Sonia Gupta Barros, John P. Kelsh, and Corey Perry are partners at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Barros, Mr. Kelsh, Ms. Perry, and Claire H. Holland. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback by Jesse Fried (discussed on the Forum here).
On June 8, 2022, the U.S. Securities and Exchange Commission (SEC) once again reopened the period to solicit input from the public on the compensation clawback rules it proposed in 2015 to implement Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The proposed rules would direct the national securities exchanges to establish listing standards that would require a company to adopt, disclose and comply with a compensation clawback policy as a condition to listing securities on a national securities exchange. The proposed clawback rules were summarized in our 2015 post on this Forum.
The SEC first reopened the comment period for the proposed rules last fall—from October 14, 2021 through November 22, 2021—as discussed in the Sidley Update available here. In that reopening release, the SEC requested comments and supporting data on the proposed clawback rules in light of regulatory and market developments since the rules were proposed in 2015. The SEC also identified 10 new topics on which it specifically requested public comment. Most notably, the SEC asked whether it should expand the types of accounting restatements that would trigger application of a clawback policy. Under Section 954 of the Dodd-Frank Act, a clawback would be triggered “in the event that the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws.” Based on its initial interpretation of the Section 954 mandate, the clawback trigger under the SEC’s 2015 proposed rules was limited to material restatements of previously issued financial statements (so-called “Big R” restatements). In the reopening release, the SEC asked the public whether it should expand its interpretation and revise the rule proposal to include all required restatements made to correct an error in previously issued financial statements, including restatements required to correct errors that were not material to previously issued financial statements but would result in a material misstatement if (1) the errors were left uncorrected in the current report or (2) the error correction was recognized in the current period (so-called “little r” restatements). This new request resulted from concerns raised that companies may not be making appropriate materiality determinations for errors to avoid triggering application of a clawback policy.
The Proposed SEC Climate Disclosure Rule: A Comment from Former SEC Chairmen and Commissioners
More from: Harvey Pitt, Paul Atkins, Philip Lochner, Richard Breeden, Richard Roberts
Harvey L. Pitt is Chief Executive Officer at Kalorama Partners LLC, and former Chairman of the U. S. Securities and Exchange Commission. This post is based on a comment letter to the U.S. Securities and Exchange Commission by Mr. Pitt; Richard Breeden, 24th Chairman of the U.S. Securities and Exchange Commission; and Philip R. Lochner, Jr., Richard Y. Roberts, and Paul S. Atkins, Commissioners at the Association of Securities and Exchange Commission Alumni, Inc.
Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here), both by Lucian A. Bebchuk and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita.
This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule by Chairman Richard C. Breeden, Chairman Harvey L. Pitt, Commissioner Philip R. Lochner, Jr. Commissioner Richard Y. Roberts, and Commissioner Paul S. Atkins. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.
We write to provide our perspective on the Commission’s recent proposal in the above-referenced release (the “Proposal”). In our view, the Proposal suffers from several serious deficiencies, many of which have been raised and examined by other commenters. We focus here on deficiencies that place the Proposal at odds with the Commission’s appropriate role and statutory mandate, into which, as former Chairmen and Commissioners, we believe we have particular insight.
We fear that the Proposal’s disregard of financial materiality, together with what we view as the almost certain judicial reaction (based on existing case law) to inevitable challenges to an eventual rule, ultimately will do irreparable damage to the SEC’s regulatory and enforcement program. The Commission’s reputation and ability to pursue its mission would be placed at risk. We strongly urge the Commission to rescind or substantially modify the Proposal.
I. The Standard for Climate-Related Disclosure Should Remain Financial Materiality
The Commission has long recognized that materiality is the “cornerstone” of the federal securities laws. [1] Familiar black-letter securities law holds that information is material if “there is a substantial likelihood that a reasonable investor would consider it important” in making an investment decision; [2] or alternatively, if there is a “substantial likelihood” that, in the eyes of the reasonable investor, the facts at issue “significantly altered the ‘total mix’ of information made available.” [3] The “reasonable investor” is the critical reference point in this analysis. The standard is objective; [4] the subjective desires of particular investors, whether few or many, do not change it. The standard is oriented toward financial outcomes, [5] for it inquires about the relevance of information to investors in securities, and the Supreme Court has explained that the defining feature of such financial activity is the expectation of profit. [6] Information is relevant to someone whose aim is the expectation of profit if it bears on whether that expectation will be realized. Such information is the only sort that passes muster as material under the objective standard, for that standard abstracts investors from their subjective, particular preferences, sweeping in only information that is relevant to all reasonable investors—and information relevant to risks and returns is the only sort that all reasonable investors necessarily care about.
READ MORE »