SEC rulemaking list 2021: ESG, cyber-risk governance among highlights

The SEC on Friday released its spring 2021 rulemaking list, which is brimming with proposed regulations that would enhance ESG-related disclosures for public companies in areas like climate change, board diversity, human capital management, and cyber-security risk governance.

SEC Chair Gary Gensler and agency staff have been vocal about their belief public companies should disclose more information to investors about how climate change is affecting their bottom lines and what those companies are doing to reduce their carbon footprint. At the moment, the bulk of the proposed regulations represent nothing more than a wish list, with a one-sentence explanation of rulemaking the agency intends to pursue.

“The Division [of Corporation Finance] is considering recommending that the Commission propose rule amendments to enhance registrant disclosures regarding issuers’ climate-related risks and opportunities,” the proposal says for a potential rule on climate change disclosure. Companies will be interested to hear more details, like whether the SEC defines climate change-related risks and chooses an established metric companies can use to measure their progress.

Ditto for the board diversity and human capital management disclosure rules: They will be proposed, the SEC says, with more information to follow.

The appearance of cyber-security risk governance on the list of proposed rules ought to raise some eyebrows, as the SEC has not spoken forcefully on this issue much at all since Gensler was installed as chair of the agency. Pursuing a disclosure rule on cyber-security risk governance—officially, it would be an amendment to existing rules—is almost certainly a reaction to the wave of recent cyber-attacks against U.S. companies and government agencies, including high-profile ransomware attacks on Colonial Pipeline and meat producer JBS USA.

The SEC also proposed to reexamine several regulatory actions that were approved last year under former Chair Jay Clayton. Potential targets include controversial rules laying out what commercial oil, natural gas, and mineral extraction companies must disclose about payments they make to U.S. and foreign governments and amendments to its popular whistleblower program meant to limit the size of large awards.

The two Republican SEC commissioners, Hester Peirce and Elad Roisman, criticized the moves as a waste of scarce agency resources, particularly since the rules have only been in effect for a few months.

”As far as we can tell, the agency has received no new information which would warrant opening up any of these rules for further changes at this time,” they wrote in a statement Monday. “We are disappointed that the Commission would dedicate our scarce resources to rehashing newly completed rules.”

Before Gensler’s arrival, the SEC had been laying the groundwork for climate change- and ESG-related rules, creating a new position of senior advisor on ESG and climate change and a task force that will examine the issues, among other announcements.

The SEC indicated it will also propose a rule for investment companies and investment advisors on ESG-related claims and disclosures made regarding certain funds. The rule will almost certainly tighten up requirements on what companies should disclose about how funds promoted as being guided by ESG-related factors operate and whether their marketing materials match the procedures in place.

Gensler has been outspoken during his short tenure about using rulemaking to address identified market weaknesses exposed by the “meme stocks” craze, including the effect on the market of short sellers, gamification of stock purchases, and payment for order flow. All those issues are reflected in the proposed rules.

The SEC will also take a hard look at special purpose acquisition companies (SPACs) to determine if they are structured to favor certain investors over others and if there is something the agency should be doing to protect all SPAC investors.

“To meet our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us,” Gensler said in a press release that accompanied the rulemaking list. “I look forward collaborating with my fellow commissioners and the dedicated staff to propose and finalize rules that will strengthen our markets, increase transparency, and safeguard investors.”

The SEC’s rulemaking list also represents a promise by the agency to finish implementing some of the 11 rules from the Dodd-Frank Act of 2010 that are still not completed, including short sale disclosure reform (Section 929Xa), conflicts of interest regarding certain securitizations (Section 621), and listing standards for recovery of erroneously awarded compensation (Section 954).

Gensler made finishing the remaining rules from Dodd-Frank a priority during his time as chair at the Commodity Futures Trading Commission.