According to Law 360 reporting on a webcast panel last week, Acting Director of Enforcement Melissa Hodgman, warned that, in addition to “increased scrutiny” of “funds touting green investments,” we may well see more ESG disclosure-related enforcement actions in general. In March, then-Acting SEC Chair Allison Herren Lee announced the creation of a new climate and ESG task force in the Division of Enforcement. The moderator of the panel, a former co-Director of Enforcement, observed that “usually you don’t stand up a task force unless you’re pretty sure that task force is going to produce something.” So what should we expect?
According to the press release announcing the task force, the initial focus of the task force would be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules, giving us all another reason to excavate the staff’s 2010 interpretive guidance regarding climate change. (You may recall that the guidance addressed in some detail how existing disclosure obligations, such as the Reg S-K requirements for business narrative and risk factors, could apply to climate change. See this PubCo post.) However, the remit of the task force goes beyond climate to address other ESG issues. Lee said that the task force is designed to bolster the efforts of the SEC as a whole in addressing climate risk and sustainability, which “are critical issues for the investing public and our capital markets.” The press release indicates that the task force “will develop initiatives to proactively identify ESG-related misconduct,” and “coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.” In addition, the task force “will evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues, and provide expertise and insight to teams working on ESG-related matters across the Division.” The task force will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.
Commissioners Hester Peirce and Elad Roisman issued a statement in response, indicating that they weren’t quite sure how to interpret “this ‘enhanced focus’ on climate-related matters.” To the two Commissioners, this was all really nothing new: “The staff of our Corporation Finance Division has been reviewing companies’ disclosures, assessing their compliance with disclosure requirements under the federal securities laws, and engaging with them on climate change and a variety of issues that fall under the ESG umbrella, for decades…. All of the Division’s work has been rooted in materiality, the touchstone we use in assessing issuer disclosure on all topics, including climate.” In their view, the new announcement about the task force may identify violators that have made false or misleading climate- or ESG-related statements, but again, “such actions would not be based on any new standard; we have always pursued violations of our antifraud provisions.” The two Commissioners seem to view all the announcements as a bit premature: “Wouldn’t it be more prudent for us to await the results of the Corporation Finance staff’s latest review of climate change-related disclosure and the Examinations staff’s climate- or ESG-related findings in this new exam cycle before allocating resources to an ESG-specific Enforcement initiative?” (See this PubCo post.)
When asked by the moderator to describe the types of cases we should expect to see, Hodgman responded with a pretty good head’s up: “the public can expect to see more cases like September’s Fiat Chrysler case.”
In that case, the SEC charged that Fiat Chrysler Automobiles N.V., a London-based public company that sells vehicles through its Michigan-based subsidiary, made misleading disclosures about an internal audit of its emissions control systems. According to the SEC Order, following the VW “Dieselgate” scandal, FCA initiated an internal review of its own emissions control systems to verify that its vehicles did not contain similar “defeat devices.” In February 2016, the Order charged, “FCA issued a press release and an annual report, which both stated that the internal audit confirmed FCA’s vehicles complied with environmental regulations concerning emissions.” But the SEC contended that those statements were ultimately misleading: “Although the statements focused on the internal audit’s determination that FCA vehicles did not have a mechanism to detect that they were being tested in laboratory conditions, the statements were misleading because they did not sufficiently disclose that the internal audit had a limited scope focused only on finding cycle-beating defeat devices like the ones used by VW, and was not a comprehensive review of compliance with emissions regulations. In addition, at the time FCA made these statements, EPA and the California Air Resource Board…engineers had raised concerns to FCA about the emissions systems of FCA’s ‘EcoDiesel’ engines.” In 2017, the EPA and the DOJ charged FCA with violations of the Clean Air Act with regard to some of FCA’s diesel vehicles, alleging that the vehicles contained “software functions and calibrations” that “caused a reduction in the effectiveness of the emission control system.” In the end, the SEC charged that FCA violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-16 thereunder. FCA agreed to settle the charges and pay a civil money penalty of $9.5 million. According to an SEC official quoted in the press release, the case illustrated “the importance of public companies providing accurate and complete information to investors….At a time of heightened scrutiny of automakers’ regulatory compliance, FCA provided misleading assurances to investors by not disclosing the limitations of its internal audit.”
According to Hodgman, we should “expect to see ‘other cases like that, where there was a misstatement or something that wasn’t disclosed to investors that they needed to know to make [an] investment decision.’” In addition, she observed “that ‘like many of the other areas, I don’t think this is a different approach to enforcement or applying anything in a different way,’ adding that ‘our securities laws were written to evolve and [meet] the new products and the new environments in which we find ourselves.’