Weinberg & Company

Best Practice Newsletter – June 2023

ESG Moves to Final Rule Stage

Updated SEC Rulemaking Agenda Released-

Climate change disclosure rules are one of 37 tagged as in “Final Rule Stage”, according to the SEC’s latest Rulemaking agenda, released in mid-June.

Initially proposed in March 2022, the decision on the climate change disclosure rules has been delayed several times following receipt of over 14,000 public comment letters. A final vote may now be coming between October 2023 and April 2024.

The proposed climate disclosure rules, also known as ESG rules, are far reaching and would require US public companies to assess and disclose (Form 10-K) how their businesses impact climate change. In certain cases, companies would be required to report on greenhouse gas emissions generated by themselves and their suppliers.

Significant pushback has come from companies complaining that the proposed rules are unclear, burdensome, and costly. It also generated comments from lawmakers, legal scholars, and attorneys general from 12 states who challenged the SEC’s legal authority to enact ESG rules.

It also appears that the final SEC decision will not be unanimous. SEC Commissioner Hester Peirce has been an outspoken dissenter since the ESG rules were proposed in 2022.

In a recent speech at the European financial think tank Eurofi, Peirce said: “This commandeering of private capital in the name of ESG causes me grave concerns,” adding, “Today’s ESG-specific standards too often have a different purpose. These standards cannot help but direct the allocation of private capital, especially when they are combined with sustainable finance initiatives designed to encourage financing of favored activities and the defunding of disfavored activities. Indeed, they appear intended to do exactly this: to direct private capital flows. As such, they are meant not primarily to serve investors’ needs but rather to direct the allocation of private capital to further government ends.”

Other notable proposed rules that have been moved to the Final Rule Stage include Cybersecurity Risk and SPAC disclosures, both of which were proposed in March 2022. New cybersecurity rules would require companies to provide more detail on cyberattacks, including regular filings on cyber risk management, governance and what companies were doing to prevent attacks. Companies also would be required to disclose data breeches within four business days of their occurrence.

New SPAC disclosure rules would require SPAC targets to file the same S-4 registration forms that currently are required of the SPAC. In filing the S-4s, the target companies could be held liable for any false or misleading information that the company provided in its merger documents. In addition, SPAC targets would no longer be allowed to use certain disclaiming safe harbor clauses in forward-looking statements that are typically found in SPAC deals. Eliminating such safe harbor clauses treats SPAC deals like traditional IPOs, which prohibit companies from using projections that may entice investors.

To view the complete SEC Rule Agenda, see: SEC Agency Rule List

To read Commissioner Peirce’s speech, see: SEC Commissioner Peirce Remarks

SEC Drops 42 Enforcement Cases

Improper handling of data involving 42 enforcement cases has led the SEC to dismiss those cases in June. The decision followed an over year-long investigation which found that enforcement staffers improperly viewed legal records that were meant for in-house Administrative Law Judges ruling on the cases.

In its statement the SEC notes that the data breech was not in accordance with protocols which require that enforcement staff and in-house ruling divisions be kept separate throughout any enforcement proceedings.

The SEC said that as enforcement staff collected materials in the cases, databases containing the information weren’t appropriately walled-off and became available to the in-house court staff.

The majority of the 42 dismissals involved small cases, some of which the SEC had been litigating since 2014. The agency also said that it had agreed to lift industry bans on 48 individuals who petitioned the SEC once the data breech became public.

This issue comes to light amid growing criticism questioning whether the administrative process can be impartial, considering it has both prosecutorial and judicial powers.

Last April a unanimous Supreme Court decision made it easier for individuals and companies to challenge complaints filed against them by the SEC and Federal Trade Commission (FTC).

The ruling challenged whether in-house administrative judges can always impartially adjudicate cases. It revolved around two separate cases: a Texas accountant who challenged the constitutionality of an SEC administrative law judge to hold enforcement proceedings against her, and another case involving the use of an administrative law judge by the Federal Trade Commission against an Arizona technology company.

To view the SEC’s statement, see: SEC Statement Administrative Adjudications

Employers Reigning in Costs

Although the labor market has been recovering post-pandemic and more people have returned to work, continuing economic unease in the U.S. is causing public companies to reign in their compensation, benefits, with many cutting staff, according to a recent survey by the Center for Audit Quality (CAQ).

Key takeaways from CAQ’s just released 2023 Spring Audit Partner Pulse Survey suggest a reversal of a three-year trend, and a “shift in power from employees to management in the current moment, with management’s focus shifting to reigning in costs and improving efficiency.”

CAQ conducted the survey, now in its second year, by asking audit partners at the country’s leading public company audit firms about what they are observing in the industries they audit in terms of economic health indicators, challenges and risks facing businesses within their sectors, and how those businesses are adjusting their strategies in the current environment.

The survey reported that workplace flexibility, often demanded by employees as a condition of employment in 2022 in the wake of the pandemic, is no longer a top focus for employers; dropping from 75% in Spring 2022 to 41% in Spring 2023.

Similarly, the survey reported that while increasing salaries and novel signing bonuses made big news in 2022, audit partners see way fewer public company employers that they audit being willing to pay more for talent. In 2022, 73% of employers were increasing compensation to lure and retain talent, compared to 35% this year.

Most notable is that companies across various sectors are focusing instead on reducing headcount (45% in 2023 compared to 8% in 2022). Upskilling those retained employees has increased, with 43% of companies focused on upgrading skills, compared to 26% a year ago. Luring and retaining employees with promises of benefits also has dropped. Today only 16% of employers view increasing benefits as a top priority, compared to 30% a year ago.

To view additional survey findings, see: CAQ Survey

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