Bills that would add disclosures on ESG and executive compensation narrowly advanced to the full House, while bills that would ensure SEC disgorgement authority and curb insider trading related to Form 8-K were readily approved.
The House Financial Services Committee clashed on party lines over environmental, social, and governance (ESG) bills and over two bills that would create new executive compensation disclosures. But a bill that would ensure the SEC’s ability to obtain disgorgement in enforcement actions and another bill that would curb insider trading related to Form 8-K won easy approval. The House FSC also marked-up numerous banking bills, including a highly controversial bill regarding the North American Development Bank that raises environmental concerns about the U.S. southern border.
ESG metrics disclosure. ESG issues have become increasingly common place in shareholder proposals and related litigation, especially regarding environmental issues (see, e.g., law suits involving Exxon in federal courts in New York and Texas—opposition to class certification and opinion on motion to dismiss—and in New York state court), and in SEC rulemaking petitions (see, e.g., petitions submitted August 13, 2019; February 27, 2019; October 1, 2018; July 21, 2009; November 23, 2009; June 12, 2008; September 18, 2007). Other ESG issues include human capital which, much like the environment, has garnered increasing attention (see, e.g., SEC commissioners’ views on handling Regulation S-K changes, SEC Chairman Jay Clayton’s statement; and a rulemaking petition).
The ESG Disclosure Simplification Act (H.R. 4329; amended version), sponsored by Juan Vargas (D-Calif), would bring Congress into the debate over ESG disclosures. Companies with securities registered under Exchange Act Section 12 or which report under Exchange Act Section 15(d) would have to disclose in their proxy statements a clear description of how the company views the link between ESG metrics and the company’s long-term business strategy along with a description of the company’s process for determining how ESG metrics impact that strategy. A sense of Congress in the bill would provide that ESG metrics are de facto material. Disclosure could be made in notes within a filing. There also would be a phase-in for smaller companies.
The SEC would have to issue rules to implement the disclosure requirement and to define what constitutes "ESG metrics." The Commission could mull applicable international ESG standards in drafting rules.
The bill also would create within the SEC the Sustainable Finance Advisory Committee. Each commissioner would select an equal share of the committee’s candidates for the up to 20-member committee. The committee’s purpose initially would be to recommend ESG metrics to the Commission. The committee also would submit a report on ESG matters to the Commission and the Commission would have to publish a reply to the report. The bill was reported by a vote of 31-22.
SEC disgorgement authority. The Investor Protection and Capital Market Fairness Act (H.R. 4344), sponsored by Rep. Ben McAdams (D-Utah) would authorize the SEC to seek, and for a federal court to award, disgorgement and other remedies, such as injunctions and officer and director bars. The legislation is a response to a footnote in the Supreme Court’s Kokesh opinion which, although declining to address the issue, noted that questions may exist about the authority of federal courts to order disgorgement. The bill would exclude "disgorgement" from the definition of "civil fine, penalty, or forfeiture" for purposes of 28 U.S.C. §2462, the general federal civil limitations period that was the focus of Kokesh.
An amended version of the House bill would bring the text closer to the Senate version of the legislation. Under the amendment, a federal court could not order permitted forms of relief if the SEC brought an action more than 14 years after the alleged violation occurred. The SEC also would have to report to Congress about implementation of the bill within 10 years of its enactment; the report would have to categorize enforcement actions and issuers while also listing the top 10 enforcement actions with the "longest durations of misconduct." The bill would be effective for enforcement actions brought on or after the date of enactment. The bill was reported by a vote of 49-5.
Pay increase ratio disclosure. The Greater Accountability in Pay Act (H.R. 4242; amended version), sponsored by Rep. Nydia Velazquez (D-NY), would require public companies to report the ratio of an issuer's executive pay increases to the pay increases the issuer paid to its employees during the same fiscal year. The disclosure would build upon the pay ratio disclosure already required of public companies under Dodd-Frank Act Section 953(b).
Specifically, a company would have to calculate "the percentage increase in the median of the annual total compensation of all executive officers" of the issuer over the prior fiscal year and "the percentage increase in the median of the annual total compensation of all employees of the issuer, excluding executive officers" for the same period. A company must then obtain the ratio of these two calculations. Moreover, a company would have to compare the results of the first two calculations to the same-period percentage change in the Consumer Price Index for All Urban Consumers. The bill was reported by a vote of 32-21.
Executive compensation claw backs. Under the Corporate Management Accountability Act (H.R. 4320; amended version), sponsored by Rep. Katie Porter (D-Calif), a public company would have to disclose in its annual report or proxy statement whether it has procedures to claw back (or withhold from payment) compensation from named executive officers in the amount of "covered fines" paid by the company. If a company has such procedures, it would have to describe them and disclose the amounts recouped during the last three fiscal years. A company that has no relevant claw back procedure would have to explain why such procedures are unnecessary. The bill was reported by a vote of 31-22.
Form 8-K and insider trading. Companies generally must file or furnish a Form 8-K within four business days of some reportable event. The 8–K Trading Gap Act of 2019 (H.R. 4335; S. 2488) requires the Commission to adopt rules within one year of enactment to mandate that companies have policies, controls, and procedures reasonably designed to prohibit certain types of insider trading during this four-day period.
The original House bill did not include a provision requiring the SEC to exempt investment companies and investment advisers or other disclosures that comply with Regulation FD from the Form 8-K trading ban as had the Senate bill. The amended House bill is now equivalent to the Senate bill. The House bill was reported by a vote of 52-0.
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