The SEC has suspended its wide sweeping rules on climate disclosure affecting public companies, pending resolution of lawsuits filed nationwide.
The regulator hit the pause button on April 4th, less than a month after adoption of its “Enhancement and Standardization of Climate-Related Disclosures for Investors” rules. It was in response to a series of lawsuits that were filed against it in six different Circuit Courts of Appeals by various business groups, including the US Chamber of Commerce and 25 state attorneys general that have challenged the regulator’s authority to impose the rules.
Unhappy for a far different reason, the Sierra Club has filed a lawsuit in the DC Circuit, alleging that the SEC didn’t go far enough by not including a requirement for public companies to report on indirect emissions throughout their supply chain.
The climate rules were approved by the SEC on March 6 after two years of deliberations and thousands of comment letters. Those rules require US-listed public companies to disclose Scope 1 emissions– described as direct greenhouse gas emissions (GHG) generated by the company, and Scope 2 emissions, which refer to disclosures about a company’s indirect emissions from purchased energy.
Shortly after the SEC’s adoption of the rules, the Fifth Circuit Court granted an administrative stay in a case involving two fracking companies. Soon there were nine lawsuits challenging the SEC in several Circuit districts. The cases were then consolidated into the Eighth Circuit in St. Louis, Missouri.
The pending legal challenges make it unclear when or if the SEC’s rule will become effective.
The SEC’s new market surveillance tool is being challenged in a Texas court by two individuals and the National Center for Public Policy Research on grounds that it violates constitutional protections for free speech and warrantless searches and seizures.
Filed April 16 in Waco, the lawsuit (Davidson et al v. Gensler) contends that the SEC lacks the authority to create the Consolidated Audit Trail (CAT), a database that is designed to collect virtually all US trading data.
The lawsuit contends that CAT “enables SEC to review private citizens’ investment choices and, in many cases, to see their entire portfolios, allowing the government to review citizens’ trading strategies and thereby evaluate the core values and moral convictions that motivate Americans’ investment decisions.” Further, it would “impose dystopian surveillance, suspicionless seizures, and real or potential searches on millions of American investors.” The suit asks that CAT be declared void and its database be expunged.
SEC spokesperson Stephanie Claire Allen responded to the Texas lawsuit by saying, “The Commission undertakes its regulatory responsibilities consistent with its authorities.”
The 2016 SEC rule that established the Consolidated Audit Trail called for capture of data on customers and orders for both over-the-counter and exchange-listed equities across all US markets. Implementation has been delayed several times over issues including privacy concerns, the threat of cybercriminal hacks, and costs.
The program’s costs were the crux of an October 2023 lawsuit filed by the American Securities Association and Citadel Securities against the SEC because of the regulator’s plans to fund CAT by charging broker-dealers fees, potentially in the billions of dollars, according to the suit.
CASE INFO:
Davidson et al v. Gensler
US District Court for the Western District of Texas
Case Number: 6:2024cv00197 Filed: April 16, 2024
CPAs Seek Delay in Beneficial Ownership Reporting
The AICPA and CPA groups from all 50 states and US territories have asked the US Treasury and the Financial Crimes Enforcement Network (FinCEN) to suspend enforcement of Beneficial Ownership Information (BOI) reporting requirements until pending court cases have been resolved.
Starting January 1, 2024, many companies are required to report information to the US government about who owns and controls their companies. This was the result of the September 2022 Corporate Transparency Act (CTA), which was enacted into law as part of the Anti-Money Laundering Act. The CTA requires “reporting companies” to file ownership information with the Department of Treasury’s FinCEN.
In their letter to Treasury Secretary Janet Yellen and FinCEN Director Andrea Gacki, the groups said that a March 1, 2024 Alabama court ruling, which found the CTA unconstitutional, has created confusion within the business community.
“The recent NSBA v. Yellen case which found the Corporate Transparency Act (CTA) to be unconstitutional has only compounded confusion, with most entities believing they no longer have a filing requirement,” noted the groups. This ruling in favor of the National Small Business Association was immediately appealed by the Department of Justice.
BOI filing requirements under the CTA encompass a broad swath of business entities, though it primarily affects non-publicly traded companies.
Under the rule, a domestic “reporting company” is defined as any entity that is a corporation, a limited liability company, or is created by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe.
The government says that information provided to FinCEN will only be accessible to “certain authorized recipients, including law enforcement and regulators, for the purposes of countering money laundering and the financing of terrorism, and for other specific purposes.”
The CTA allows for 23 exemption categories. It is important for all entities to review the requirements of the new rule and exemption categories.
An average of 20,000 new claims are pouring into the IRS weekly from businesses seeking monies from the pandemic-era Employee Retention Credit (ERC), said IRS Commissioner Danny Werfel during his appearance before the Senate Finance Committee on April 16.
Fraudulent ERC claims have been so pervasive, that since September the IRS has suspended payouts, focusing instead on identifying and prosecuting bad actors. During that time, it also launched a Voluntary Disclosure Program which allowed businesses to repay 80% of monies received, and a voluntary withdrawal program, which allowed claimants to withdraw claims that weren’t yet paid, if they realized the claim was ineligible.
The IRS had reported that 3.6 million ERC claims had been processed for about $230 billion by September 2023. The program’s original cost had been estimated at approximately $78 billion, with some analysts reporting that actual costs may rise closer to $550 billion.
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