Best Practice Newsletter – October 2023

California Jumps Ahead of SEC on ESG-

While the Securities and Exchange Commission has been delaying its decision to implement wide sweeping climate change disclosure rules (known as ESG) in light of thousands of comment letters and legal challenges, California’s Governor Gavin Newsom just signed a new state law which far exceeds the SEC’s proposed guidelines.

Unlike the SEC version, which would require US SEC registrants to report on direct and indirect emissions, California’s SB253 goes a step further requiring both public and private companies that operate in the state, and which have total revenues in excess of $1 billion, to report direct and indirect emissions.

The bill requires the California State Air Resources Board to develop and adopt regulations by January 1, 2025 that would require companies to report on Scope 1 and Scope 2 emissions beginning 2026 and to report on Scope 3 Greenhouse Gas Emissions beginning 2027.

Initial estimates are that more than 5,300 companies that operate in California will be controlled by the law. The words “operate in California” mean that the law will extend far beyond California’s borders and include companies based throughout the 50 states and the District of Columbia. Additionally, the Scope 3 emission disclosure requirements would expand well beyond the 5,300 affected companies, as every business in a company’s supply chain, no matter how small, would also be affected by the law.

Section 2 of SB 253 states: “Reporting entity” means a partnership, corporation, limited liability company, or other business entity formed under the laws of this state, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States with total annual revenues in excess of one billion dollars ($1,000,000,000) and that does business in California. Applicability shall be determined based on the reporting entity’s revenue for the prior fiscal year.”

SB253 defines the various scope emissions as follows:

·    Scope 1 emissions refer to all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.

·    Scope 2 emissions refer to indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.

·    Scope 3 emissions refer to indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.

Companies would be required to obtain “an assurance engagement, performed by an independent third-party assurance provider, of their public disclosure.”

Opposition to the bill has come from business groups such as the California Chamber of Commerce, as well as agricultural groups and oil companies. They argue that companies don’t have the expertise to comply, and that the SEC’s pending ruling on its own ESG guidelines might be duplicative.

To view the entire text, click SB253

Big Banks Issue Thousands of Pink Slips

America’s largest banks have been cutting tens of thousands of jobs, and they’re not done.

CNBC is reporting that from Q4 2022 to Q3 2023 Bank of America, Morgan Stanley, Wells Fargo and Goldman Sachs have “quietly” given pink slips to 20,000 workers, also reporting that “the deepest cuts are yet to come.”

Goldman Sachs had the deepest cuts, trimming 5.4% of its workforce, while Wells Fargo cut 4.7%. Both banks cite declining revenues in some key businesses. Morgan Stanley cut 2.1%, and Bank of America trimmed 1.9% of its workforce.

The two outliers according to CNBC, are Citigroup, which held steady in its workforce since Q4 2022 and JP Morgan Chase, which increased headcount by 5.1%. It’s important to note that 5,000 of those added jobs can be attributed to JP Morgan’s acquisition of failed bank First Republic in May 2023.

Transactional activity slowed considerably after the Federal Reserve began raising interest rates to cool an overheated economy. According to CNBC, “banks found themselves suddenly overstaffed for an environment in which fewer consumers sought out mortgages and fewer corporations issued debt or bought competitors.”

The Institute for Mergers, Acquisitions & Alliances, an industry group which tracks M&A activity, shows the number of U.S. deals declining from a high of 25,170 in 2021 to 21,274 deals in 2022, and to 11,554 deals for the three quarters of this year.

Initial public offerings have seen a steady decline as well. During the heyday years of 2020 and 2021, when an unprecedented number of IPOs went to market, bankers were needed to work the 480 deals, both traditional IPOs and SPACs that closed in 2020 and the 1035 that closed in 2021. The vast majority of those transactions were SPACs.

The total number of IPOs declined markedly to 181 in 2022, as the SEC tightened regulations surrounding SPACs. This crackdown on SPACs by the SEC, combined with a series of interest rate hikes by the Federal Reserve, continues to slow IPO activity, with only 130 IPOs closing as of mid-October, the vast majority of which are traditional IPOs.

Beneficial Ownership Reporting Timeline Shortened

The SEC has adopted amendments governing beneficial ownership reporting under Section 13D and 13G of the Securities Exchange Act of 1934, which significantly shorten ownership filing deadlines.

SEC Sections 13(d) and 13(g), along with Regulation 13D-G, require an investor who beneficially owns more than 5 percent of a covered class of equity securities to publicly file either a Schedule 13D or a Schedule 13G. An investor with control intent files Schedule 13D, while exempt investors and investors without a control intent, such as Qualified Institutional Investors and Passive Investors, file Schedule 13G.

“Today’s amendments shorten the deadline for initial Schedule 13D filings from 10 days to five business days and require that Schedule 13D amendments be filed within two business days; generally accelerate the filing deadlines for Schedule 13G beneficial ownership reports (the filing deadlines differ based on the type of filer); clarify the Schedule 13D disclosure requirements with respect to derivative securities; and require that Schedule 13D and 13G filings be made using a structured, machine-readable data language,” said SEC Chair Gary Gensler.

In addition, the SEC has adopted new guidance regarding the current legal standard governing when two or more persons may be considered a group for the purposes of determining whether the beneficial ownership threshold has been met, as well as how, under the current beneficial ownership reporting rules, an investor’s use of certain cash-settled derivative securities may result in the person being treated as a beneficial owner of the class of the reference equity securities.

The new rules will become effective 90 days after publication in the Federal Register. Compliance with the revised Schedule 13G filing deadlines will be required beginning on Sept. 30, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will be required on Dec. 18, 2024.

For a more detailed overview of the amendments, Click SEC Fact Sheet