Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP SEC Rulemaking Roundup | 68 8 See Shearman & Sterling LLP, "SEC Proposes Sweeping New Climate-Related Disclosure Framework," https://www.shearman. com/en/perspectives/2022/03/sec-proposes-sweeping-new-climate- related-disclosure-framework (March 31, 2022). 9 See U.S. Securities and Exchange Commission Investor Advisory Committee, "Recommendation of the SEC Investor Advisory Committee's Investor-as-Owner Subcommittee regarding Human Capital Management Disclosure," https://www.sec.gov/files/spotlight/ iac/20230921-recommendation-regarding-hcm.pdf (September 21, 2023). process proceeds, it remains to be seen whether the rule even survives this challenge. At the very least, companies will have additional time to prepare for any new stock buyback disclosure requirements. PENDING RULE PROPOSALS Climate-Related Disclosure Framework 8 In March 2022, the SEC proposed one of the most sweeping new disclosure frameworks that would require public companies to include significant climate- related disclosure in periodic reports, registration statements and financial statement footnotes. The proposed rules would require disclosure of: • climate-related risks, • impacts of climate-related risks on strategy, business model and outlook, • board role in overseeing climate-related risks, management role in assessing and managing climate risk and the process for identifying, assessing and managing climate risks, • climate-related targets or goals, and • GHG emission metrics (including Scope 1 and 2 and, in certain circumstances, Scope 3 metrics). The proposed rules also included required disclosure of certain climate-related financial information in a note to the company's annual financial statements. The financial statements note would need to contain financial impact metrics that include disaggregated climate-related impacts and expenditures, subject to a 1% threshold requirement. Importantly, these new requirements would fall within the scope of the company's internal control over financial reporting (ICFR) and be subject to the annual financial statement audit by the company's independent auditors. Adoption of a final rule has been delayed, in part due to the enormous response received by the SEC through comment letters from companies and other stakeholders. Many commenters have focused their criticism on the Scope 3 emission and financial statement requirements. POTENTIAL RULES ON THE HORIZON The SEC's regulatory agenda that was included in the Spring 2023 Unified Agenda noted several additional rules that were under consideration and that have not yet been proposed. While the agenda is non-binding and provides very little detail on the scope of the potential rulemaking, below are brief descriptions covering a few of the notable rulemakings under consideration. Corporate Board Diversity The SEC is considering new disclosure requirements about the diversity of board members and board nominees. This follows the adoption by Nasdaq of its board diversity rule, including a requirement to disclose a board diversity matrix that could be a model for the SEC. The Nasdaq rules also include requirements for most companies to have, or explain why they do not have, diverse directors. Human Capital Management Disclosure The SEC adopted rule changes in 2020 to bolster disclosure of human capital risks and resources. Since then, certain groups have recommended that the SEC should go further to strengthen human resource disclosures. The SEC's Investor Advocacy Committee recently recommended the addition of more granular employee information, turnover or comparable workforce stability metrics, total cost of the company's workforce and more workforce demographic data, as well as narrative disclosures in the MD&A of how the company's labor practices, compensation incentives and staffing fit within the broader company strategy. 9 Regulation D and Form D Improvements Some SEC Commissioners have advocated the need to reform Regulation D, which contains exemptions available and widely used by issuers for unregistered securities offerings. Possible changes that have been discussed include new comprehensive disclosure requirements for companies selling in reliance on Regulation D and a more robust Form D, which currently discloses certain issuer and offering information following the initial Regulation D sale. Another area for possible revision is the accredited investor definition, which includes certain financial criteria for individuals that are not indexed and have not been updated since they were set in 1982. * * * The timing and details of these and other possible rules remains uncertain, but one thing remains clear: the SEC, under the leadership of Chair Gensler, will continue to be busy.