Securities and Exchange Commission: Open Meeting
Securities and Exchange Commission
Open Meeting
Wednesday, March 6, 2024
Topline
- Commissioners voted 3-2 in favor of adopting rules to require registrants to disclose certain climate-related information in their registration statements and annual reports.
- Commissioners voted 5-0 in favor of amendments to the national market system (NMS) stock order execution disclosure requirements of Regulation NMS under the Securities Exchange Act of 1934 that would expand the scope of entities subject to Rule 605, modify the categorization and content of order information reported under the rule, and require reporting entities to produce a summary report of execution quality.
Opening Statement
Gary Gensler, Chairman, Securities and Exchange Commission
Chairman Gensler began the meeting by explaining his support for the adoption of the climate related disclosures, noting they benefit investors and consumer alike. He said companies are allowed to take reasonable risks, as long as they disclose them, and explained that the SEC’s job is to oversee the flow of disclosures to investors and provide guidance as needed. Gensler noted the SEC required disclosure multiple times over the last 90 years including in the 1970s when disclosure of environmental risks was required and discussed how those disclosure requirements have become integral to today’s disclosure regimes. He explained how the final rule proposal is based on the materiality standard that dates back to the anti-fraud laws of the 1930s and that has been defined by the Supreme Court.
Gensler noted that far more investors are making investment decisions informed by climate risks. He said that 90% of the Russell 1000 are voluntarily providing public climate data, and many are disclosing greenhouse gas emissions. He explained that the final rule would require climate risks to be included in a company’s annual SEC filing. Gensler discussed how the how the rule will update Regulation S-K; require large, accelerated filers and accelerated filers to disclose Scope 1 emissions (direct emissions) and Scope 2 emissions (emissions associated with energy purchases) when they are material; and require registrants to file attestation reports to improve the reliability of the metrics and methodologies. He said that, based on public feedback, the SEC would not include Scope 3 emissions in the final rule and will allow more time for registrants to file emissions disclosures (in their second quarterly report). He said the Commission would also require footnote disclosure of losses due to weather damage. He said that companies already need to account for this, but it is there to disaggregate costs. Gensler concluded that international businesses have to comply with additional climate disclosures, and described the SEC’s rule as an important step to ensure that there are US standards for climate information for investors.
ITEM 1: The Enhancement and Standardization of Climate-Related Disclosures for Investors
The Commission considered whether to adopt whether to adopt rules to require registrants to disclose certain climate-related information in their registration statements and annual reports.
Staff Discussion
Erik Gerding, Director, Division of Corporate Finance
Gerding discussed how climate-related risks inform investment and voting decisions. He said that these risks can significantly impact a company’s financial position and their securities pricing. He explained how, although many companies already disclose some information regarding climate risk, disclosure is not uniform. Gerding said that they took into account the comments that they received and that the rule would strike the balance between requests for climate information by investors and costs imposed on companies.
Elliot Staffin, Special Counsel, Office of Rulemaking
Staffin explained that the final rule would require registrants to disclose climate information in their annual SEC filing under regulation S-K. He noted the final rule would create a new part of regulation S-K to require the disclosure of material climate-related risks and their impact on the operations and financial conditions of a company. Staffin said the rule would also require companies to disclose how they are mitigating climate risks posed to their business model. He added that if a company has taken the steps to respond to climate risks, a qualitative and quantitative analysis of the mitigation or adaptation activities is required. He also talked about how, if a registrant has adapted a transition plan to managing material transition risk, a description of the transition plan and updated disclosure are required.
Staffin discussed Subpart 1500, which would require registrants to disclose if they use scenario analysis and, in doing so, if they determine a climate-related risk is reasonably likely to have a material impact on their business, results of operation, or financial condition. He said that if a registrant’s use of an internal carbon price is material to how it manages climate-related risk, certain disclosures about the internal carbon price are required. He explained that if a registrant sets a climate goal that has or is reasonably likely to materially affect their business, results of operation, or financial condition, they would have to make certain disclosures about their goal. Staffin said that if carbon offsets or Renewable Energy Certificates are used as a material part of the company’s plan to mitigate climate-related targets or goals, they must disclose certain information about them.
Staffin noted changes from the proposed to final rule resulted in a less prescriptive approach including (1) making certain climate related disclosures being based on materiality; (2) eliminating the proposed requirement to disclose board members’ climate expertise; (3) exempting smaller reporting companies and emerging growth companies from the Scope 1 and 2 emissions disclosure requirements; (4) not requiring any disclosure of Scope 3 emissions; (5) requiring certain disclosures under the Regulation S-K rules rather than the Regulation S-X rules; (6) extending the Private Securities Litigation Reform Act safe harbors to certain forward looking statements; (7) eliminating the proposal to require a private company that is a party to a business combination transaction to register on Form S-4 or F-4 to provide the Subpart 1500 disclosures as well as the Regulation S-K disclosure; (8) eliminating the proposed requirement to require any material change to the climate-related disclosures in Form 10Q or in 10K for a foreign issuer; and (9) extending certain phase-in periods. He concluded that the final rule allows a registrant to provide updated GHG emissions for the most recent fiscal year on their 10-Q disclosure form for the second fiscal quarter in the year immediately following the year to which it relates or in an amendment to their annual report.
Paul Munter, Chief Accountant
Munter noted that he would talk about two specific aspects of the final rules: (1) certain disclosures of financial statement effects that would be required in a note to the registrants audited financial statements and (2) the attestation requirements over Scopes 1 and 2 GHG emissions disclosure.
First, Munter noted the final rule related to financial disclosures has been significantly revised to balance commenter’s costs with improved disclosure of disaggregated costs. He explained that the final rule focuses on certain disaggregated costs, expenses, charges, and losses caused by severe weather events and does not require an assessment on whether these events were caused by climate or are climate-related. He said the final rule requires disclosure of financial estimates or assumptions that have been materially impacted by severe weather events or natural conditions, or disclosed targets or transition plans.
Second, Munter discussed the staff’s recommendation that the Commission adopt attestation requirements for Scope 1 and 2 GHG emissions for accelerated and large accelerated filers. He said that these are subject to longer phase requirements than the proposed rules and only large accelerated filers will need to obtain reasonable assurance after several additional years. He explained the staff’s belief that this requirement would grant investors greater confidence regarding GHG disclosures and the methodology used by the registrant.
Erin Nelson, Senior Special Counsel, Division of Corporate Finance
Nelson explained that the final rule would require registrants to disclose three main categories of information: (1) the capitalized costs, expenditures, and charges and losses caused by severe weather events such as hurricanes, tornados, flooding, drought, wildfires, increased temperatures, and sea level rise, subject to a 1% and certain de minimis thresholds; (2) the capitalized costs, expenditures, and charges and losses associated with the acquisition or use of carbon offset or RECs, if used as a material component of a plan to achieve climate-related goals; (3) financial estimates of the impacts of severe weather events or transition plans. She noted the rule would require the financial disclosures to include contextual information and any recoveries from severe weather events during the fiscal year. Nelson discussed the rule’s requirement for accelerated filers who are required to disclose Scope 1 and 2 emissions to obtain an attestation report, beginning the 7th fiscal year after the disclosure date. She also noted that the final rules related to Regulation S-K include a longer phasing period for filing disclosures and eliminate certain attestation reporting requirements.
Jessica Wachter, Chief Economist
Wachter noted that 40% of companies already disclose information about climate change in their annual reports. She explained that while many companies also set public targets and goals, the lack of a common reporting framework makes these goals difficult to compare. Wachter emphasized that the final rule would increase comparability and reduce information asymmetry and would promote efficient pricing of securities and better capital formation. She acknowledged that there may be costs associated with collecting climate information but explained that these costs would be mitigated in part by allowing growing companies to remain exempt from Scope 1 and 2 emissions reporting and a longer phase-in period.
Commissioner Questions and Comments
Commissioner Peirce
Commissioner Peirce said the changes in the final rule do not take away from the flaw of requiring disparate treatment for climate information. She said that the final rule would spam investors with information about the SEC’s pet topic of the day, and that climate should not receive special treatment. She explained that she would dissent because the Commission failed to offer any concrete evidence of the necessity of the rule. Peirce argued that the rule ignored the role that materiality plays in disclosure and that the existing regime already captures climate issues. She warned that the rule would replace the current principles-based regime and make things more confusing for investors, not less. Peirce discussed how the rule wrongly classifies asset managers as investors and would require them to pursue data which isn’t relevant to the overall financial position of the company. She described the rule as an attempt to wade into the types of requirements that Congress should be making and warned that it would prove expensive for public companies trying to comply with the added disclosure costs. She said that others with particularized interests such as anti-cannabis and anti-war investors will line up to try to get the information that they want, and they should not be able to force others to foot the bill in getting these disclosures. She said that the process should play out organically. Peirce concluded that attempts to bring climate data in line with financial data are strained and are at best educated guesses for judging greenhouse gas impacts.
Peirce asked if the Commission planned to go back in several years and assess the effectiveness of the rule. Wachter said they will continue to monitor whether the benefits of the rule outweigh the costs. She said they might look at the usefulness to investors and said they will look to see if there is a stock price reaction to news regarding climate risk. She said there are other metrics that they can look at to gauge effectiveness.
Peirce asked how much it would cost companies to make a materiality assessment. Wachter said that they analyzed commenters data to estimate costs but do not have costs specifically on making the materiality determination. She noted these costs would vary and that for some companies, it would be de minimis.
Peirce asked Munter whether he is confident that with Regulation S-X disclosures that there will be the same quality of reporting for climate-related matters as financial matters. Munter said that this is a disaggregation of information that would be in their books and records and that they are not imposing any additional accounting requirements. He said that many of the physical risks would fall into existing U.S. GAAP categories.
Peirce asked about the definition of a “natural condition.” Munter explained that the final rule allows registrants to decide what is a severe natural condition. He noted the rule also provides a list of examples. Peirce asked if the definition would include a global health pandemic. Munter said that it is not immediately clear to him that a global health pandemic would be included as a physical risk. He said the disclosures are primarily aimed at requiring registrants to disclose when they have had a natural event occur that leads to financial statement impact because of physical risk. He said that physical risk talks about damage to equipment.
Peirce asked if Munter’s office would be able to provide help to those trying to comply with the rules. Munter said that they are ready to help through their regular process and is happy to report on the types of questions that they are receiving.
Peirce asked whether this was a new kind of rule and if the SEC had statutory authority for the rule.
Gerding said it was not a new kind of rule, noting the Commission has long required detailed measurement disclosures under Regulation S-K.
Peirce asked how Scope 1 and 2 emissions pose a risk to a company. Gerding explained those disclosures are only required for certain registrants and only have to be disclosed for physical risks to a business’s operations.
Peirce asked if staff predicted any unique enforcement challenges as a result of the rule. Gerding explained that the rule includes the same standard of materiality that is established in Commission rules and Supreme Court case law.
Peirce asked if the SEC was preempting California’s disclosure requirements with the rule. Megan Barbero, General Counsel, SEC explained that nothing in the rule expressly preempts state laws. She said that if anything this would be a question of implied preemption which would depend on the specifics of how the state laws are being applied or enforced.
Peirce asked if climate-related risk would include a scenario such as reduced electric vehicle demand from a change in policy. Gerding said customer demand, including reduced customer demand, is a transition risk covered under Regulation S-K.
Commissioner Crenshaw
Commissioner Crenshaw emphasized that investors are entitled to reliable climate disclosures when making decisions, and explained how the rule would establish a disclosure framework to supply climate information. She said that it is critical that the SEC give investors the tools that they need to properly assess risk. Crenshaw said that investors continue to face disparate and costly data. She noted that commenters on the proposal recognized that climate data is a quantifiable metric for understanding risk in a company and have been calling for climate disclosures. Crenshaw described the rule as the bare minimum but said it would be better for investors than no rule at all, which is why she planned to vote yes.
Crenshaw said she regrets that the rule omits Scope 3 emissions reporting and described Scope 3 as an invaluable metric for investors to measure risks for companies across their portfolios. She explained how the Commission has clear authority under the Securities Act to require disclosures that are relevant to risks posed to investors and noted that the Commission has a framework that is meant to be updated to reflect the demands of modern consumers. She said this authority for the protection of investors would have supported a more robust rule and Crenshaw emphasized that it is the SEC’s obligation to respond to investors’ need for data and noted that just because climate is a buzzword, it should not be treated differently than a risk by any other name that would be worthy of commission rulemaking. Crenshaw said that rolling back the proposal was a missed opportunity. She said executive compensation, governance risks, and other disclosures are also non-financial requirements that help investors understand the risks facing a company and are no different from climate disclosures. Crenshaw concluded that the Commission should implement a disclosure regime for greenhouse gas reporting and consider guidance and FAQs to ensure that they supply enough investor information.
Commissioner Uyeda
Commissioner Uyeda said he was unable to support the rule and described it as an attempt to abuse the SEC’s reporting regime to implement climate regulation. He warned that the rule is part of a larger goal to use corporations for social and political goals rather than to return capital to investors. Uyeda explained that the rule established a precedent for using the SEC’s regulatory authority for political goals and would destroy the SEC’s reputation as an impartial regulator. He warned that this rule provides a roadmap for investors to use holdings to force companies to disclose things as a tool for political and social change.
Uyeda said the rule introduces a totally new application of Regulation S-X and elevates climate above all other risks for registrant companies. He warned that the attestation requirement for large filers is truly unprecedented and outside the limiting principle. Uyeda explained that the Commission should have reproposed the rule rather than introducing a final rule, given the proposal’s thousands of pages of feedback and the omission of Scope 3 reporting. He warned that companies would have to immediately supply climate related information and spend resources to measure their emissions or face an enforcement action and lamented that the money spent on measuring emissions will be spent to get information to the SEC instead of reducing greenhouse gases.
Commissioner Lizarraga
Lizarraga noted that the SEC has historically amended its disclosure roles to adapt to changing market conditions to protect investors and emphasized that the final rule being considered was no different. He explained that American securities laws are dynamic and adaptable, and noted that U.S. capital markets have always appreciated regulators response to investor demands for data. Lizarraga discussed the commentors who expressed vulnerability due to the lack of comparable and consistent climate reporting standards for disclosure requirements. He explained how the final rule would provide investors with more liability protections and prohibit greenwashing by companies on their climate reporting data.
Lizarraga noted that the final rule does not require the disclosure of Scope 3 emissions and clarified that the Commission does not intend to be a climate regulator. He concluded that the final rule is a product of the Commission’s basic duty to supply information to investors and reflect investors’ views that climate risks are important to their decisions. Lizarraga said that the rule, while not perfect, is necessary.
Vote
Chairman Gensler called the role. Chairman Gensler, Commissioner Crenshaw, and Commissioner Lizarraga voted in favor of the proposal. Commissioner Peirce and Commissioner Uyeda voted against. The proposed rule was approved by a vote of 3-2.
ITEM 2: Disclosure of Order Execution Information for National Market System Stocks
The Securities and Exchange Commission considered whether to adopt amendments to the national market system (NMS) stock order execution disclosure requirements of Regulation NMS under the Securities Exchange Act of 1934 that would expand the scope of entities subject to Rule 605, modify the categorization and content of order information reported under the rule, and require reporting entities to produce a summary report of execution quality.
Staff Discussion
Haoxiang Zhu, Director, Division of Trading and Markets
Zhu explained that Rule 605 was created to allow market centers to publish statistical information, including shares executed and the speed of execution. He noted that Rule 605 has not been updated since it was adopted in 2000, despite significant changes to trading technology. Zhu explained that the rule was recommended to expand the scope of entities subject to Rule 605 and make execution quality data more accessible to investors. He urged the Commission to require broker-dealers to publish execution quality reports. Zhu noted the rule’s amendments specify that stocks must report separately from broker-dealers. He concluded by recommending that every market center publish a summary report on executions.
Lauren Yates, Senior Special Counsel, Division of Trading and Markets, SEC
Yates said the recommended threshold of 100,000 customer accounts for broker-dealers provides a fair balance between the benefits of execution quality statistics and the costs of implementation and continued reporting. She explained how the amendments would require broker-dealers and market centers to publish summaries on their functions and noted that covered orders to broker-dealer platforms would have a modified definition within the rule.
Kathleen Gross, Senior Special Counsel, Division of Trading and Markets, SEC
Gross explained how the amendments would ensure that Rule 605 reflects modern broker-dealers where average share prices have increased and fractional shares are traded with increased frequency. She recommended that the definition of covered orders include orders made outside of regular trading hours, certain orders with stop prices, and certain short sale orders. Gross said the amendments would add several order-type categories, including nonmarketable stock orders, if they occur at regular trading hours. She noted the amendments would require average time to execution information to be supplied for all orders and would require effective spread and cumulative value to be included in the report. Gross concluded that the rule would improve competition quality among broker dealers and transparency for investors.
Jessica Wachter, Chief Economist, SEC
Wachter discussed how the amendments would change reporting requirements and create buckets based on notional values and not number of shares to characterize orders. She noted the amendments would update timestamp conventions to a 1,000th of a second for trading.
Commissioner Questions and Comments
Chair Gensler
Chair Gensler said he supported the adoption of this proposal because it will improve transparency of execution quality and facilitate investors’ ability to compare brokers, increasing competition in our markets. He said that investors are increasingly turning to broker-dealers and apps and warned that apps are not required to disclose execution quality for transactions. Gensler explained how equity markets have been changed by existing regulations on transactions that reflect changes in technology, like broker-dealer apps. He said the final rule would require large broker-dealers to publish execution-quality information. Gensler explained the rule would allow investors to better select brokers while fostering greater competition among brokers for better execution quality. He concluded that it’s time to update the existing 605 reporting requirements and increase transparency for investors.
Commissioner Peirce
Commissioner Peirce started by saying that on balance the rules are positive. She noted that Rule 605 has not kept up with the securities market changes and said the rule was out of date a decade ago. She said that while she didn’t agree with everything in the rule, getting Rule 605 updated is an important first step. Peirce warned that the rule may ultimately be out of date again as the securities market continues to evolve. She urged the Commission not to become complacent about letting a costly report regime exist if it is no longer supplying effective information to investors. Peirce said the proposal may raise doubts about the effectiveness of our economic data and urged the Commission to ask when it is prudent to engage in further rulemaking.
Peirce asked how likely retail investors are to benefit from 605 reports from broker-dealers. Gross explained how the amendments would make the reports more useful and accessible for retail investors because they will provide human readable information. She said that investors could also benefit from the increased competition amongst broker-dealers.
Peirce asked for an explanation for classifying broker-dealers as market centers only because they trade fractional shares. Yates explained that fractional shares have become more popular amongst individual investors, and said Rule 605 should be updated to reflect this trend. She noted that while fractional shares continue to be an overall small part of the securities market, they include a large number of individual accounts. Wachter added that they estimate that all but 5 broker-dealers that engage in fractional share transactions would already meet the thresholds and, even then, 5 is probably an overestimate.
Peirce asked how the Commission would help broker-dealers during the implementation phase of the rule. Gross explained that the implementation phase would be 18 months after the publication of the rule in the federal register, which will be at least 20 months. She said this is sufficient to comply with the amended rule.
Peirce mentioned some commenters frustration that they were not able to access the CAT data used in their analysis and asked why it is appropriate for the SEC to engage in rulemaking based on non-public data. Barbero said that the Administrative Procedures Act (APA) does permit the use of non-public data in a rulemaking so long as the release provides for a meaningful opportunity to comment. She said the CAT database contains highly sensitive and granular market information, so the proposal described the CAT data that was used, the methodology of analysis, and the results of the analysis so, even though the sensitive raw data itself is not disclosed, the release does meet the APA standards.
Peirce then said that in the proposal release, the SEC relied on analysis of Rule 605 and 606 reports from a select group of broker-dealers but dismissed requests to provide the identity of the broker-dealers. She asked why the SEC did this and said it felt like the SEC was trying to hide the ball. Zhu said that they believe that the data provided allowed people to meaningfully comment, and that the individual identity is commercially sensitive information.
Commissioner Crenshaw
Commissioner Crenshaw discussed how before Rule 605, retailers were not in a position to judge execution quality and broker-dealers offered the lowest commissions. She explained how Rule 605 was designed to create a more efficient national market system for investors by providing a clearer picture of broker-dealers. Crenshaw said the amendments would increase the relevance of 605 reports, while customers of large broker-dealers would get access to information about their execution quality and be able to choose a broker-dealer based on this new data. She added that the amendments will allow investors to make better comparisons based on order-type categories by increasing the relevance of time to execution data.
Commissioner Uyeda
Commissioner Uyeda agreed that the amendments would expand the reporting entities under Rule 605 and reflect the constructive comments that we received. He described how the updated rule would enhance multivenue competition, which did not exist when Rule 605 was created. Uyeda noted the amendments would require monthly reports on covered orders and fractional shares trading. He said that it makes logical sense to improve Rule 605 before acting on Regulation Best Execution, Order Competition Rule, and amendments to Regulation NMS. He said that the information that the SEC will receive from this rule will provide the data necessary to analyze those future rules. Uyeda concluded that the rule reflects the overall mission of the SEC to protect investors and improve market competition.
Commissioner Lizarraga
Lizarraga said the information required by Rule 605 does not reflect current market trends. He noted the amendments include summary reports that will allow analysts and investors to make the best decision. Lizarraga said he was pleased to support this rule.
Vote
Chairman Gensler called the role. Commissioners unanimously approved the rule.
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