front-running, spoofing or giving conflicted investment advice? Were there appropriate guardrails in place? Were the guardrails tested and monitored? Did the guardrails consider the possibility that the AI model may be “learning and changing on its own,” or may “hallucinate” or “strategically deceive users?” The SEC and Congress are continuing to evaluate the use of AI and how to protect against these predictable and unpredictable harms. For further reading, see this February 14 PubCo post.