Securities Regulation Daily IAC considers sustainability disclosures, unpaid arbitration awards
Thursday, December 13, 2018

IAC considers sustainability disclosures, unpaid arbitration awards

By Amy Leisinger, J.D.

The SEC’s Investor Advisory Committee met today to discuss the purposes and evolution of sustainability and environmental, social, and governance (ESG) disclosures and the potential to increase their usefulness for investors. The committee also tackled the issue of unpaid arbitration awards and considered potential solutions that can make harmed investors whole.

Sustainability and ESG disclosures. According to Janine Guillot of the Sustainability Accounting Standards Board, the SASB aims to set standards for companies intended to facilitate sustainability and ESG disclosures of material information that are cost effective and industry specific. The goal, she said, is to enhance the overall quality of these disclosures while encouraging provision of more reliable ESG information in a manner that can be compared across companies. The SASB intends its standards to be a useful guide for company disclosures, as market forces continue to increasingly compel sustainability and ESG disclosures, according to Guillot. Specific standards can provide for a common language and lead to companies developing tailored performance metrics that are truly useful to investors and the markets in general, she said.

Baker & McKenzie Senior Counsel and Retired Partner Daniel L. Goelzer explained that investors have noted that sustainability and ESG information currently is taken into account on a more regular basis but some are dissatisfied with existing disclosures, particularly because of the difficulty in making comparisons across companies. In addition, Curtis D. Ravenel, global head of Bloomberg’s Sustainable Business & Finance, opined that as long as these types of disclosures remain voluntary, companies can "cherry pick" the information they provide. State Street’s Jennifer Bender agreed while further elaborating on the fact that sustainability and ESG data is subjective and, thus, can interject additional risk and that it is important to focus on materiality. Nevertheless, she noted, higher ESG-rated firms see lower cost of capital, which could be seen as an important benefit to certain companies.

Along these lines, Yafit Cohn, associate group general counsel for Travelers, noted that ESG issues are "about value, not values." The focus needs to remain on value to shareholders, and, as such, standards setters and potential regulators need to be careful not to get overly prescriptive in requirements for sustainability and ESG disclosures. The goal should be to create a principles-based framework that centers around materiality, she opined, and the management of each individual firm is in the best position to make decisions about what sustainability and/or ESG information is financially material. The panelists suggested that a narrative disclosure on sustainability could be a good first step, as a breadth of individual data points may not be useful for companies or investors.

Unpaid arbitration awards. Noting that most FINRA arbitration cases settled without awards, FINRA Executive Vice President and Director of Dispute Resolution Richard Berry explained that a fair number of cases that get to an award go unpaid. FINRA is considering rules changes to prevent nonpayment, and a proposal has been made to create a member pool of funds to cover unpaid awards. Other solutions could include changes to the bankruptcy code to prevent discharging of arbitration awards and/or requiring firms to maintain insurance to cover potential claims, he said.

Public Investors Arbitration Bar Association President Christine Lazaro noted, however, that insurance cannot help defrauded investors, as insurance would not cover fraud by a broker. Robin Traxler, senior vice president of the Financial Services Institute agreed, further opining that errors and omissions insurance could be costly to small firms, as well as unfair to firms that do not engage in misconduct. She also suggested that both insurance and the creation of an award pool could encourage bad actors who may assume that they would not have to pay an award and can just rely on insurance payment or disbursements from the pool. The only punishment would be a bar from FINRA membership, she said. According to Traxler, FSI recommends creating incentives to pay awards, in particular by having the SEC expand the definition of statutory disqualification to those not paying arbitration awards in order to ensure that these bad actors cannot just move to a different part of the financial industry. Pace University Associate Dean for Academic Affairs and Professor of Law Jill Gross further suggested that holding companies or parent companies of FINRA members should be required to submit to arbitration, even as non-members; this would ensure that bad actors could not dodge payment of awards simply by holding assets in another entity, she said.

Most importantly, the panelists concurred, any solution to nonpayment of arbitration awards needs to shift the costs of misconduct back to the wrongdoer.

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