The following symposium post comes to us from John Rice at Duquesne Law.

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I’m pleased to add my voice among those commenting as part of this virtual symposium on the recently-released Content Scope Outline for the “Business Associations & Relationships” for the NextGen Bar Exam. Despite my general skepticism of the efficacy of any bar examination, I tend to view the draft outlines as an improvement above the current exam outline. I join with my colleagues Joan, Joshua, and Benjamin in stressing how imperative it is that the NCBE specify the specific sources of law from which these topics are drawn.

In terms of substance, I favor separating LLCs into their own category rather than merely being a sub-set of corporation law. Additionally, the business litigator in me feels compelled to note that the draft outline’s description of “Shareholder and member litigation: direct and derivative litigation” is underdeveloped. I want my students to recognize litigation as a form of shareholder control over the corporation and to evaluate the standing prerequisites and demand requirement. Likewise, I would prefer more attention be paid to the specific remedies available in business disputes, including declaratory judgment, injunctive relief, and the appointment of receivers and custodians.

In this post, however, I wish to briefly move our conversation of the “Business Associations & Relationships” coverage to consider the “Foundational Skill and Associated Lawyering Task” of legal research. The NCBE has identified two “skills” under the umbrella of legal research: First, the ability to engage in statutory interpretation, and second, legal issue spotting in a “client file.” In doing so, the NCBE under-comprehends the skills associated with legal research and overlooks what I consider to be one of the most fundamental legal research skills, and that skill is one particularly well-situated to be tested in the context of business law; that is, synthesis of separate legal authorities into one analysis.

Of all the subjects identified to be tested on the NextGen Bar Exam, Business Associations is the only subject that would require a test candidate to consider the interplay of separate legal authorities: the constitutional delegations of authority, the default rules created by the applicable statutory scheme, the private ordering agreed to by contract between the parties, the case law from the jurisdiction interpreting the statute and contract, and the underlying principles of equity and fairness. For example, a question about fiduciary duty in the context of a Delaware corporation would require a candidate to draw from multiple sources of law: the line of case law recognizing the existence of fiduciary duty; the statutory limits that may be impose on fiduciary duty by the chartering documents and bylaws; and the contractual limits actually agreed to by the parties.

Joshua implicitly recognized this opportunity in his post when he discussed the significance of looking to corporate documents to understand the applicable rules for quorum. But this sort of analysis should be the goal of the bar examination’s testing of the law of business associations—not merely an incidental consequence. A minimally competent attorney—whatever that may mean—should be able to articulate the legal research and factual investigation they would need to undertake to answer a question.

In my view, the NCBE would be wise to revise the content outlines to account for how candidates may evaluate different sources of applicable law in light of one another, and to express what information—legal and factual—they would to engage in a complete analysis of the questions presented.

The Northwestern Pritzker School of Law invites applications for three full-time faculty positions in its Master of Science in Law program, with an expected start date of July 1, 2022. Candidates will be considered for appointment on the law school’s lecturer track (Lecturer or Senior Lecturer); these positions are not tenure eligible.

The Master of Science in Law (MSL) is an innovative legal master’s degree offered by the Northwestern Pritzker School of Law. This program is geared specifically towards STEM professionals who are interested in topics at the intersection of law, regulation, business, and policy. The residential full-time program began in 2014; the online part-time format was added in 2017. The MSL program has a diverse student body, with both domestic and international students, and students of different ages, levels of work experience, backgrounds, race and ethnicity, and career goals. There are currently over 200 students enrolled and the program has over 400 alumni. Graduates of the MSL work in a variety of industries, including consulting, finance, pharma, biotech, engineering, healthcare, and law (including intellectual property, legal operations, and others); some go on to further study in medicine, business, law, and other fields.

The duties of the positions include teaching a full-time load of courses each year within both formats (residential and online) of the MSL program; there may also be the opportunity to teach in the JD program. Administrative responsibilities of the positions include advising and recruiting students. We seek applicants with a record of or potential for excellence in teaching, an aptitude for mentoring students regarding academic and career goals, and the ability to work collaboratively with others.

Preferred qualifications include a JD and 3-5 years of experience teaching or working in a field relevant to the MSL curriculum, such as a legal, business, entrepreneurship, or regulatory setting. In addition, we seek applicants who have experience with or interest in working with international students and global issues.

The MSL is an important manifestation of the Law School’s commitment to programs at the interface of law, business, and STEM. While MSL classes are separate from JD classes, they are taught by the same faculty and often cover similar topics. MSL students are well-integrated into the life of the law school; their presence enhances the learning environment for all law students.

The MSL curriculum clusters in four main areas: business, regulation, intellectual property, and skills development. Classes cover a wide variety of topics at the law-business-STEM interface, such as privacy, patent design, health and medicine, IP strategy, entrepreneurship, data security and breach, and regulation of STEM industries. Students in the MSL also take classes that focus on developing communication and quantitative skills.

We welcome applicants who can teach a variety of courses across the MSL curriculum; we have a particular interest in applicants who can teach courses in business law, intellectual property, legislation and regulation, ethics, and professional communication/skills (including writing, research, etc.).

Applicants should submit a CV and a cover letter explaining interest in the position through Northwestern’s online application system at this link: https://facultyrecruiting.northwestern.edu/apply/MTQ2Mg%3D%3D. Applicants are encouraged to apply by April 8, 2022.

To learn more about the MSL program, please see the law school’s MSL website. A copy of the MSL curriculum can be found online here.

Northwestern requires all staff and faculty to be vaccinated against COVID-19, subject to limited exceptions. For more information, please visit our COVID-19 and Campus Updates website. 

The Northwestern campus sits on the traditional homelands of the people of the Council of Three Fires, the Ojibwe, Potawatomi, and Odawa as well as the Menominee, Miami and Ho-Chunk nations. We acknowledge and honor the original people of the land upon which Northwestern University stands, and the Native people who remain on this land today.

Northwestern University is an Equal Opportunity, Affirmative Action Employer of all protected classes, including veterans and individuals with disabilities. Women, racial and ethnic minorities, individuals with disabilities, and veterans are encouraged to apply. Click for information on EEO is the Law.

So the SEC dropped a couple of hundred pages of proposed new rules governing SPAC transactions. 

I’d say the rules fall into three categories: 

First, there are the ones meant to harmonize the regulatory framework for SPACs and for more traditional IPOs, both in terms of requiring disclosures akin to those in the IPO context, and in terms of imposing similar liability regimes, so that SPAC target companies will be vulnerable to Section 11 liability, financial advisors that shepherd the de-SPAC process will be treated as underwriters, and the PSLRA safe harbor will be unavailable for de-SPAC related projections.

(That last point is tricky: As the SEC acknowledged in its release, and as Professor Amanda Rose points out in a paper, because the de-SPAC is a merger, companies may essentially be required to include projections, like the ones that underlie financial advisors’ opinions, in their proxy statements.  Which would mean, unlike in a traditional IPO, there would be no minimizing liability exposure simply by failing to include projections in the SEC filings.  Couple that with Section 11 liability and it could be pretty intense.  That said, the SEC is proposing to require issuers to include climate-related forward-looking information in registration statements, where no safe harbor would apply, so there is that to even the scales.).

Second, there are the ones meant to address the particular pathologies of SPACs, namely, their conflicts of interest, which encourage sponsors to pursue even bad deals over liquidation, and the dilution that public shareholders suffer as a result of the promote, the redemptions, and the warrants.  And the SEC deals with these the way it deals with most things: extensive new disclosure requirements, including ones regarding conflicts, dilution, and SPAC-specific requirements for the basis of any projections.  Many of these, drawn from the take-private rules, are disclosures meant more to force governance improvements than to actually reveal information, like disclosure of the fairness of the transaction, whether a majority-of-the-minority vote is required, and whether the independent directors had their own counsel to negotiate the deal on behalf of public stockholders.

Third, there’s the investment company thing.  Professors Robert Jackson and John Morley have filed lawsuits against a couple of SPACs arguing that their variation from the SPAC structure – or just their delay in finding a merger partner– rendered them investment companies.  The SEC proposes to formalize when a SPAC will avoid becoming an investment company, namely, if they keep the current form (no variations, like Bill Ackman proposed), sign a deal in 18 months, and close in 24.

Now, we all know that the SPAC market has cooled significantly; it operated like a speculative bubble for a while, along with meme stocks and joke cryptocurrencies, but a lot of that sheen has worn off, which means we may see less … umm… hasty work in the future and fewer outlandish projections, even without the new rules.

That said, the SPAC form still suffers from inherent incentives for SPAC sponsors to merge even with poor-quality firms.  Sure, yes, the sponsor will prefer a high-quality target to a poor-quality one, but sometimes a high-quality target is hard to find, and in those instances, the sponsor would prefer the chance of a payout with the poor-quality firm to liquidation.

Professors Michael Klausner and Michael Ohlrogge have a paper where they discuss at length how sponsor earnouts – which are supposed to mitigate these conflicts by only allowing sponsors to receive additional shares if the post-merger trading price hits certain targets – are almost comically weak.   They offer some suggestions for reform, for example, by encouraging more cash investment by the sponsor and shortening the earnout time periods, though they admit their proposals would only remove incentives for extremely bad deals, and not incentives for just, you know, mildly bad ones.  I was fortunate enough to see Michael Ohlrogge present this paper (and Amanda Rose present hers) at Vanderbilt’s Law & Business Conference in March, and one of the things he mentioned was that it’s easy to incentivize people to work hard to find a good deal, but it’s more difficult to incentivize people to admit failure.

Which made me think that this problem is not unlike the lead plaintiff/counsel problem in securities cases.  I previously talked about this here, and the issue is that plaintiffs’ attorneys in securities class actions are incentivized to seek lead counsel status, with an institutional client as a proposed lead plaintiff, relatively early in the case, before expending the time and funds on a full investigation.  Once they’ve secured the lead spot, that’s when the real investigatory work begins, but at that point, even if the investigation turns up nothing, it’s very hard to admit that, drop the case, and confess error to the client.  So, they’re incentivized to pursue cases that, by then, even they know are pretty weak.

I don’t have a solution for this problem in the securities class action context but I can offer one for SPACs, though even I’m not sure I like it: If we want to incentivize a behavior, we have to actually incentivize it.  In this case, if the behavior we want to encourage is getting sponsors to seek liquidation when there are no good mergers to be had, then maybe there needs to be a payout for that.  Smaller than what they’d get for a good merger, obviously, and we’d need layers of independent-review protections to ensure that sponsors made serious efforts to identify a likely target, and the money would have to come out of the liquidation payments to investors (which would make the SPAC form less attractive for that reason alone, but also might encourage greater diligence from the initial investors), but at the end of the day, maybe the way to get people to admit failure is to pay them to do it.

Volume 14 of the William & Mary Business Law Review is currently accepting submissions for publication in 2022 and 2023. The Journal aims to publish cutting-edge legal scholarship and contribute to significant and exciting debates within the business community. Submissions for consideration can be sent via Scholastica, or if need be, via email to wm.blr.articlesubmission@gmail.com.

Glad to join in on the virtual  symposium that launched earlier this week. I come to this with a bit of experience in bar preparation.  I’ve helped put together bar preparation lectures for a bar prep company on business associations topics before.  Business law has been tested as a component of the Multistate Essay Examination (MEE) for some time now.  The outline for the future bar exam looks different from the outline for business law subjects tested on the MEE.  Here are some things that the MEE now includes that the draft outline omits:

  1. Duty of Obedience
  2. Inherent Agency
  3. Limited Partnerships
  4. Limited Liability Partnerships
  5. Cumulative Voting
  6. Financing
  7. Dissolution
  8. Transfer Restrictions

This isn’t a comprehensive list. The outline is generally shorter and covers less than the subjects flagged as being on the MEE.  This of course raises questions about why these areas are not important enough to make the cut.  Some of these I would cut myself, such as the duty of obedience and inherent agency doctrines.  But I would be interested to know how the NCBE arrives at the decision that some of these subject headings merited inclusion on the MEE, but do not merit inclusion on the future bar exam.  I don’t think we should keep testing things simply because it has been tested in the past, but I would like to have some understanding about how we decide what we should be testing in the future.  A lack of clarity about how we decide what to test may contribute some to the skepticism Dean Fershée and others now feel about the exam.

Business law also appears under-developed in comparison to other areas.  The guidance for civil procedure frequently includes descriptions about what the subjects include.  We don’t have the same level of detail for business law.  This leaves us guessing at what could end up within those topics. 

I’d like to join Joan and Joshua in pleading for some guidance on what this stuff means.  Take LLC fiduciary duties.  Under Delaware law, LLCs have fiduciary duties as a default.  Under Nevada law, they do not.  If the exam will test LLCs and fiduciary duties, what is the rule?  State law varies enormously here.  If they’re going to enshrine Delaware law for this purpose, they should say so.

The way I figured out how to give guidance when putting bar preparation materials together was to go back and read MEE analysis of their own questions.  You can access the stalest guidance on the website for free.  To get more clarity from them, I assume you have to pay.  Will the MEE analysis be a good guide to what they mean with these new areas?  I’d hope so.  

Thanks to Joan Heminway for kicking off our virtual symposium, here, where some of us will take a look at the recently released National Conference of Bar Examiners (NCBE) content summaries of the material planned for future bar exams in the Content Scope Outlines .  These comments relate to the “Business Associations & Relationships” portion. 

As a general matter, I have been growing increasingly skeptical of the bar exam and its role and purpose for the profession.  I very much believe we need to facilitate a process to help ensure clients are served by competent lawyers who have the skills necessary to serve clients.  However, I am more and more convinced that bar exam does an incomplete job of testing readiness for practice, potentially ingrains some bad practices, and continues to inappropriately limit access to the profession for women and minorities. Those issues, though, are for another time.   

Following are my initial thoughts on the Business Associations and Relationships portion of the Outlines:

In the area of “Partnerships,” under “Nature of general partnerships” and “Formation, the outline states: “This topic includes the de facto treatment of improperly created incorporated entities as general partnerships.”  Here, in place of “incorporated entities” I would recommend replacing it with “corporations” or “limited liability entities.”  If they intend to limit the review to corporations, which would not be surprising given the way the “de facto corporation doctrine” is often taught, then say that. If it means improperly formed limited liability entities (intending to include LLCs, LPs or LLPs) then say that.  An “incorporated entity” is necessarily a corporation.

For the section on “Corporations and Limited Liability Companies,” I agree with Joan that the corporation concept of “articles of incorporation” is too narrow, unless they intend to pick a state or model law that uses that phrase (and if so, please tell us!).  Adding “formation document” or “creation document” could work, though most casebooks include something “charter or articles or certificate of incorporation.” 

For LLCs, I think it should say “Operating or member agreements” (not members, though maybe “members’ agreements”). 

Items “IX. Piercing the Corporate Veil” should say, “Piercing the Entity Veil” given that this section does not say whether it’s just corporations (the general section is corporations and LLCs).  A literal reading of this would suggest they only intend to test it as to corporations, but given the way courts and other commentators treat this concept, such an assumption would be (unfortunately) flawed. There is an “asterisk” by this area, which means exam takers will be expected” to know the details of the relevant doctrine without consulting legal resources.”  Here, too, it would be important to know the jurisdiction because veil piercing law is not uniform state to state, and this is even more true of LLCs than it is of corporations. The basics are similar, but states vary.  Texas, for example, requires “actual fraud” for contract-type veil piecing claims.  And veil piercing is different for LLCs, too. Compare, for example, Minnesota law and the ULLCA. 

Under “management and control” of corporations, I don’t love that they test quorum, because it’s my understanding that, in years past, they have tested on some default rules of quorum (though I have not been able to verify that). Quorum should always be checked by looking at the articles/certificate/charter and bylaws AND buy checking the state statute to make sure that the chosen path is permissible under the statute.  There is no “asterisk” by this area, which means exam takers should “have generality familiarity with the topics.” So, it’s possible the bar examiners are approaching this by testing quorum where they would provide the relevant statute and or corporate documents (or specifics would not matter for the call of the question).  If so, great, but I think it’s worth raising to ensure that’s the case.

Finally, fiduciary duties may be tested for corporations and LLC.  These, too, are general, so hopefully exam takers will be able to respond with general knowledge and supplemental information in the exam. Given the divergent nature of Delaware LLC law in this area, it would seem worthwhile to give some guidance as to the source of law, exam takers should be using in their responses.  I will, again, second Joan’s point: “I favor letting examinees know which sets of rules and norms apply to their exam responses.”

 

The National Conference of Bar Examiners (NCBE) recently released content summaries of the material proposed to be tested on the future bar exam.  Labeled Content Scope Outlines (the “Outlines“), they are available here.  Among them, are content descriptions under the heading “Business Associations & Relationships,” pp. 7-9 of the Outlines.  This post introduces a series of posts over the next week or two on those specific parts of the Outlines.  I will start the ball rolling by making four opening comments below, each focused on a general issue.

  • Testing Guidance – The Outlines designate topics that will be “tested in a way that assumes examinees know the details of the relevant doctrine without consulting legal resources” and distinguishes them from ones that will be “tested in a way that assumes examinees have general familiarity with the topics for purposes of issue-spotting or working efficiently with legal resources provided during the exam.”  I find this designation and separation helpful.
  • High-Level Content Guidance – Given that Delaware corporate and limited liability company law  (a) are national standards and (b) include provisions that are different from those in the Model Business Corporation Act and the Uniform Limited Liability Company Act, respectively, I favor letting examinees know which sets of rules and norms apply to their exam responses.  The Outlines do not offer this information.
  • Topic Annotations – At various points, the Outlines offer a short comment about the specific contents of a particular topic.  For example, they note that the topic “Vicarious liability of principal for acts of agent . . . includes distinctions between employees and independent contractors. This topic also includes delegable/nondelegable duties.”  These statements are useful, although some of the annotations may still leave too much to the imagination.
  • Terminology – The Outlines use “articles of incorporation” to describe a chartering document for a corporation.  Yet, Tennessee uses the term “charter” (arguably the generalist term) and Delaware uses the term “certificate of Incorporation.”  I wonder if it would be better to merely use a generic or general descriptive term like “chartering document.”  Similar issues exist with respect to limited liability company “articles of organization,” “certificates of formation,” and “operating or members agreements.”  Along similar lines, I would like to see veil piercing referred to in just that way and not as “piercing the corporate veil” when it is used to describe the veil of limited liability in limited partnerships or limited liability companies.

These comments should be enough to get us started.  I will plan to say more in a subsequent post, if time permits.

Please note that comments on the scope and depth of the subjects to be tested are being solicited and are welcomed by the NCBE.  The comment period closes on April 18, 2022.  Comments can be submitted here.

More information about the NCBE’s project on the next generation of the bar exam can be found here.

The following post comes to us from George Georgiev at Emory Law.  It follows quite nicely on Ann’s post yesterday on Climate Change and Wahed Invest.  I know a bunch of us will be commenting over time on the SEC’s climate change release, and we are grateful that George has offered his ideas here.  Please note that more of the post is below the fold and can be accessed by clicking on the “continue reading” jump link.

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The SEC’s Climate Disclosure Proposal: Critiquing the Critics
George S. Georgiev

The SEC released its long-awaited Climate Disclosure Proposal a few days ago, on March 21, 2022. The Proposal is expansive, the stakes are high, and, predictably, the critical arguments that started appearing soon after the SEC kicked off this project a year ago are being raised ever more forcefully in preparation for a potential court challenge. A close review of the Proposal, however, suggests that it is firmly grounded within the traditional SEC disclosure framework that has been in place for close to nine decades. The Proposal is certainly ambitious (and overdue), but it is by no means extraordinary. This, in turn, suggests that challenges to the Proposal’s legitimacy ought to fail, even if certain aspects of the Proposal could stand to be improved as part of the ongoing rulemaking process.

This view is not universally held. In voting against the Proposal, SEC Commissioner Hester Peirce admonished that it “turns the disclosure regime on its head” and erects “a hulking green structure” that will “trumpet” a “revised mission” for the SEC: “‘protection of stakeholders, facilitating the growth of the climate-industrial complex, and fostering unfair, disorderly, and inefficient markets.’” This certainly sounds problematic—and, indeed, quite dramatic. But once we set aside the entertaining rhetorical flourishes, we see that many of the arguments against the Proposal misstate the applicable legal constraints and mischaracterize important aspects of the Proposal. Moreover, even though Commissioner Peirce goes out of her way to praise “the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures,” her lengthy dissenting statement reveals that she actually opposes many important and established elements of the very framework she says she wants to conserve.

I will make the case that the SEC’s Climate Disclosure Proposal is in keeping with longstanding regulatory practice by examining several features of the traditional disclosure regime and the new Proposal. I will focus my analysis on arguments I’ve developed in prior research, certain other less-known arguments, and the particular aspects of the new Proposal. This piece is not intended to be comprehensive, and I want to note that the broader issue of ESG disclosure has generated extensive debate and much insightful analysis. As always, I welcome comments and amendments via email.

Shareholders, Stakeholders, and Expert Groups

The SEC’s Climate Disclosure Proposal immediately prompts the well-worn question: Is this disclosure intended for shareholders or for stakeholders? But posing this as a binary choice automatically shifts the terms of the debate in favor of opponents of climate-related disclosure, regardless of the actual content of the Proposal. Since climate change has society-wide implications, information about it will inevitably resonate beyond the boundaries of the disclosing firm and the capital markets, even when the focus is on financially-material disclosure relying on investor- and issuer-generated disclosure frameworks (as is the case here). The social resonance of climate-related disclosure can drown out its clear-cut financial relevance, render any proposed disclosure rule suspect, and lead to a situation that, when we stop and think about it, is quite illogical: A subject matter’s relevance to one audience (stakeholders) is used as an argument to cancel out the well-established relevance of that same subject matter to another audience (investors). This is a general vulnerability that applies not just to climate-related disclosure, but to other ESG disclosure as well. It is important to understand it and de-bias policymaking accordingly.

Commissioner Peirce’s dissenting statement deftly zeroes in on this vulnerability by asserting that the Proposal “tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies” and “forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.” Reading this, one would think that the Proposal was written by the Sierra Club and the National Resources Defense Council—or by a D.C. bureaucrat, who, in Peirce’s telling, is both clueless and corruptible. Yet, nothing could be further from the truth. 

The SEC’s Proposal draws on technical frameworks for financially-material disclosure developed by expert groups such as the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol. Take the TCFD, for example: Its members include representatives of mainstream investors (including BlackRock and UBS Asset Management), banks (JP Morgan, Citibanamex), insurance companies (Aviva, Swiss Re, Axa), giant industrial firms (BHP, Eni, Tata Steel, Unilever), rating agencies (Moody’s, S&P), accounting firms (Deloitte, E&Y), and others. Its secretariat is headed by a leader in the financial industry and capital markets, Mary Schapiro, who holds the unique distinction of having served as Chair of the SEC, Chair of the CFTC, and CEO of FINRA. And, for better or worse, no environmental NGOs or stakeholder organizations are represented on the TCFD. As its name suggests, the TCFD’s focus is on financial disclosures of the kind that investors require and use. The TCFD has generated an impressive roster of supporters and official adopters in just over six years, and, importantly, each of the “big three” (BlackRock, State Street, and Vanguard) has endorsed the TCFD framework.

Commissioner Peirce rightly points out that the SEC does not have the depth of expertise on climate-related matters that other, specialized regulators have. Such expertise, however, is not necessary here since the SEC is not setting GHG emission limits, calculating carbon trading prices, drawing up climate transition plans, or setting climate resilience standards for businesses. The SEC’s Proposal is limited to disclosure—and only disclosure—on a technical topic, and the SEC has decades-long experience handling disclosures on technical topics. For example, the SEC is not an energy regulator, but it drew up a specialized disclosure framework for oil and gas extraction activities in the 1970s (with help from expert groups, much like it has done here), and it has administered this framework successfully since then. As the composition of the economy has changed, the SEC has had to develop some expertise in cybersecurity disclosure, tech disclosure, and in other specialized areas. The Climate Disclosure Proposal does not veer away from this time-tested approach; the only difference is that it concerns a hot-button topic.

Statutory Authority and Regulatory Practice: Recalling Schedule A of the Securities Act

A central challenge to the Proposal is that it goes beyond the authority given to the SEC by Congress because the rules are too prescriptive, not rooted in “materiality” (more on which later), and because Congress has not directed the SEC to pursue rulemaking on this particular topic. A fair amount of debate has focused on what it means for the SEC to act as “necessary or appropriate in the public interest or for the protection of investors”—language that has been part of the securities laws since they were passed in the 1930s but that has not been tested in court.

Continue Reading The SEC’s Climate Disclosure Proposal: Critiquing the Critics

Not long ago, the SEC filed an enforcement action against robo-advisor Wahed Invest.  Wahed Invest assured clients that it only selected investments that were compliant with a Shari’ah law.  In fact, according to the SEC, in addition to many other fraudulent practices (it claimed to have funds it didn’t have; it claimed to rebalance and didn’t), it also failed to adopt policies and procedures to assure Shari’ah compliance.  As the SEC put it:

While Wahed Invest advertised its adherence to Shari’ah compliant investing, Wahed Invest failed to adopt and implement written policies and procedures reasonably designed to address its Shari’ah advisory decision-making processes and compliance reviews and oversight.

On the Wahed Invest Website, in its marketing materials, and in interviews, Wahed Invest extensively discussed the importance of its income purification process. For example, the Wahed Invest Website stated that Wahed Invest “go[es] the extra mile to ensure your wealth is pure” by creating a “unique annual purification report” for each robo-advisory client, which were provided to clients.

Despite these representations to clients and prospective clients, Wahed Invest had no written policies and procedures addressing how it would assure Shari’ah compliance on an ongoing basis or how it would calculate and report the purification of unpure income. Wahed Invest also failed to adopt policies and procedures to ensure Wahed obtained reasonable support for its Shari’ah-related marketing claims.

I am unaware of any other enforcement action by the SEC based on nonfinancial information provided to investors.  I.e., there is no argument that the investors’ interest in Shari’ah compliant securities was traceable to any financial motive or expectation that Shari’ah investments would perform better; it arose because of investors’ religious preferences.  I suppose in the long history of the securities laws and creative forms of fraud there must be other examples of enforcement actions like this, but I personally don’t know what they are.

Why am I mentioning this now?

Because on Monday, the SEC dropped 500-odd pages of proposed rules regarding climate change disclosures.  And though (obviously aware of the likelihood of litigation), the release is chock full of references to the financial/business impacts of climate change, there is also this nugget:

several large institutional investors and financial institutions, which collectively have trillions of dollars in assets under management, have formed initiatives and made commitments to achieve a net-zero economy by 2050, with interim targets set for 2030.  These initiatives further support the notion that investors currently need and use GHG emissions data to make informed investment decisions. These investors and financial institutions are working to reduce the GHG emissions of companies in their portfolios or of their counterparties and need GHG emissions data to evaluate the progress made regarding their net-zero commitments and to assess any associated potential asset devaluation or loan default risks. A company’s GHG emissions footprint also may be relevant to investment or voting decisions because it could impact the company’s access to financing or signal potential changes in its financial planning as governments, financial institutions, and other investors make demands to reduce GHG emissions

Notice that especially in the first part of the paragraph, the SEC appears to be taking into account the constraints of institutional investors to achieve their own climate-related goals (help achieve a net-zero economy), which may or may not be strictly about those investors’ ability to maximize their financial returns for investors.   I mean, it’s hard to articulate – climate change is so disastrous that it obviously will have economic impacts, and so at a very high level any climate change regulation is investment regulation – but in more concrete terms, the SEC seems to be recognizing these investors’ own contributions to transitioning to a net-zero economy as investment goals.

I’m pointing this out because the idea that the SEC should respect investors’ nonfinancial tastes – not merely when prohibiting lies, as in Wahed Invest, but in required disclosures – is contestable.  At the same time, though, some institutional investors may operate under regulatory mandates – including mandates from other countries – to work to achieve climate-related goals, and there would be something perverse about the SEC ignoring that mandate when determining the kind of information investors need.

So.  I have no doubt these issues will be hashed out in great detail when the lawsuits begin, and maybe by then I’ll have finished reading all 500-odd pages.

Join me in sunny Miami on April 26 for this in-person conference featuring outside counsel, inhouse practitioners, and academics. 

Panel topics include:

Change Management: The Legal Department of the Future –  More and more, in-house legal departments are employing new hybrid and remote work models, incorporating artificial intelligence and technology in their workflows, and restructuring and absorbing new teams after mergers, acquisitions, and divestitures. This panel discussion will focus on how the in-house legal department can be a champion in leading successful developmental and transformational change by implementing change management best practices to be effective and efficient, remaining client-focused, and being a trusted business advisor.

Remote Work:  Accelerated Adoption and Related Challenges – Which option would you choose: on-site, hybrid, or virtual? We will discuss the pros and cons of remote work arrangements, including the challenges of implementing a remote work policy in Latin America where the legal framework is a complex patchwork of requirements, as well as the strategies for creating culture and building a team in a remote work environment.

Counseling the Board of Directors (the panel I’m on)-  This panel will focus on issues that arise when counseling the board of directors and address important topics, including governance, ethics, fiduciary duties, director liability, best practices (diversity and environmental, social, and governance (ESG)), privileged insurance, and D&O insurance all in the context of private and public companies operating in the United States and Latin America.

Supply Chain: Challenges and Opportunities– Lessons learned from recent disruptions in global supply chains will shape crossborder business in the coming years. Our panel will discuss short- and long-term challenges and opportunities in supply chain management and logistics, as well as practical strategies for using technology, contractual protections, and risk-transfer solutions to overcome future supply-chain challenges.

What Is Your Company’s ESG Score? This panel will discuss the origins of climate change management, sustainability and how to operationalize it at your company, as well as how to transition to a low-carbon economy— including standards and disclosures. Panelists will also discuss the importance of implementing mechanisms to adopt a company’s ESG score as an ethical obligation to company commitments and as a governance imperative.

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If you make it down to Miami, I promise to buy you a mojito or cafecito. And don’t worry, hurricane season doesn’t start until June.