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In that section, companies are required to disclose a specified list of financial disclosure and documents set out in Schedule A, to obtain consents from any accountant, engineer, or appraiser or other professional identified in the disclosures, andin a separate sentenceto disclose such other information, and be accompanied by such other documents, as the Commission may by rules or regulations require as being necessary or appropriate for the protection of investors.. Funding, governance and public accountability are all critical elements of a reliable, trusted disclosure system. These higher costs can be particularly burdensome for smaller and more capital constrained companies, and yet if these companies do not provide ESG disclosures, they risk higher costs of capital. I am unaware of any relevant case law on the application of the IPO exclusion. A movement is afoot to impose cost-benefit analysis (CBA) on financial regulation (CBA/FR). If the public wants comprehensive disclosures of climate impact that extend beyond impacts on investors, legal authorities other than those used here may need to be usedperhaps by other agencies or Congress itself. But just as important is the recognition of the costs associated with not having ESG disclosure requirements. Congress provided a safe harbor for forward-looking statements made by established, publicly traded, reporting companies. About Us| Before joining the SEC, he served as the John F. Cogan Professor of Law and Economics at Harvard University, where he also was Vice Dean for Finance and Strategic Initiatives. [2] It permits significant differences in how companies respond to a variety of mandatory requirements, including in many cases disclosing items if and only if they are material. There are 300+ professionals named "John Coates", who use LinkedIn to exchange information, ideas, and opportunities. The question of whether the proposed disclosures would in fact be an all-in good idea, cost-justified, appropriately considering efficiency, competition and capital formation is not a legal question. Of course, as Commissioner Peirce does not do much to dispute, and as the proposing release makes clear, existing disclosures are spotty, inconsistent, incomplete and unverified under existing Commission rules. The Ferocious, Well-Heeled - Institutional Investor The brief historical review in Annexes A and B (and much more detail could be added) shows that nothing about the current proposed rules contents (discussed more below) should be legally surprising in any meaningful way, to Congress or to companies or their investors. 22, 2019) (enjoining two cross-conditioned mergers due to disclosure inadequacies concerning special procedures used to mitigate conflict of interest). Author Page for John C. Coates, IV :: SSRN It also illustrates the pace of ESG developments. The rule is limited to companies from which the Commission has traditionally required full disclosure. John Coates, named acting director of the SEC's Division of Corporation Finance on Feb. 1, made the remarks on Thursday during a conference on climate finance hosted by the Institute of. 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. And to be yet more clear, the Commission has not simply expanded or added to required disclosures over timeit has cut, compressed, and consolidated as well, in step with the needs of investors over time. As regards climate change, environmental agencies might do well to focus on global activities as well, but it is unclear how EPA could with its existing legal authority impose requirements on companies not operating in the US. Instead, as summarized by the D.C. It has never been EPAs job. Financial risks importantly include physical risks, such as those arising from severe weather events, such as floods, hurricanes, and wildfires. 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. Congress expected the Commission to use expert judgment to update disclosure over time, as new or newly identified risks emerge. Litig., 238 F. Supp. John Coates - Agent - New York Life Insurance Company | LinkedIn More specifically, any material misstatement in or omission from an effective Securities Act registration statement as part of a de-SPAC business combination is subject to Securities Act Section 11. Earnings statements, analyst call scripts, investor presentations, and the regular flows of press releases, investor relations communications and other ways companies supplement disclosure requirements are commonly longer or more complex than anything required by the Commissions rules. Only at that time did EPA take the position its 1970 authority over air pollution gave it authority to require climate-related disclosures. The status quo is costly for companies, and increasingly so over time. 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 . As noted above, this claim is wrong because the securities laws already limit the Commissions power in two ways, to the use of disclosure (versus merits review) as a regulatory tool, and to the use disclosure for the protection of investors. These claims are further belied by a string of decisions in which courts have rejected attempts by the Commission to rely on disclosure and anti-fraud authority to engage in substantive regulation of corporate transactions or corporate mismanagement. These investors included individuals and institutions. Join Facebook to connect with John Coates and others you may know. They believe climate risks are minimal for the company, or for the world, for whatever reason, if that is their honest belief. As discussed in Point II, the proposed rule requires disclosures about financial risks and opportunities, so even if there were an explicit limit on the Commissions authority that disclosures under Section 7 be financial in nature, or related to the financial statements, or to the elements in the statute, the proposed rule would still be authorized. Yet no one has ever successfully argued that the Commission should not develop, adapt or apply disclosure rules to banks, mining companies, asset-backed issuers, airlines or defense contractors, despite the specialized knowledge that a full understanding of those companies would require, and despite the fact that the Commission does not have full-time staff who are themselves experts of the same kind that other regulators may have, or which companies hire to provide them with advice about such topics. Annex A contains just a samplingmany more additions and refinements have been adopted in the decades since 1933. On the issue of global comparability, in the first instance, arguments in favor of a single global ESG reporting framework are persuasive. That possibility further calls into question any sweeping claims about liability risk being more favorable for SPACs than for conventional IPOs. John C. Coates | Professional and Lifelong Learning Striking down regulations adopted pursuant to clear and limited delegated authority would turn the doctrines purpose against itself, prevent Congress from assigning traditional fact-finding and implementation roles to agencies, turn courts into unelected mini-legislatures, and subvert rather than reinforce the separation of powers. John CoatesActing Director, Division of Corporation Finance. Jones is a member of the American Law Institute and has served as the Co-Chair of the Securities Law Committee of the Boston Bar Association. Not long ago, the title of this statement would have needed to unpack ESG into Environmental, Social and Governance. [7] This, such observers assert, is the reason that sponsors, targets, and others involved in a de-SPAC feel comfortable presenting projections and other valuation material of a kind that is not commonly found in conventional IPO prospectuses. (Jan. 14, 2021). Cost-Benefit Analysis of Financial Regulation: Case Studies and As we address these questions, we should keep in mind some additional points. However, many legal questions have clear answers. Still another study finds that mutual fund managers are misestimating climate risks based on current, inconsistent and unreliable disclosures. [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). Equally clear is that any material misstatement or omission in connection with a proxy solicitation is subject to liability under Exchange Act Section 14(a) and Rule 14a-9, under which courts and the Commission have generally applied a negligence standard. The financial disclosure that John Coates filed also offered a rare public peek into the costs of corporate compliance monitors. Specifically, for the largest companies, the proposed rule would require three types of specific disclosures: Of these, the first and third are inarguably about financial risks and opportunities related to climate change. 6LinkedIn 8 Email Updates. John Coates | Harvard Law School The Securities and Exchange Commission today announced that Renee Jones has been appointed Director of the Division of Corporation Finance. In closing, I want to make three final points. As to motivations, the long and extensive record leading to the proposal of the rule can be reviewed in its entirety and nowhere will any evidence be found that the purpose of the rule is other than to protect investors. Reporting requirements regarding emissions of all kinds were a subsidiary authority given to EPA to supplement the more direct, substantive power to regulate the amount and type of emissions. In plain unambiguous text, they encompass financial risks and opportunities related to any source. P.C. Funding needs to be reliable and adequate, both now and over a reasonable time period into the future, and should not detract from other essential elements of the system for public company disclosures. Thousands more have been filed since the release was proposed, including many from self-identified individual investors. What Joseph L. Rini Knows, Attorney Rachel Y. Marshall A Pillar of Strength for the Community, SpotDraft Raises $26 Million in Series A Funding for AI-Powered Legal Software. [3] E.g., Andrew Ross Sorkin et al., What a SPAC Believer Thinks of SPAC Mania, N.Y. Times (Mar. See also Rodriguez v. Gigamon Inc., 325 F. Supp. But we do have a provision that permits the Commission to set up rules and regulations which will have the effect of law. He had been serving as the independent monitor for the U.S.. Professor Coates served as General Counsel and as Acting Director for the Division of Corporation Finance for the SEC. Evidence that such targets are at least partly serious can be easily compiled from public sources, some cited in the proposing release: A list of massivefar beyond materialbets being won or lost with public investor capital driven by climate risk could be significantly longer without being exhaustive. Some claim that the statutory limits on the Commissions disclosure authority have no real meaningbecause one can pretend that anything is for protection of investors, no real limiting principle exists in the 1933 and 1934 Acts on the Commissions authority, so either it impermissibly delegates or further limits need to be invented to make the statutes constitutional. About 1,020 U.S. companies voluntarily disclosed their Scope 3 emissions last year.. Specifically, Section 7 gives the Commission unambiguous authority to specify the contents of disclosure documents used to register securities for sale to the public. Even as to the financial system, it does not set out comprehensive climate policy. 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. Yet the Commission nonetheless has long protected investors in bank holding companies by requiring detailed disclosure beyond the financial statement for such companies, as noted in Annex A. After completing his Ph.D., Coates traded derivatives for Goldman Sachs and Merrill Lynch, and then ran a trading desk for Deutsche Bank in New York. This is exactly how the Commission has taken on similar issues in the past, as detailed in Annex A. To the extent that those who disfavor consideration of legislative history truly give primacy to legislative text and structure, there is no plausible basis on which to argue the Commission lacks authority to adopt the proposed rule. It would have a relatively modest impact on the economy as a whole, and basically levels up disclosure requirements to disclosures already made by the majority of large companies. Critics of Coates say he has too . The Biden administrations new acting head of a key component of the U.S. Securities and Exchange Commission reported earning more than $2.5 million in law school income and consulting fees paid by financial firms and major U.S. companies, according to a newly released financial statement. 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. Although Congress gave the Commission power to conduct temporary testing programs to evaluate the effectiveness of disclosures in the Dodd-Frank Act, in neither that statute nor the original 1933 and 1934 Acts did it suggest the Commission use polling or surveys to establish the content of disclosures appropriate to protect investors. 6LinkedIn 8 Email Updates. [16] Debate in Senate to Override President's Veto, 141 Cong. Aircraft manufacturers essentially have their own specialized program accounting, due to the unusually long and complex capital investment process they follow. 12711-VCS, 2018 WL 1560293 (Del.Ch. In Delaware, as under SEC Rule 405, control can be found to exist raising the corporate law standard in state court review of conflict of interest transactions where a shareholder owns less than 50% of the stock, but exercises control over the business affairs of the corporation. Throughout I describe rather than argue for what the law should be.