Securities Snapshot: 1st Quarter 2021
In the first quarter of 2021, the U.S. Securities and Exchange Commission and its Division of Corporation Finance took several actions to underscore its focus on environmental, social and corporate governance (“ESG”). The SEC also charged AT&T, Inc. and three executives with selectively disclosing material nonpublic information in violation of Regulation FD and decided to seek further public comment on Nasdaq’s board diversity proposal.
Many practitioners and companies wondered what the SEC may look like under President Biden’s new SEC Chair nominee, Gary Gensler. While commentators speculated that Gensler’s SEC would increase its focus on enforcement, the first quarter of 2021 solidified those speculations.
SEC Focus on Climate Change Disclosures
On February 24, the Acting SEC Chair Allison Herren Lee issued a statement directing the Division of Corporation Finance to take a hard look at companies’ climate change disclosures, including updating the SEC’s 2010 guidance on such topic “to take into account developments in the last decade.” The following excerpt from her statement illustrates the “enhanced focus” expected from the Division of Corporation Finance on climate-related disclosure in public company filings: “As part of its enhanced focus in this area, the Staff will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks. The Staff will use insights from this work to begin updating the 2010 guidance to take into account developments in the last decade.” Acting Chair Lee further stated, “Now more than ever investors are considering climate-related issues when making their investment decisions. It is our responsibility to ensure that they have access to material information when planning for their financial future.”
The appointments in February 2021 of John Coates as acting director of the Division of Corporation Finance and Satyam Khanna as its first-ever senior policy advisor for ESG regulatory issues shows the SEC’s “all-agency” approach. Coates was a member of an investment advisory committee that in 2020 urged the SEC to adopt ESG disclosure policies. Khanna is a former SEC attorney and advisor to President Biden expected to carry the President’s climate risk thinking to the SEC.
Gary Gensler, President Biden’s SEC Chair nominee, in his nomination hearing on March 2, shared his views on the role of the SEC with respect to climate risk: “In 2021, there’s tens of trillions of dollars of invested assets that are looking for more information about climate risk, and I think then the SEC has a role to play to help bring some consistency and comparability to those guidelines.”
On March 3, 2021, the SEC’s Division of Examinations announced its 2021 examination priorities, including “a greater focus on climate-related risks.” On March 4, 2021, the SEC announced the creation of a Climate and ESG Task Force in its Division of Enforcement. The ESG Task Force, which will be led by the Acting Deputy Director of Enforcement, will oversee a Division-wide effort to develop initiatives to proactively identify ESG-related misconduct. As part of its initial focus, the ESG Task Force will “identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.”
On March 15, Acting Chair Lee announced the SEC would take public comments on the type of climate data and investors would like to see, including whether the SEC should collect industry-specific data and how it might build on existing voluntary ESG reporting frameworks. Lee also stated the SEC would look at proxy voting rules including revisiting guidance from 2019 that could discourage some investment advisors from voting proxies and will examine providing more details around SEC decisions on how shareholder proposals reach corporate ballots.
All of these actions depict how quickly the SEC is moving to address climate and ESG matters in the context of increasing investor focus on climate and ESG-related disclosure and investment. We expect the SEC, under this new administration, to continue this enhanced focus on climate disclosures. Companies should review the SEC’s 2010 guidance in its entirety and be ready for future SEC guidance and rulemaking.
The SEC’s ESG webpage is here.
SEC Charges AT&T and Three Executives with Regulation FD Violations
On March 5, 2021, the U.S. Securities and Exchange Commission announced it charged AT&T, Inc. and three of its investor relations executives with selectively disclosing material nonpublic information to research analysts in violation of Regulation FD. The SEC’s complaint alleges that to avoid falling short of the consensus revenue estimates for the third consecutive quarter, AT&T investor relations executives made private, one-on-one phone calls to analysts at several firms. According to the complaint, on these calls, the executives disclosed internal smartphone sales data and the impact of that data on internal revenue metrics. The complaint alleges that internal company documents provided that revenue and sales of smartphones were types of information generally considered “material” to investors, and therefore prohibited from selective disclosure under Regulation FD. The complaint further alleges that as a result of what they were told on these calls, the analysts substantially reduced their revenue forecasts, leading to the overall consensus revenue estimate falling to just below the level that AT&T publicly reported on April 26, 2016.
At this point, the SEC’s allegations are unproven and it is unclear whether this claim will be settled and what type of penalties (if any) AT&T will face. The charges reinforce the SEC’s commitment to ensuring issuers disclose material information to the investing public and not selectively to analysts.
Updates to the Nasdaq Diversity Proposal
On December 1, 2020, Nasdaq filed a rule proposal with the U.S. Securities and Exchange Commission that would require listed companies to have, or explain why their boards do not include, diverse directors. In a response to comments from the SEC, Nasdaq filed an amendment to the rule proposal on February 26, 2021. The Nasdaq proposal needs SEC approval to take effect.
In a notice posted on its website on March 10, 2021, the SEC said it would take additional time to rule on the Nasdaq proposal, while also seeking further public comment. The decision means that a final decision on whether to approve or reject the Nasdaq proposal will be delayed indefinitely. This delay will allow nominee Gary Gensler to join the SEC and provide further support or modification.
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