In remarks before the Investment Adviser Association Compliance Conference 2020, SEC Commissioner Allison Lee advocated for better disclosure on climate risk. She also weighed in on proposed advertising rules for investment advisers and criticized proposed reforms to rules for proxy advisors.
Climate Risk Disclosure
Commissioner Lee advocated for better climate risk disclosure for investors. She stated: "We must not only seek to prevent false or misleading disclosure, but also to ensure that investors receive the material information that they need to pursue their investment goals, either on their own or through their investment advisers." Ms. Lee criticized the SEC's "Disclosure Effectiveness Initiative," intended to overhaul the disclosure requirements for public companies and funds, for failing to sufficiently require disclosure of the risks of climate change (see generally SEC Seeks Comment on Regulation S-X). Ms. Lee stated that she would continue to advocate on behalf of investors to ensure that the SEC address climate change risk through both rulemakings and guidance in order to better serve investors.
Ms. Lee reviewed the SEC's recent proposal to update its advertising rules. See SEC Proposes Amending Investment Adviser Solicitation and Advertising Rules; see also Attorneys Review SEC-Proposed Amendments to Investment Adviser Advertising and Solicitation Rules. She stated that she generally supported the proposal; however, she questioned whether it is overly reliant on "principles" as opposed to imposing specific requirements that would be more straightforward to implement.
Ms. Lee questioned whether the requirements that (i) advertising be "fair and balanced" and (ii) testimonials not be "reasonably likely to cause an untrue or misleading inference to be drawn" were sufficiently clear that compliance professionals would be able to make judgments as to which advertisements and testimonials passed muster. Ms. Lee also questioned whether the ambiguity of the proposed rules would lead to regulatory interpretation "by enforcement."
Ms. Lee criticized two proxy proposals released in November 2019, asserting that both would adversely impact investors. She argued that the first proposal unduly restricts small retail investor shareholders from submitting proposals for a vote at a company's annual meeting. Ms. Lee claimed that the second proposal, which would impose additional evidentiary burdens on proxy advisors, (i) offers no concrete evidence of the problem it aims to address, (ii) gives the issuer undue influence on contested proxy issues where an issuer disagrees with a proxy advisor, and (iii) will lead to a reduction in shareholders' voting rights. (See generally recent articles on proxy advisors.)
While the two statements likely have no direct connection, Commissioner Lee's remarks on principles-based regulation follows reasonably closely on comments by CFTC Chair Heath Tarbert, who argued that "detailed, prescriptive rules" will (i) provide for greater flexibility in the tech sector, (ii) facilitate innovation, and (iii) help the CFTC "stay ahead of the curve." See CFTC Chair Heath Tarbert Calls for Principles-Based Approach to FinTech.
As to Commissioner Lee's call for greater disclosure of climate risks, the evidentiary concerns raised in New York State v. ExxonMobil are noteworthy, and the political pressures on this matter may be even more significant than the business risks. In any case, recent events have shown that there are any number of risks (e.g., a potential pandemic or political risk) that may be more significant (and more readily quantified) than climate risk disclosure.