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Park on "ESG Securities Fraud": Recommended Reading

My friend and colleague Jim park has an interesting new article on the emergent problem of ESG securities fraud:

As investors have become more concerned about the risk that corporate wrongdoing will impact a company’s stock price, the SEC and private plaintiffs are increasingly bringing cases alleging that a company misrepresented risks relating to Environmental, Social, and Governance (ESG) matters. The courts have been skeptical of such claims because of the perception that the scope of securities fraud liability would be too broad if it policed disclosure relating to the myriad of ESG risks facing public companies. They have thus often used the puffery doctrine to find that vaguely optimistic statements about a company’s ethics and culture of compliance are not misrepresentations.

This Article argues for a different focus in evaluating ESG securities fraud cases. Cases should not be arbitrarily dismissed mainly on the ground that commitments of ESG compliance are mere puffery. Instead, courts should recognize that the core question in such cases is whether the corporation through its managers knew of a material risk of an ESG problem but deceptively obscured that risk in its communications with investors. Courts should assess the materiality of ESG risk by applying the infrequently used probability-magnitude test set forth by the Supreme Court in Basic v. Levinson. In doing so, they should consider facts relating to whether the probability of the risk at issue is subject to reasonable calculation or whether it is an uncertainty. Screening cases based on the materiality of ESG risk would be a more effective way for courts to identify meritorious cases.

Park, James J., ESG Securities Fraud (April 25, 2023). Wake Forest Law Review, Forthcoming, UCLA School of Law, Law-Econ Research Paper No. 23-02, Available at SSRN: https://ssrn.com/abstract=4428212

Are "smart investors" really demanding corporate disclosures about scope 3 emissions?

Bloomberg is reporting that:

The SEC’s upcoming corporate climate disclosure rules face a new legal threat from environmentalists even as Republicans and businesses have long signaled they would sue to stop the regulations.

Long Overdue: The Sierra Club and Earthjustice are strongly considering suing the agency if it softens or drops plans for big companies to disclose the Scope 3 emissions from their supply chains and other indirect sources under the new reporting regime, three environmental advocates told Bloomberg Law. “It’s long overdue,” one of the advocates said of Scope 3 disclosures. “It’s the kind of information that smart investors are demanding.”

I simply don't believe that to be the case. Start with the perfectly plausible assumptions that investors value disclosure and that corporations desire to minimize their cost of capital. Or, more precisely, assume that the marginal social benefit of an additional unit of disclosure (however measured) declines as more is produced, while the marginal social cost of producing additional units rises as more are produced. Further assume that at t=0 the capital markets are in a disequilibrium state in which the marginal benefit of additional disclosure to investors exceeds the marginal cost to a firm of providing such disclosure.

If investors value disclosure, voluntary disclosure will lower cost of capital. Investors will be willing to pay more (a/k/a demand less of a return) for securities of companies that make voluntary disclosure. In turn, the corporate managers who actually make disclosure decisions frequently have large and nondiversified investments in firm-specific human capital. Management therefore suffers more than anyone if the firm fails. Suboptimal disclosure practices thus put management at risk. The information asymmetry between firms and investors increases the latter’s risk and therefore manifests itself in reduced liquidity. To overcome investor reluctance to hold risky, illiquid shares, firms must issue capital at a discount, which leads to a higher cost of capital. In theory, a credible commitment to provide increased levels of disclosure reduces the possibility of information asymmetries, which in turn, should reduce the discount at which firm shares are sold, and thus result in a lower cost of capital. Information asymmetries between issuers and investors are only one component of the firm’s overall cost of capital, of course, and the only component directly reducible by disclosure. Because a lower cost of capital makes it less likely that the firm will fail, however, management has a strong interest in ensuring adequate levels of disclosure. 

Under those conditions, potential gains from trade exist. Both investors and the firm will be better off if the latter provides additional disclosure. Absent some market failure, neoclassical economics predicts that the firm will voluntarily provide additional disclosures until an equilibrium is reached in which the marginal social benefit of providing an additional unit of disclosure equals the marginal social cost of producing that additional unit.

In short, if rational investors wanted disclosures about scope 3 emissions, they'd be willing to pay for them, and management would offer them.

Even if there were a market failure, mandated disclosure would still be objectionable. A particularly trenchant objection to mandatory disclosure, for example, is that it functions in ways not unlike price controls. A regulatory regime is unlikely to peg prices at the equilibrium point at which marginal cost and marginal benefit are equal. As with any legal rule, the mandatory disclosure regime thus is likely to be under- and/or over-inclusive. Under-inclusive disclosure rules harm investors by denying them information they need. Over-inclusive rules harm investors by requiring the firm to spend money on unnecessary disclosures, which essentially comes out of the investors’ pockets. Investors presumably do not want management to engage in disclosure that produces diminishing returns; i.e., investors will not want management to spend a dollar on disclosure unless that expenditure produces at least a dollar’s worth of benefit to the shareholders. Under a regime of voluntary disclosure, management has an incentive to provide disclosure until it achieves that equilibrium. Because management’s wealth is closely tied to the firm’s financial well-being, it has an incentive to achieve an efficient trade-off between lowering the cost of capital and spending money on disclosure.

The government has no comparable incentive. Moreover, different firms are likely to achieve equilibrium at different levels of disclosure. Hence, government regulation by definition will both over- and under-inclusive. To be sure, government could address the problem of under-inclusiveness by requiring issuers to disclose any additional information necessary to make the mandated disclosures intelligible and understandable. In determining the cost of disclosure, however, management would have to factor in the possibility of liability for fraud if they failed to disclose information a court, acting with the benefit of hindsight, thought should have been disclosed. Hence management might tend to over-invest in disclosure. In any case, there is no way for the government to avoid the problem of over-inclusiveness.

Event Driven Litigation

I've been consulting lately with some investment fund managers about event driven litigation, so I noted with interest Kevin LaCroix's post on the topic.

He begins by noting that this is a topic on which he has opined before and that others have also addressed it recently:

Among others, the Bloomberg columnist Matt Levine, in an article provocatively entitled, “Everything Everywhere is Securities Fraud” (here) also weighed in on the event-driven litigation trend.

There are, of course, usually two sides to every story, and in a April 5, 2023 Law360 article entitled “Why Event-Driven Securities Class Actions Often Succeed” (here, subscription required), David Barenbaum and Michael Dark of the Berman Tobacco firm provide a plaintiffs’ side view of event-driven securities litigation, and make out their case that these cases are not only not frivolous but provide securities investors important remedies and protections.

Mr. LaCroix goes on summarize the argument made by Barenbaum and Dark. He then offers what I think is a very reasoned and reasonable critique of their arguments. Recommended reading.

 

Is the SEC now the morality police? Must companies accuse their employees of misconduct in their proxy statement?

From today's WSJ:

Former McDonald’s Corp. MCD 0.45%increase; green up pointing triangle Chief Executive Steve Easterbrook agreed to a five-year bar from serving as an officer or director of a public company, to resolve a regulatory investigation over allegedly misleading statements he made about having sexual relationships with employees.

Mr. Easterbrook also agreed to pay a $400,000 fine without admitting or denying the Securities and Exchange Commission’s fraud claims against him, the agency said Monday. McDonald’s also agreed to settle the SEC’s investigation of its conduct, which stemmed from how it described Mr. Easterbrook’s separation from the company in an annual proxy statement for shareholders. ...

The SEC’s action against Mr. Easterbrook highlights the agency’s increased focus on executive pay and related disclosures to shareholders.

I have no sympathy for Easterbrook's conduct. He deserved to be fired.

My problem is: Why is internal personnel/Human Resources/sexual harassment now a SEC enforcement matter?

In my casebook Advanced Corporation Law, I discuss the SEC's use of the proxy rules to affect corporate governance. I start with Gaines v. Haughton, 645 F.2d 761 (9th Cir.1981). Lockheed had made foreign corrupt payments over a period of many years. After the payments came to light, a shareholder sued alleging that the company had violated the proxy rules by failing to disclose the payments. The court drew “a sharp distinction … between allegations of director misconduct involving breach of trust or self-dealing the nondisclosure of which is presumptively material and allegations of simple breach of fiduciary duty/waste of corporate assets the nondisclosure of which is never material for § 14(a) purposes.”

In passing, I mention Amalgamated Clothing & Textile Workers Union, AFL-CIO v. J. P. Stevens & Co., 475 F. Supp. 328 (S.D.N.Y. 1979), vacated sub nom. Amalgamated Clothing & Textile Workers Union v. J. P. Stevens & Co., 638 F.2d 7 (2d Cir. 1980), in which plaintiffs alleged that Stevens’ board of directors violated the proxy rules by failing to disclose an alleged corporate policy to “thwart,” “resist,” and “abuse” federal labor laws. The court dismissed the suit on grounds that a rule effectively requiring the board “to accuse itself of antisocial or illegal policies” would be a “silly, unworkable rule.”

Granted, these cases are not on all fours with the McDonalds case. For one thing, shareholders do vote on matters relating to executive compensation. The SEC takes the position that management integrity is pertinent and material information to which shareholders are entitled. But there is caselaw for the proposition that management integrity is not always material.

In Greenhouse v. MCG Capital Corp., 392 F.3d 650 (4th Cir. 2004), in which plaintiff claimed that the firm’s CEO had misrepresented his college career, the court rejected plaintiff’s argument that management’s integrity is always material. The court distinguished Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824 (8th Cir.2003), on grounds "that the fact misrepresented in Gebhardt—the company’s earnings—might plausibly alter the total mix of information to a reasonable investor; here, Mitchell’s failure to complete his fourth year in college could not." Easterbrook's conduct strikes me as closer to the facts of Greenhouse than Gebhardt. 

I point you in particular to this passage from Greenhouse:

Under [plaintiffs'] theory, almost any misrepresentation by a CEO—including, perhaps, one about his or her marital fidelity, political persuasion, or golf handicap—that might cause investors to question management’s integrity could, as such, serve as a basis for a securities-fraud class action. The law simply does not permit such a result.

I thus share SEC Commissioner's Hester Peirce and Mark Uyeda's concern that the McDonalds matter "creates a slippery slope that may expand Item 402’s disclosure requirements into unintended areas – a form of regulatory expansion through enforcement."

The Commission’s Order finds, among other things, that McDonald’s violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-3 thereunder because the company failed to provide the disclosure required by Item 402(b) and (j)(5) of Regulation S-K.  Item 402(b) requires companies to disclose all material elements of compensation of named executive officers.  Item 402(j) requires disclosure of material factors regarding agreements that provide for payments to a named executive officer in connection with his or her termination.  The Order states that McDonald’s violated the aforementioned paragraphs of Item 402 by failing to disclose its use of discretion in treating Mr. Easterbrook’s termination as “without cause” (as opposed to “with cause”) after finding that Mr. Easterbrook violated the company’s Standards of Business Conduct. 

...

We are unaware of prior Commission or staff actions or positions applying Item 402 in the way that the Order does.  Additionally, the Order can be read to suggest that the underlying reasons for why the company decided to terminate a named executive officer “without cause” instead of “with cause,” and vice versa, need to be disclosed under Item 402.  Such “hiring and firing discussion and analysis,” however, is beyond the rule’s scope.  A principles-based disclosure rule does not need to expressly describe every possible factual permutation that falls within its scope; however, it also does not provide the Commission with a blank check to find violations when disclosures outside of the rule’s ambit are not made.  Industry practice for complying with Item 402 has developed over many years, so to spring a novel interpretation through an enforcement action is not a reasonable regulatory approach.

If the Commission undertook such a regulatory proceeding, it would have to face up to the limitations imposed by Gaines and Greenhouse. Put simply, the SEC's regulatory purview does not extend to C-suite personnel decisions.

Does the implied private right of action under Securities Exchange Act Section 14(a) exist? Does a derivative claim?

Lee v. Fisher is now pending before the Ninth Circuit Court of Appeals en banc. The case involves a derivative suit by a shareholder challenging The Gap. Inc.'s board of directors alleged lack of diversity. In addition to the state law claims, plaintiff alleged that the company had made false and misleading statements in its proxy soliciting materials in violation of Securities Exchange Act Section 14(a). The plaintiff asserted that the proxy claims could be brought derivatively.

The defendants filed a motion to dismiss alleging, among other things, that the forum selection clause in the Company's Bylaws designates the Delaware Court of Chancery as the exclusive forum for Plaintiff's claims. Gap's forum selection clause provides:

“Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or agent of the Corporation to the Corporation or the Corporation's stockholders, (iii) any action or proceeding asserting a claim against the Corporation arising pursuant to any provision of the Delaware General Corporation Law or the Corporation's Certificate of Incorporation or these Bylaws, or (iv) any action or proceeding asserting a claim against the Corporation governed by the internal affairs doctrine, in each case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein.

Courts have routinely upheld forum selection clauses with respect to state law claims. Whether a forum selection clause may be validly applied to federal law claims, however, has been more controversial. In Butorin on behalf of KBR Inc. v. Blount, 106 F. Supp. 3d 833 (S.D. Tex. 2015), the court faced a slightly different forum selection clause:

Unless the Corporation consents in writing to selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of fiduciary duty owed by any director or officer or other employee of the Corporation to the Corporation or the Corporation's stockholders, ... shall be a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware.)

In Butorin, as in Lee, the claims included a derivative claim allegedly arising under 14(a). Setting aside the unique issues raised by the timing of the clause's adoption, the relevant part of the Texas court decision held that "the Forum Selection Bylaw is valid and enforceable and sua sponte TRANSFERS this case to the United States District Court in the District of Delaware."

The critical question in Lee is whether a forum selection clause can be enforced with respect to federal questions if the clause does not provide the option of bringing such claims in the District of Delaware.

In Fisher, plaintiff contended that Ninth Circuit law provides that:

An “exceptional reason” or “extraordinary circumstances” for not giving controlling weight to a forum-selection clause exists if the plaintiff made a strong showing that:

(1) the clause is invalid due to “fraud or overreaching,” (2) “enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision,” or (3) “trial in the contractual forum will be so gravely difficult and inconvenient that [the litigant] will for all practical purposes be deprived of his day in court.”

Lee v. Fisher, 20-CV-06163-SK, 2021 WL 1659842, at *3 (N.D. Cal. Apr. 27, 2021). On the facts before the court, only the second prong was seriously in play.

The California district court further explained that: 

It is undisputed that the Exchange Act contains an anti-waiver provision and that federal courts have exclusive jurisdiction over Exchange Act claims. The Exchange Act voids “[a]ny condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title.” 15 U.S.C. § 78cc(a) (the “anti-waiver provision”). Therefore, if the Court were to enforce the forum-selection clause, Plaintiff would not be able to bring her claim under Section 14(a) of the Exchange Act. The issue is whether Plaintiff's lost opportunity to bring a Section 14(a) claim violates the strong public policy of the forum in which she filed this lawsuit.

The court concluded that the second prong could not be satisfied on its facts:

The Ninth Circuit has made clear that the strong federal policy in favor of enforcing forum-selection clauses supersedes the anti-waiver provisions in state and federal statutes, regardless whether the forum selection “clause points to a state court, a foreign court, or another federal court.” Yei A. Sun, 901 F.3d at 1090. Because the anti-waiver provision standing alone does not supersede the forum-selection clause, “in order to prove that enforcement of such a clause would contravene a strong public policy of the forum in which suit is brought, ... [P]laintiff must point to a statute or judicial decision that clearly states such a strong public policy.” Id. (quotation marks and citation omitted). Plaintiff fails to do so.

Plaintiff does not point to any statute or judicial decision that clearly states that enforcing the forum selection clause would contravene a strong public policy. Instead, Plaintiff first argues that enforcement of the cause would contravene the federal courts' exclusive jurisdiction over Exchange Act claims and that it would violate the Supremacy Clause of the U.S. Constitution. There is no dispute that federal courts have exclusive jurisdiction over the Section 14(a) claim under the Exchange Act. However, enforcement of the forum selection clause does not violate exclusive jurisdiction; enforcement of the forum selection clause means that Plaintiff cannot assert her Section 14(a) claim. Preventing a party from asserting a federal claim does not violate principles of exclusive federal jurisdiction. It is difficult to understand Plaintiff's argument that the federal courts' exclusive jurisdiction over Exchange Act claims supplies an independent basis, let alone the required strong public policy, to preclude enforcement of the forum selection clause.

Accordingly, the court concluded: 

The Court finds that Plaintiff fails to demonstrate that enforcing the forum selection clause would contravene a strong public policy of this forum. Therefore, the Court GRANTS Defendants' motion, enforces the forum selection clause and DISMISSES this action without prejudice to Plaintiff filing claims against Defendants in the Delaware Court of Chancery.

On appeal, the Ninth Circuit initially affirmed. Lee v. Fisher, 34 F.4th 777 (9th Cir. 2022). Subsequently, however, the court ordered that the case be reheard en banc. Presumably, the court did so because the initial panel decision created a circuit split with the Seventh Circuit. In Seafarers Pension Plan ex rel. Boeing Co. v. Bradway, 23 F.4th 714 (7th Cir. 2022). In Seafarers, a divided panel held that an identical Boeing forum-selection clause was unenforceable because it was “contrary to Delaware corporation law and federal securities law.” Id. at 718.

In Seafarers, the dissenting judge was Frank Easterbrook who was a famous law and economics scholar at Chicago before going on the bench. Critically, Judge Easterbrook opined that "plaintiff retains its right to sue directly under § 14(a) in federal court." Id. at 729.

Why is that critical? I quote from my book Corporate Law (Concepts and Insights): 

No matter how closely one scrutinizes Securities Exchange Act § 14(a), one will not find anything relating to a private party cause of action under the statute or rules. In J. I. Case Co. v. Borak,[1] however, the Supreme Court implied a private right of action from the statute. Case proposed to merge with American Tractor Co. Borak owned around 2000 shares of Case stock and sought to enjoin the merger on the grounds, inter alia, that the company’s proxy materials were false and misleading. Borak claimed that the merger was approved by a small margin and would not have been approved but for the false and misleading statements. Case argued that Borak had no standing to sue, as the federal proxy rules provided no private party cause of action.

Despite the lack of any statutory authorization for a private party cause of action, Justice Clark’s opinion for the Court found that such an action in fact existed. To be sure, Justice Clark purported to find a statutory basis for the cause of action in Exchange Act § 27. Noting that § 27 gives district courts jurisdiction over “all suits in equity and actions at law brought to enforce any liability or duty” under the Act, Justice Clark contended that “[t] he power to enforce implies the power to make effective the right of recovery afforded by the Act. And the power to make the right of recovery effective implies the power to utilize any of the procedures or actions normally available to the litigant. . . .” The trouble with that argument is that Section 27 speaks of liabilities imposed by the Act, but nothing in § 14(a) or the rules thereunder creates such liabilities vis-à-vis shareholders.

Borak is better understood as an exercise of judicial fiat. A private right of action exists not because Congress intended it, but because a majority of the Supreme Court said so. The general legitimacy of implied private rights of action is beyond our purview, however.[2] Instead, we are concerned solely with Justice Clark’s policy justification for this particular cause of action.

Justice Clark was quite above-board as to his motivation—he wanted to deter fraud and other proxy violations. According to Justice Clark, private enforcement provides “a necessary supplement” to SEC efforts. He implied that shareholders are in a better position than the SEC to detect proxy violations—they have fewer proxy statements to review and presumably are better informed about the company. Again, however, the argument is spurious. Most shareholders do not carefully review proxy materials. Instead, they are rationally apathetic. They lack both the desire and the incentive to closely monitor the firm. Justice Clark doubtless knew that individual shareholders were unlikely to emerge as champions of corporate truth and justice. Instead, it seems probable that he was trying to provide incentives for the plaintiffs’ bar to become more active in proxy litigation.

This inference is supported by Clark’s characterization of the implied private right of action as being both direct and derivative in nature. Strikingly, he did so over Borak’s strong argument that the suit was only direct in nature. At the time Borak was decided, the modern federal class action procedure had not yet been adopted. If proxy actions were allowed to proceed only directly, and plaintiffs’ lawyers were limited to representing individual shareholders, the contingent fees generated by proxy litigation would be insufficient to attract quality lawyers. (The situation would be even worse in cases like Borak, where plaintiff sought only equitable relief.) Because the implied cause of action had a derivative element, however, a plaintiffs’ lawyer could effectively sue on behalf of all shareholders, by nominally suing in the corporation’s name, generating larger damage claims and bigger contingent fees

Today, as Easterbrook pointed out, a plaintiff thus has the option of bringing a direct suit as a class action. But Borak's holding that suit could be brought either directly or derivatively remains on the books.

Or does it? Law professors Joseph Grundfest and Mohsen Manesh have filed an amicus brief in the Lee case. Although they argue that the forum selection clause is valid, they preface that part of their brief with a much more aggressive argument that there is no implied private right of action to sue derivatively under Section 14(a):

As a foundational matter, there is no private right of action to bring a derivative claim under Section 14(a). The derivative Section 14(a) claim is implied, not express. It is a creature of the judicial imagination rooted in Borak’s dicta, not in any Supreme Court holdings.  This implied claim’s remedies duplicate state law, and the claim’s very existence, as well as its essential metes and bounds, is contingent on state not federal law.

The Supreme Court commands that implied private rights be narrowly construed. Enforcing an implied private right based on dicta that generate redundant remedies in a cause of action that is existentially contingent on state law, not on federal law, is not narrow construction. It is sprawling overreach.

Implied private rights of action exist in many areas of federal law. The Warren era Supreme Court was a big fan of so-called private attorneys general; i.e., the idea that private party litigation was an essential supplement to public enforcement of federal law. Federal prosecutors and regulators have limited resources and private party litigation thus can help ensure enforcement of federal laws that might otherwise fall through the cracks due to lack of government resources.

Borak was an early example of the court creating an implied private right of action and, accordingly, set out at some length the analytical framework for doing so.

The Rehnquist court subsequently abandoned the Borak approach:

Respondents would have us revert in this case to the understanding of private causes of action that held sway 40 years ago when Title VI was enacted. That understanding is captured by the Court's statement in J.I. Case Co. v. Borak, 377 U.S. 426, 433, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), that “it is the duty of the courts to be alert to provide such remedies as are necessary to make effective the congressional purpose” expressed by a statute. We abandoned that understanding in Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975)—which itself interpreted a statute enacted under the ancien regime—and have not returned to it since. Not even when interpreting the same Securities Exchange Act of 1934 that was at issue in Borak have we applied Borak's method for discerning and defining causes of action. ... Having sworn off the habit of venturing beyond Congress's intent, we will not accept respondents' invitation to have one last drink.

Alexander v. Sandoval, 532 U.S. 275, 287 (2001).

I tell me students that the Supreme Court is thus out of the business of creating new implied private rights of action, but that ones that had been approved by a majority of the court in the past have been grandfathered into the law and are thus rarely if ever overturned. Ironically, I premise that conclusion on an article by Professor Grundfest. See Joseph A. Grundfest, Disimplying Private Rights of Action Under the Federal Securities Laws: The Commission's Authority, 107 Harv. L. Rev. 963, 992-94 (1994) (describing implied private right of action under section 10(b) and Rule 10b-5 as having been “grandfathered” by the Court).

Interestingly, Grundfest and Manesh's brief does not cite that article. Indeed, the brief makes no reference to well-established private rights of action being grandfathered. In contrast, courts seem to accept that the Borak derivative claim is well-established:

"It is now well established that a private party may bring suit for a violation of Section 14(a), ... and that a shareholder may bring s derivative suit on behalf of the corporation for a violation of Section 14(a)." Dillon v. Berg, 326 F. Supp. 1214, 1218 (D. Del. 1971), aff'd, 453 F.2d 876 (3d Cir. 1971). See also In re Trump Hotels Shareholder Derivative Litig., 96 CIV. 7820 DAB, 2000 WL 1371317, at *10 (S.D.N.Y. Sept. 21, 2000) ("It is well settled law that a Section 14(a) claim may be brought directly or derivatively.").

Indeed, it has been argued that the Supreme Court itself has "clarified that Borak has been grandfathered." William C. Tyson, The Proper Relationship Between Federal and State Law in the Regulation of Tender Offers, 66 Notre Dame L. Rev. 241, 358 n.186 (1990). I am not sure I would go quite that far. Professor Tyson relies on Touche Ross & Co. v. Redington, 442 U.S. 560, 577 (1979), which stated: "We do not now question the actual holding of that case, but we decline to read the opinion so broadly that virtually every provision of the securities Acts gives rise to an implied private cause of action." Not exactly a ringing endorsement.

In any case, Grundfest and Manesh argue that "Borak’s logic is overtly purposive and implements an interpretive approach that has been resoundingly repudiated by the Supreme Court." They then contend that Borak's statements regarding derivative standing were dicta. 

I'm generally opposed to implied private rights of action, so I tried to review their argument sympathetically. But I don't buy it.

In Burks, for example, the Supreme Court stated (albeit arguably in dicta):

A fundamental issue in this case is which law—state or federal—governs the power of the corporation's disinterested directors to terminate this derivative suit. The first step in making that determination is to ascertain which law creates the cause of action alleged by the plaintiffs. Neither the ICA nor the IAA—the plaintiff's two federal claims—expressly creates a private cause of action for violation of the sections relevant here. However, on the basis of District and Circuit precedent, the courts below assumed that an implied private right of action existed under each Act. ... The two courts also sanctioned the bringing of the suit in derivative form, apparently assuming that, as we held in J. I. Case Co. v. Borak, 377 U.S. 426, 432, 84 S.Ct. 1555, 1560, 12 L.Ed.2d 423 (1964), “[t]o hold that derivative actions are not within the sweep of the [right] would . . . be tantamount to a denial of private relief.”

Burks v. Lasker, 441 U.S. 471, 475 (1979) (emphasis supplied). See also Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 66 (1977) (Stevens, J., dissenting) ("In Borak, the Court held that a derivative suit on behalf of the corporation could be brought under [section] 14(a), although it seems clear that the primary beneficiaries of that section were individual stockholders rather than corporations.").

I the suspect that the Ninth Circuit will not agree with Grundfest and Manesh, although I commend their audacity. Anyway, go read the brief. I have just sort of skimmed over their detailed and clever analysis.

The SEC Proposes Trashing the Stock Market Part 1A: The WSJ on Best Order Execution

The Securities and Exchange Commission proposes 1,656 pages of regulation that would re-engineer the equities market in the name of fixing a nonexistent problem. https://t.co/GXKBfB5yl3 via @WSJ

— Steve Bainbridge (@PrawfBainbridge) December 16, 2022

"An SEC Inspector General report recently warned that @GaryGensler's move-fast-and-break-things agenda is overwhelming staff and diverting resources from investor protection." https://t.co/5Rj3R3n0Uv via @WSJ

— Steve Bainbridge (@PrawfBainbridge) December 16, 2022

@GaryGensler's "stock-trading overhaul isn’t intended to improve competition or protect retail investors. The beneficiaries are Nasdaq, Calpers and brokers that can support zero-commission trading with other revenue." https://t.co/woaitSGFMR via @WSJ

— Steve Bainbridge (@PrawfBainbridge) December 16, 2022

The SEC Proposes Trashing the Stock Market Part 1: Best Order Execution

The SEC has proposed new Regulation Best Execution:

Proposed Regulation Best Execution would require broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to comply with the proposed best execution standard. Further, the proposal would require these policies and procedures to address how broker-dealers will comply with the best execution standard and how they will determine the best market and make routing or execution decisions for customer orders.

The policies and procedures would also be required to address additional factors for conflicted transactions with retail customers. With respect to such transactions, the proposal would require broker-dealers to document their compliance with the best execution standard, including all efforts to enforce their best execution policies and procedures for conflicted transactions and the basis and information relied on for their determinations that such conflicted transactions would comply with the best execution standard. Broker-dealers would also be required to document any arrangement concerning payment for order flow.

For starters, if this goes through, retail investors can kiss zero commission brokerage accounts goodbye. SEC Commissioner Hester Peirce opines that:

I cannot support this proposal, which is unduly prescriptive and seems less concerned about whether customers actually get best execution than if brokers implement a checklist that the Commission itself is not confident will help brokers achieve even better—much less best—execution. 

...

The proposed rule provides a handy checklist for SEC examiners and enforcement attorneys, but it does not foster brokers’ exercise of judgment to achieve what is best for customers.  Best execution cannot be reduced to a checklist.  Indeed, a checklist mandated by the Commission invites a culture of check-the-box compliance that does little to improve execution quality.  Instead, it may promote broker and regulatory complacency about working creatively to get the best execution possible for customers. 

Peirce further explains that institutional investors will also suffer:

Institutional customers arguably do not need the protection of a best-execution rule, particularly one as prescriptive as this proposal.  The proposed rule makes price the primary objective of the broker.  Institutional investors may have other important objectives, such as speed and minimizing the effect on price. The rule makes it hard for institutional brokers to tailor best execution to a customer’s objectives.

Finally, Peirce sends potential challengers a none too subtle hint about how to challenge the rule:

The release does not take serious account of the potential for increased commissions when it assesses likely changes in execution quality, even though it seems that any estimate of execution quality, particularly in a rulemaking like this, should take the per-share cost of commissions into account.  At some points in the release, the discussion hints that a broker-dealer, to meet its requirements under the rule, should convert PFOF into price improvement.  Why is withholding price improvement from the customer worse than charging the customer a (likely higher) commission?

As we know, the SEC has lost a number of cases in recent years for doing an inadequate cost-benefit analysis, which seems to be what Peirce is teeing up.

Commissioner Uyeda is also not a fan of the Commission's cost-benefit analysis:

This particular proposal uses the phrase “the Commission believes” 77 times.  What does that phrase mean?  If the phrase is employed as a reasoned conclusion of the Commission after a discussion of supportive evidence and relevant analysis, then I suppose that is fine.  However, when the expression—“the Commission believes”—is employed as a substitute for evidence, like spackling used to fill a hole, then that is a problem.  Indeed, “the Commission believes” seems to be used as another regulatory shortcut for situations when the Commission has no hard evidence or data, but nonetheless has a theoretical concern.

 

Elizabeth Holmes Sentenced to 11+ Years

In a way, it calls to mind the housekeeper's testimony testified that Leona Helmsley said: "We don't pay taxes; only the little people pay taxes"

— Steve Bainbridge (@PrawfBainbridge) November 18, 2022

James Park, The Valuation Treadmill

My friend and UCLAW colleague James Park's new book The Valuation Treadmill "traces the history of securities fraud regulation from the 1960s to the present to better understand the problem of public company securities fraud."

Jim makes "the novel argument that securities fraud emerged as a significant risk for public companies as investors changed how they valued stocks. As investors adopted modern valuation models and attempted to develop projections of a corporation’s ability to generate earnings into the future, it became more important for public companies to meet market expectations about their performance. Public corporations now have a structural incentive to issue misleading disclosure to create the appearance that their economic prospects are brighter than they really are."

He uses very interesting case studies involving Xerox, Penn Central, Apple, Enron, and GE.

Jim offers up a brief summary of his argument at the Harvard Forum. But you really need to buy the book.

 

Conservative activists are finally discovering SEC Rule 14a-8 and using it to make shareholder proposals: Will the SEC apply neutral principles?

I have long wondered why conservative activists don't make use of the shareholder proposal rule to the extent liberal activists do. In 2004, for example, I asked:

Every time I teach the shareholder proposal rule (Securities Exchange Act Rule 14a-8) in Business Associations, I always wonder the same thing: Why don't conservative activists use the rule more often?

An informed reader responded:

t seems that conservatives have attempted to push a limited agenda through the 14a-8 process. In almost all of these cases, these types of proposals were excluded under 14a-8(i)(7) [as an ordinary business matter]. Which brings me to your point. I think that most proposals pushing a conservative agenda would deal with ordinary business matters.

He had a point. But the SEC under Gary Gensler seems to have liberalized the ordinary business exception to allow a slew of social and environmental proposals from progressives to be included on company proxy statements. Which raised the question: Would he apply neutral principles and allow conservative proposals?

Accordingly, last fall, I took to Twitter to propose that "What I need are some really rich conservatives to finance a Rule 14a-8 shareholder proposal campaign."

It seems others have stepped up to the plate. Bloomberg reports:

More conservative proposals were filed this proxy season by activists looking to bend the ears of CEOs on social issues, aligning with a political crusade to skewer “woke capitalism.”

Conservative or anti-ESG proposals have doubled this proxy season, according to consulting firm Georgeson Inc., which counted 52 such resolutions filed this year—double the 26 filed 2021. ...

The resolutions, most of which target major companies including Walmart Inc.and Comcast Corp., received very few shareholder votes on corporate ballots, regularly securing less than 3% support. But the number of proposals won’t be letting up, said Scott Shephard, a fellow at the National Center for Public Policy Research, one of the main organizations driving conservative shareholder activism.

“I wouldn’t expect the numbers to sink,” said Shephard, explaining that one of his aims is to put CEOs on notice for allegedly violating their fiduciary duties when they project personal preferences.

My new paper: Sarbanes-Oxley § 404 at Twenty

Bainbridge, Stephen Mark, Sarbanes-Oxley § 404 at Twenty (August 26, 2022). UCLA School of Law, Law-Econ Research Paper No. 08, 2022, Available at SSRN: https://ssrn.com/abstract=4201778

Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) was intended to improve public company internal controls over financial reporting (ICFR). Faulty internal controls were believed to have contributed to many corporate scandals during the dot-com era. Empirical research of the pre-SOX era suggested that reporting companies with poor internal controls tended to have more frequent earnings restatements, more SEC enforcement proceedings, and poorer performance than comparable firms with strong internal controls. When SOX was adopted § 404 was not among the most controversial provisions. Instead, it was the attorney conduct rules, CEO and CFO certification requirements, and the ban on loans to officers and directors—plus the larger question of federalizing corporate governance—that generated most of the early criticism aimed at the statute. Once companies began implementing § 404’s mandate for assessments of their internal controls over financial reporting, however, it became apparent that compliance costs were considerably greater than anticipated. In short order, § 404 became—and remains—SOX’s most controversial provision. SOX’s twentieth anniversary seems an opportune time to reassess the controversy over § 404. There is a considerable body of empirical evidence on the costs and benefits of § 404, which this article reviews. As it turns out, however, there are so many potential confounding factors that all of the evidence must be viewed with a degree of skepticism. Nonetheless, a few conclusions can be drawn. With the benefit of hindsight, it seems clear that Congress in 2002 had no idea what it would cost companies to comply § 404. The SEC had an estimate of what § 404(a) compliance would cost but had no idea what § 404(b) compliance would cost. Sticker shock seems the right description of the reaction once those costs became clear. Section 404 compliance costs were substantial from the outset. Those costs were disproportionately borne by smaller firms from the outset. Section 404 compliance costs remain high and show no signs of dropping over time. It remains the case that those costs are disproportionately borne by smaller firms. As far as achieving its main goal of reducing material weaknesses in ICFR, § 404 cannot be deemed a success. Both adverse managerial reports and auditor attestations actually rose prior to 2014 and have dropped only slightly in the subsequent period. Problems with firms failing to remediate persistent material weaknesses remain a source of concern.

Gary Gensler's Regulation of Crypto by Persecution

2/ @GaryGensler's SEC has adopted Sporkin's approach and is aiming it straight at crypto assets. Instead of having Congress decide whether the SEC or CFTC (or Treasury) is the correct regulator, Gensler is using enforcement suits to seize jurisdiction.

— Steve Bainbridge (@PrawfBainbridge) July 22, 2022

3/ Having staked out his claim to crypto by dragging industry players into court, @GaryGensler is trying to make new law not by complying with the Administrative Procedures Act but by what Karmel might call "regulation by persecution."

— Steve Bainbridge (@PrawfBainbridge) July 22, 2022

Recommended Reading: Grundfest's "The Most Curious Rule Proposal in Securities and Exchange Commission History"

Grundfest, Joseph A., The Most Curious Rule Proposal in Securities and Exchange Commission History (April 25, 2022). Rock Center for Corporate Governance at Stanford University Working Paper No. 248, Available at SSRN: https://ssrn.com/abstract=4094133 or http://dx.doi.org/10.2139/ssrn.4094133

The Securities and Exchange Commission advertises itself as a disclosure-based agency that eschews merit regulation. It logically and historically provides greater investor protection to less sophisticated investors. The Commission’s proposed Private Equity Rules, however, reject both principles. They would transform the agency into a merit regulator that provides greater “investor protection” to more sophisticated than to less sophisticated investors.

The world’s most sophisticated investors dominate the market for venture capital, hedge, and private equity fund investing. They are represented by expert counsel. Yet, with no evidence of market failure, the Commission would prohibit these most sophisticated of all investors from entering into fully disclosed contractual provisions that they are free to reject but willingly accept. This is merit regulation in a market that least requires merit regulation.

This transition to merit regulation is fraught with peril. Once the agency merit regulates in the absence of market failure, it invites special interest pleading by other constituencies seeking to further parochial interests. It will be difficult for the Commission to articulate a principled basis for adopting some forms of merit regulation but not others. The inevitable result is a more politicized agency that can no longer credibly limit its mission to disclosure regulation.

Moreover, while the Commission would prohibit the world’s most sophisticated investors from agreeing to certain contractual provisions, it would allow the least sophisticated to be bound by precisely the same conditions. The Commission nowhere analyzes or defends this odd inversion which conflicts with large bodies of law and precedent.

If the Commission’s rationales for adopting the proposed rules are sufficient under the Administrative Procedures Act, then the Commission will have established a foundation for far more muscular intrusions into a broad range of contractual arrangements involving publicly traded instruments and private placements. Put another way, if the SEC can so aggressively regulate the substance of freely negotiated contracts involving the most sophisticated investors absent evidence of market failure, it follows, a fortiori, that it can regulate most other contractual arrangement involving less sophisticated investors subject to its jurisdiction. Much more is therefore at stake than a set of specialized rules impinging on freely negotiated contracts involving venture capital, hedge, and private equity funds. The proposed rules implicate foundational questions about the SEC’s role and authority in governing US capital markets that should not be minimized or ignored.

This draft is in the form of a comment letter submitted to the Commission, and is being converted to a law review article for future publication.

The Spirit Deal Shows Investors are not Embracing Stakeholder Capitalism

It is a core tenet of my forthcoming book, The Profit Motive: In Defense of Shareholder Value Maximization, that investors are far more skeptical of ESG and stakeholder capitalism than their proponents want us to believe. Sure, you can cite survey data in which a substantial number of investors say they love ESG, but things look differently when you look at concrete examples of what investors do. 

As you may know, Spirit Airlines is currently the target of competing takeover bids from Frontier and JetBlue. The union representing Spirit flight attendants reportedly supports the Spirit-Frontier deal, while the union representing JetBlue flight attendants is opposed to the deal. f shareholders are concerned with ensuring that stakeholders like the flight attendants are protected, presumably shareholders would also favor the Frontier deal. But today's WSJ reports:

On Wednesday, [Spirit Airlines] postponed a shareholder meeting scheduled for Friday that would have included a vote on the acquisition bid made by its competitor Frontier Airlines. Spirit’s board of directors retains a strong preference for this merger, which seems like a perfect cultural fit, over a rival one proposed by JetBlue Airways. But the board’s latest move betrays hesitation that shareholders might not put the same value on non-pecuniary factors.

Investing is allegedly about making money and investors can get more of it from JetBlue.

It is an anecdotal example, of course [insert joke about lawyers, anecdotes, and date here.] But it is consistent with a point I make in The Profit Motive:

Turning to shareholders, despite the acknowledged proliferation of socially responsible and ESG investors, it remains the case that when most shareholders invest “in a corporation, they do not think that they are giving their money away.”  To the contrary, they expect “to receive a healthy return on their capital.”  As a harshly critical statement on corporate purpose signed by over 6,000 stakeholder theorists and other progressive academics concluded, “left to their own devices, most capital investors will not care for the dignity of labor investors; nor will they lead the fight against environmental catastrophe.”

Point of Personal Privilege: A Reply to the Letter of 30 Law Professors Supporting the SEC Climate Change Proposal

As regular readers know, I signed the letter of 22 law professors opposing the SEC's pending climate change disclosure regime proposal. Now there is a new letter from 30 law professors supporting the proposal, whose primary authors are Jill Fisch (Penn), George Georgiev (Emory), Donna Nagy (Indiana), and Cynthia Williams (Osgoode Hall). I don't propose a point by point reply to their letter, but I do want to exercise a point of personal privilege and rise in objection to the way the Letter of 30 uses my work.

Back in 2010, the SEC issued interpretative guidance for disclosure of business or legal developments relating to climate change. I wrote a blog post on January 28, 2010, in which I concluded that the guidance didn't change very much and that some of the criticism directed at the guidance was overstated.

The Letter of 30 quotes from that post:

A contemporaneous analysis of the Commission’s 2010 guidance and of critics’ reactions published by one prominent corporate law scholar concluded that “the requirement that firms discuss climate change is not new,” that “[a]ffected corporations already know that they need to provide climate change-related disclosure,” that “[c]orporate lawyers already know how to write such disclosures,” and that “claims that these disclosures will be ‘silly’ or will produce a ‘massive subsidy to charlatans’ are overstated.”⁵⁵ These observations from 2010 are equally valid with respect to the Commission’s 2022 Proposal.

⁵⁵ See Stephen M. Bainbridge, The SEC’s New Climate Control Disclosure Guidance: “Nonsense on Stilts”?, PROFESSORBAINBRIDGE.COM (Jan. 28, 2010) (summarizing and assessing commentary on the 2010 climate guidance, and noting further that the [principles-based] guidance might muddy the water so climate disclosures would become less rather than more informative for investors), https://www.professorbainbridge.com/ professorbainbridgecom/2010/01/climate-control-disclosure.html (last visited: May 29, 2022).

I stand by the 2010 blog post and the Letter of 22. Inconsistent? I don't think so. Rather, with all due deference, I completely reject the claim that my 2010 observations are pertinent to the 2022 proposal.

1. The Times are Different 

In 2010, despite a party-line split on the guidance, the Democrat majority on the SEC was careful to avoid staking out a political position and to at least appear to be keeping politics out of the process. As the Letter of 22 points out, the current Democrat majority on the SEC has jumped into the politics of climate change and come down on one side:

Climate change is a politically-charged issue. The Proposal would compel corporations and officials to regularly speak on these issues, explaining the views and opinions of their boards and officers.

Indeed, the proposal "would require companies to disclose extensive climate-related risks that have little to do with firms’ current financial outlook but serve an ulterior political purpose." The SEC is mandating the new disclosure regime in response to demands from politically powerful institutional investors with a specific progressive political agenda on climate change:

Another subgroup of investors the Proposal unfairly favors are those who, unlike traditional investors, are not focused on economic gain from their investments. For instance, the boards of public employee pension funds, such as CalPERS, include government appointees and elected officials, all of whom respond to politics, including the politics of climate change. Less overtly, the Proposal benefits fund managers promoting virtues other than investor protection, such as the pension funds of the AFL-CIO, which advocate shareholder proposals pushing a labor agenda.

The SEC once prided itself on being one of the most apolitical agencies in the federal government. The 2022 proposal reflects the increasing role political considerations are playing in the SEC's rule making procedures. Not surprisingly, this has generated pushback from Congress, such as the "letters from 19 Senators and 40 House Members challenging the SEC’s power and urging it to withdraw the Proposal."

Context matters. Given the increasingly polarized political debate over climate change, the Letter of 22 counseled that the SEC should defer to Congress on a matter of such “vast economic and political significance.” Indeed, the Letter of 22 suggests that it would be unconstitutional for the SEC to do otherwise.

2. The 2010 Guidance was Modest and Built on Longstanding Principles

Speaking of “vast economic and political significance,” there is an enormous difference between the 2010 Guidance and the 2022 proposal. The 2010 Guidance required only 29 pages. Most of that was background and context. The substantive guidance consisted of just 6 pages of principles-based recommendations. (FWIW, I note in passing that my views on principles-based regulation have evolved since 2010. I'm much more favorably inclined towards that regulatory mode these days, but that it a broad question for another day.)

The 2010 Guidance created no new disclosure requirements. Rather, it provided guidance as to how climate change disclosures might need to be worked into the existing framework. The SEC's 2022 Proposal admits as much:

The guidance did not create new legal requirements nor modify existing ones. Instead, it highlighted climate-related topics that registrants should consider in seeking to meet their existing disclosure obligations (e.g. the impact of legislation, regulation, international accords, indirect consequences, physical risks, etc.) and in what section they should be discussed.

Second, the 2010 Guidance actually was concerned at least as much with the potential adverse impact of climate change regulation as it was with climate change itself. The SEC warned, for example, that "significant developments in federal and state legislation and regulation regarding climate change ... may trigger disclosure obligations." This was self-evidently true. Companies had long included potential regulatory change as a risk factor, to cite but one example. Similarly, the SEC suggested that international accords or treaties might materially impact corporate profitability. In sum, out of the four issues the SEC saw as raising potential disclosure obligations only one related to the "physical effects of climate change."

Third, the 2010 Guidance consistently emphasized the concept of materiality. Climate change issues only had to be disclosed if they met the longstanding definition of materiality.

Fourth, there was no suggestion that every company would have to disclose any particular facts. The 2010 Guidance noted that "regulatory, legislative and other developments" might be significant for "some companies." Likewise, the SEC noted that "some companies might suffer financially" is certain laws were passed. In sum, the phrase "some companies" and "some registrants" appear four times in the 2010 Guidance. In contrast, the phrases "all companies" or "all registrants" do not appear in the guidance.

Finally, the issue of whether to provide disclosure and the issue of how to present it was left to the individual issuer. A typical formulation in the 2010 Guidance provided, for example, that:

Depending on the nature of a registrant’s business and its sensitivity to public opinion, a registrant may have to consider whether the public’s perception of any publicly available data relating to its greenhouse gas emissions could expose it to potential adverse consequences to its business operations or financial condition resulting from reputational damage.

There is no mandated disclosure. There is not even a mandate to consider disclosure. The necessity of disclosure is recognized to depend on company-specific considerations.

In sum, as my blog post from 2010 concluded, the complaints about the 2010 guidance were largely unwarranted. There was no radical change being effected. To be sure, the number of companies including climate change disclosures in their SEC documents rose after the 2010 Guidance was issued. According to a Gibson Dunn analysis, however, the guidance overall had little longterm impact:

... the 2010 Climate Change Guidance was not a focus of SEC staff comments in the years that followed.  According to a 2018 Government Accountability Office report (the “GAO Report”), the SEC staff issued a limited number of climate change comments to public companies and often without citing the 2010 Climate Change Guidance.  For example, the GAO Report noted that based on a review of SEC filings by companies in five industries particularly “affected by climate change-related matters” (oil and gas, mining, insurance, electric and gas utilities, and food and beverage), the SEC staff issued only 14 comment letters relating to climate-related disclosures to 14 companies, out of the over 41,000 comment letters issued from January 1, 2014, through August 11, 2017.

My 2010 self would not have been surprised by that outcome. I anticipated that the negative reaction to the guidance was much ado about little.

3. The 2022 Proposal is a Vast Change that Radically Departs from Traditional Disclosure Practices

The 2022 Proposal is completely different from the 2010 Guidance. The core document is a whopping 490 pages long with 1068 footnotes. 

Unlike the 2010 Guidance, the 2022 Proposal creates an entirely new disclosure regime. According to the SEC's fact sheet, that new regime requires registrants to provide disclosure in 14 categories and sub-categories. The Proposal itself reports that:

We are proposing to add 17 CFR 210.14-01 and 14- 02 (Article 14 of Regulation S-X) and 17 CFR 17 CFR 229.1500 through 1506 (subpart 1500 of Regulation S-K) under the Securities Act1 and the Exchange Act,2 and amend 17 CFR 239.11 (Form S-1), 17 CFR 239.18 (Form S-11), 17 CFR 239.25 (Form S-4), and 17 CFR 239.34 (Form F-4) under the Securities Act, and 17 CFR 249.210 (Form 10), 17 CFR 249.220f (Form 20-F), 17 CFR 249.306 (Form 6-K), 17 CFR 249.308a (Form 10-Q), and 17 CFR 249.310 (Form 10-K) under the Exchange Act.

Unlike the 2010 Guidance, the 2022 Proposal mandates disclosure. For example, it proposes requiring "all registrants to disclose their Scopes 1 and 2 emissions."  In total, the words require, requiring, requirement appear on 386 pages of the proposal. The word mandatory appears on 45.

In fact, the 2022 Proposal itself recognizes that the 2010 guidance is extremely modest compared to the current proposal. At pages 306-307, for example, the Proposal states:

A number of the Commission’s existing disclosure requirements may elicit disclosure about climate-related risks; however, many of these requirements are principles-based in nature and thus the nature and extent of the information provided depends to an extent on the judgmentof management.  As discussed above, in 2010, the Commission published interpretive guidance on existing disclosure requirements as they pertain to business or legal developments related to climate change.  The 2010 Guidance emphasized that if climate-related factors have a material impact on a firm’s financial condition, disclosure may be required under current Item 101 (Description of Business), Item 103 (Legal Proceedings), Item 105 (Risk Factors), or Item 303 (MD&A) of Regulation S-K.

Conclusion

In sum, the 2010 Guidance and the 2022 Proposal are very different beasts. the 2010 Guidance at least arguably was no big deal. The 2022 Proposal is unarguably a very big deal.

I recognize and appreciate that the Letter of 30 took some pains to note that I didn’t think highly of the 2010 Guidance. I also recognize and appreciate that the Letter of 30 deploys my analysis in a section of their letter making a historical argument about earlier environmental and climate-related disclosure rather than in a section dealing specifically with the 2022 Proposal. I also recognize and appreciate that they didn't claim there was an inconsistency between my 2010 post and the Letter of 22.

As such, I would have let the Letter of 30 slide but for the statement that:

These observations from 2010 are equally valid with respect to the Commission’s 2022 Proposal.

It is that statement to which I take umbrage. The rest of the passage seems unobjectionable.

In response to an earlier draft of this post, one of the Letter of 30’s authors has told me via email that the phrase I find objectionable, “equally valid,” applies only to the question clearly stated at the beginning of the paragraph: “Is climate change a ‘novel’ or ‘illegitimate’ subject matter for the disclosure regime?” I accept that that was their intent.

In my view, however, the Letter of 30 can be fairly read to suggest that my argument that corporate lawyers would be able to adapt to the 2010 Guidance without too much difficulty is “equally valid” with respect to the 2022 proposal. I therefore felt it necessary to object to any suggestion that my 2010 analysis is in any way pertinent to the enormous cost I believe will be required to comply with the 2022 Proposal.