SEC proposes climate disclosures for public companies, but downstream effect on private issuers as value chain; investor expectation; and path to IPO.
SEC leadership moves: Martha Miller, the SEC’s Small Business Advocate, to depart; speculation that Pelosi aide and Republican Senate Banking Committee counsel to be nominated as Commissioners.
Chairwoman Waters sends letters to financial services trades asking how members are severing ties to Russia, and which companies are not.
Powell warns on digital asset risk and bipartisan Senate duo working on legislation for a digital asset framework.
Following an emergency meeting of NATO leaders to discuss the Russia-Ukraine conflict, the Administration announced it would place additional sanctions on more than 400 Russians and Russian entities, including members of Russia’s Duma and 40 Russian defense companies. President Biden also warned U.S. companies to be on guard against Russian cyberattacks and encouraged them to adopt a list of best practices, noting instances of “network scanning activity” stemming from multiple Russia-based IP addresses.
In Congress, House Financial Services Chair Maxine Waters sent a letter to more than 30 financial services trade groups requesting information on what steps their members have taken to end business relationships in Russia as well as data on which companies remain engaged in business activities in Russia following its invasion of Ukraine and their reason for doing so.
In other congressional news, the week was dominated by SCOTUS nominee Ketanji Brown Jackson’s confirmation hearings, with a confirmation vote likely occurring early next month. The COMPETES Act, legislation intended to strengthen America’s innovation and competitiveness, continues to move through procedural hurdles to reconcile versions passed by the House and Senate. As a reminder, the House-passed version contains an amendment that would provide the SEC broad authority to rewrite the rules for private capital raising, and while we remain relatively confident the provision will be stripped, we remain engaged.
Fireside chat on the regulatory outlook for private markets and crypto
Join my Carta policy teammate Holli Heiles Pandol for a fireside chat with Andy Trujillo, Head of Business at CartaX, to discuss the regulatory outlook for private markets and crypto on April 5 at 10 am (PT)/1 pm (ET). They will discuss the SEC’s rulemaking and enforcement agenda and how it will affect private companies and funds, as well as digital assets. This will be worth your time: Before joining Carta last year, Holli was leading legislative affairs at the SEC, and before that served as senior counsel on the Committee on Financial Services in Congress. Andy helped build CartaX from the ground, and also has deep knowledge of private market regulation. Register here.
SEC proposed landmark climate disclosure rules
The SEC issued its highly anticipated proposal to standardize climate disclosures for public companies to provide investors with “consistent, comparable, and decision-useful information” and provide issuers with “consistent and clear reporting obligations.” At a high level, the proposal would require companies to disclose how climate risks impact their business; report on climate-related targets and goals; and include certain climate-related financial statement metrics. The proposal would also require public companies to disclose greenhouse gas emissions (GHG) from operations and energy use (Scope 1 and Scope 2) and indirect emissions generated by suppliers and customers (Scope 3) if they are material or the company has set a GHG target or goal.
The proposal has largely been applauded by those who have been calling for mandatory climate disclosures, though some progressives want the SEC to go further, particularly with respect to GHG emission disclosures. For Scope 3 emissions—the most controversial part of the proposal—the SEC provided a safe harbor, a longer phase-in period, and exempted smaller reporting companies. On the other side, Commissioner Hester Peirce, former SEC Chairman Jay Clayton, and Republicans in Congress argue that climate policy should be set by Congress, and that the SEC lacks both the authority and expertise to set a climate agenda.
Impact on private markets
The proposal did not affirmatively impose climate disclosure requirements on private companies, though it will likely have a number of effects on the private markets. Companies that are required to report Scope 3 emissions will require more climate data from private business partners in their value chain, and institutional investors will likely require more climate data to help inform capital allocation decisions. However, the burdens of doing so and associated liability will be far less than in the public space.
Private companies that plan to eventually go public will need systems in place to comply with the proposed climate disclosure regime; however, the expected costs to comply may incentivize companies to stay private, leading to even fewer public companies. The SEC has been increasingly concerned with the growth in the size of the private markets, so such a result may embolden their efforts to find ways to push more private companies into the public markets or find other avenues to impose similar climate disclosure requirements, potentially through Regulation D filings or requiring private fund managers to report ESG metrics for their portfolio companies.
The proposed rules will be open for public comment until May 20, 2022, or 30 days after publication in the Federal Register, whichever period is longer. If adopted, the rules would be phased in based on filing status, with large accelerated filers (public float of $700M+) beginning in FY 2023 (FY 2024 for Scope 3 reporting). Given the substantial compliance cost and controversy associated with the proposal, we expect litigation. In the meantime, the SEC will likely continue to be more aggressive in reviewing company disclosures for climate-related items, and we are likely to see a number of enforcement cases stemming from the work of the climate and ESG task force announced last year.
SEC’s first small business advocate to depart agency
Martha Legg Miller, the SEC’s first Director of the Office of the Advocate for Small Business Capital Formation (OASB), announced she is leaving the agency at the end of April. Martha (as she prefers to be called) has been an incredible advocate and resource for entrepreneurs and the startup ecosystem. During her tenure, OASB launched a number of resources to aid in navigating the capital-raising process and conducted extensive outreach and engagement to help elevate the voice of the entrepreneurs and their investors to policymakers at the SEC and in Congress, particularly those who have been traditionally underrepresented. Sebastian Gomez Abero, OASB’s Deputy Director, will serve as acting director of the office.
Shortlist for SEC noms coming into focus
With Commissioner Lee announcing her intent to depart the SEC and Commissioner Roisman’s departure in January, the five-member commission will have two vacancies to fill, and the leading contenders are starting to come into focus. On the Democratic side, Jaime Lizárrga, a long-time senior advisor to Speaker Nancy Pelosi and a Financial Services Committee alum, is the frontrunner. On the Republican side, Mark Uyeda, a counsel on the Senate Banking Committee who has also advised former SEC Commissioner Mike Piwowar, may get the nod. Nothing is certain, but we expect the president to announce nominations in the near future so the Senate can begin its work to confirm the bipartisan pair.
Crypto & digital assets
Powell warns of crypto risks & advocates for “same activity, same regulation”
Speaking at the Bank for International Settlements, Federal Reserve Chair Jerome Powell said digital assets present financial stability risks because the “existing regulatory frameworks were not built with a digital world in mind.” Powell believes regulations should follow the principle of “same activity, same regulation,” meaning activities should be subject to the same regulations whether they are being conducted by a regulated entity such as a bank, or a non-regulated entity. In a separate speech, undersecretary for domestic finance Nellie Liang said policymakers are making progress toward crafting regulatory proposals for stablecoins.
Bipartisan Senators working on digital asset framework
Sens. Gillibrand and Lummis are collaborating on legislation to provide a broad-based framework for regulating digital assets, though details are still fluid. Importantly, this effort is bipartisan and seeks to capture a comprehensive view rather than merely one segment such as stablecoin. Such a framework, according to the Senators, means some aspects of the industry will be regulated by the SEC and others the CFTC. They hope to introduce the legislation in the coming weeks.
CFTC noms advance
The Senate Agriculture Committee advanced four nominees, Kristin Johnson, Summer Mersinger, Caroline Pham and Christy Goldsmith Romero, to the Commodity Futures Trading Commission; they now move to the full Senate, where confirmation is likelyDuring their confirmation hearing, the nominees declined to endorse creating a list of digital assets that would be under the CFTC jurisdiction but did note that the CFTC has a suitable certification process. Once the Senate approves the full CFTC contingent, expect them to bolster oversight efforts and push regulatory proposals in the digital assets space.
House Financial Services hearing: “Keeping Up with the Codes – Using AI for Effective RegTech” – Mar. 30 at 10 am (ET)
House Financial Services hearing: “Oversight of America’s Stock Exchanges: Examining Their Role in Our Economy” – Mar. 30 at 2 pm (ET)
Gensler delivers opening remarks at the 2022 SEC Investor Advocacy Clinic Summit – Mar. 31 at 10 am (ET)
SEC Small Business Forum – Apr. 4-7at 1:00 pm (ET)
Notable SEC proposed rules and comment deadlines
*60-day comment period after publication on SEC website or 30 days after publication in Federal Register, whichever is longer.
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