The Financial Accounting Standards Board (the “FASB”) recently completed an update to its Conceptual Framework for Financial Reporting (the “Framework”).  The Framework is a body of interrelated objectives and fundamentals that provides the FASB with guidance as it sets standards for financial accounting and reporting. The update marks the end of a significant project that began with the first concepts statement in 1978 and culminates with the issuance of a new chapter to the FASB’s Framework in July 2024.  The new Chapter 6, Measurement, provides objectives and concepts for FASB to consider when choosing a measurement system for an asset or a liability recognized in general purpose financial statements. It describes:

  1. Two relevant and representationally faithful measurement systems: the entry price system and the exit price system, and
  2. Considerations when selecting a measurement system.

In a statement released on August 12, 2024, Paul Munter, the Chief Accountant for the Securities and Exchange Commission’s Office of the Chief Accountant, emphasized the importance of the updated Framework in shaping FASB’s standard-setting activities to guide the FASB in developing improved accounting principles to enhance the accuracy and effectiveness of financial reporting and the protection of investors in the public interest.

The Chief Accountant underscored that the updated Framework will be a critically important component of the FASB’s standard-setting agenda, including by assisting the FASB in determining which projects to prioritize and how to scope and evaluate those projects. The Framework will assist the FASB in deciding whether to focus on disclosure requirements or address more fundamental issues related to the recognition and measurement of financial elements. By assessing whether each project is consistent with the principles laid out in the Framework, the FASB can develop standards that result in financial reporting that best serves the needs of investors and protects the public interest.

The Chief Accountant also highlighted that the updated Framework offers significant benefits to stakeholders by promoting transparency and understanding in the standard-setting process. The FASB’s application of the updated Framework in public deliberations will allow it to more clearly articulate the reasoning behind its decisions, facilitating greater understanding and feedback from stakeholders.

Given the importance of quality in financial reporting for the strength of the capital markets, the completion of the updated Framework underscores the FASB’s focus and commitment to developing and maintaining high-quality accounting standards that meet investor needs and serve the public interest.

Mayer Brown is a sponsor of this year’s Northwestern Pritzker School of Law’s Ray Garrett Jr. Corporate and Securities Law Institute. Delivering a timely analysis of critical corporate and securities law issues and developments confronting public corporations, the Garrett Institute provides both private practitioners and corporate counsel an opportunity to hear from SEC officials and Delaware judges and network with the corporate and securities law community. Mayer Brown partner Bill Kucera will participate as Session Chair on the “Rights and Duties of Controlling Shareholders: Recent Developments” panel.

For more information, visit the conference website. For Mayer Brown clients and friends, we are offering courtesy registration for the in-person and on-demand sessions.  Reach out to your Mayer Brown contact or ckaplan@mayerbrown.com.   

Several federal financial regulators (the “Agencies”) have approved and published an interagency proposal to establish data standards that promote interoperability of financial regulatory data across these agencies (the “Proposal”). The Agencies issued the Proposal as required by the Financial Data Transparency Act of 2022 (FDTA) and have requested comment on their jointly established data standards.

Comments on the Proposal are due 60 days after it is published in the Federal Register, which is expected shortly. In this Legal Update, we provide background regarding the FDTA and summarize key aspects of the Proposal. Continue reading.

On July 15, 2024, Governor Gavin Newsom proposed amendments that would, among other things, delay initial reporting deadlines for two of California’s recently enacted climate-related disclosure laws by two years.

Governor Newsom signed the two bills, Climate Corporate Data Accountability Act (California Senate Bill 253 (SB-253)), relating to greenhouse gas (GHG) emissions disclosures, and the Climate-Related Financial Risk Act (California Senate Bill 261 (SB-261)), relating to climate-related financial risk disclosures, into law in October 2023.  See our Legal Update discussing the two bills.  The first-of-their-kind state laws apply to all US companies doing business in California that meet certain annual revenue thresholds: more than $1 billion for SB-253 and more than $500 million for SB-261.  The California laws go beyond the SEC’s final climate-related disclosure rules, which have been stayed due to legal challenges.  See our blog post discussing the SEC’s stay. The California laws are similarly subject to challenge, but have not yet been stayed.  See our Legal Update discussing this challenge.

Under Governor Newsom’s proposal, companies subject to SB-253 would not have to disclose Scope 1 and Scope 2 GHG emissions until 2028, and Scope 3 GHG emissions until 2029.  The proposal would not require companies subject to SB-261 to report climate-related financial risks until 2028.  Like EU climate change disclosure rules, California will require disclosure of Scope 3 GHG emissions, which are defined as emissions that result from activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain, according to the US Environmental Protection Agency. While initially proposed by the SEC, Scope 3 GHG emissions disclosure requirements were removed from the SEC’s final climate-related disclosure rule.

At the time of signing SB-253 into law, Governor Newsom noted, in his Governor’s Message, his concerns about the bill, saying “The implementation deadlines in this bill are likely infeasible, and the reporting protocol specified could result in inconsistent reporting across businesses subject to the measure.”

Learn more about the different climate change-related disclosure requirements across the globe.

The Latest in the Saga of the SEC’s Regulation of Proxy Advisory Firms

On June 26, 2024, the Fifth Circuit Court of Appeals vacated a significant part of a 2022 Securities and Exchange Commission (SEC) rulemaking, which itself was a reversal of the agency’s 2020 amendments to the rules relating to proxy voting advice produced and disseminated by proxy advisory firms. This is the latest chapter in the long, and as yet unfinished, story of SEC regulation of proxy advisory firms.

Continue reading this Legal Update.

Webinar | July 22, 2024
1:00 p.m. – 2:00 p.m. EDT
Register here.

Disclosures by public companies about their human capital management continue to be a focus of investors, regulators, and other stakeholders. In 2020, the SEC adopted a requirement for registrants to discuss their human capital resources to the extent material to an understanding of the registrant’s business taken as a whole. The principles-based nature of this requirement has led to some variation in disclosures, which has in turn led to calls for more prescriptive requirements. In addition, there is continued interest in disclosures about corporate board diversity, particularly in light of NASDAQ’s adoption of a new diversity listing rule and similar state legislation.

During this session expert faculty will discuss:

  • The SEC’s human capital and diversity disclosure requirements
  • Trends in public companies’ human capital management disclosures since the 2020 amendments
  • Possible amendments to the SEC’s human capital management disclosure requirements
  • NASDAQ board diversity listing rule, similar state legislation and related litigation
  • Key takeaways and practical considerations

Nasdaq’s 2024 Governance Pulse Survey is now live. The Survey gathers insights from board members, CEOs, general counsel, corporate secretaries, and other key leaders on governance practices and board priorities. The data and findings will be published in Nasdaq’s Global Governance Pulse Report this fall and featured and discussed at Nasdaq’s Global Governance Pulse Forum on October 28, 2024. See last year’s Global Governance Pulse Report and Global Governance Pulse Forum. Survey participants will receive an advance copy of Nasdaq’s 2024 Report of data and key findings and an invitation to the Forum.

Take the survey here.

In recent public comments, SEC Commissioner Hester Peirce shared her personal concerns regarding the “fuzziness around what ESG means.” The Commissioner noted that often market participants emphasize the importance of ESG; however, they may not articulate their particular areas of focus. She notes that ESG may encompass a broad range of issues, including, but not limited to, climate, biodiversity, clean water, oceans, employee well-being, labor rights, community engagement, the circular economy, etc. In part, in the Commissioner’s view, the elasticity of the term has contributed to controversy—in that different groups may embrace different causes all under the same banner and their perceptions regarding these issues, and the degree of importance they attribute to these issues, may change over time. The Commissioner notes that a number of issues under the ESG rubric have historically been associated with considerations that investors factored into their assessments of the long-term value of companies before there was a label for them. In turn, companies considered environmental and social factors that impacted their returns and that they considered material to their long-term financial value. The Commissioner posits that there might be less controversy if ESG-related issues were evaluated based on an assessment of their correlation to long-term financial value for the particular company in question.

In her remarks, the Commissioner also questions ESG-related investment objectives and whether there may be conflicts of interest that may impair the imperative to focus on maximizing financial returns. She also raises concerns regarding causality and the extent to which causal connections between ESG factors and financial returns are supportable. For many of these reasons, the Commissioner expresses the view that asset managers should state clearly whether and how they will invest in, vote in, and engage with portfolio companies on behalf of clients.

The Commissioner observes that, in her view, companies sometimes target ESG objectives that may be inconsistent with financial returns and in so doing point to broader stakeholder interests. These more highly discretionary factors and ESG metrics, the Commissioner notes, weaken board accountability and management accountability. The Commissioner also commented at length regarding the decision to collect, track, analyze, and report on ESG data, including the costs associated with building the information technology and other systems necessary for appropriate disclosure controls and procedures and internal control over financial reporting. This resource allocation may, in itself, affect decisionmaking and limit corporate flexibility.

Perhaps given that the Commissioner was speaking in Poland, she addressed the Corporate Sustainability Reporting Directive, or CSRD, which affects European companies and, to some extent, U.S. companies. The Commissioner also cited the European Taxonomy Regulation and the Corporate Sustainability Due Diligence Directive. The Commissioner noted that requiring the reporting of granular ESG-related metrics may come to have an effect on corporate and capital resource allocation. She notes that regulator-mandated ESG metrics may reflect a particular view of what should be important to decision-making, which may be divorced from the views of the real economy and retail investors. To that end, the Commissioner emphasizes the importance of principles-based disclosures based on financial materiality that allow registrants to address the ESG items that are important to the registrants’ businesses. See the full text of Commissioner Peirce’s remarks.

In June 2024, the Center for Audit Control (the “CAQ”) released its report entitled “Financial Restatement Trends in the United States: 2013 – 2022,” announcing the findings from its study examining trends and characteristics of public company restatement events that took place between January 1, 2013 and December 31, 2022.  For purposes of the study, “restatements” are defined as corrections of errors in public company financial statements filed with the U.S. Securities and Exchange Commission (“SEC”).  The population of restatements can be divided into two kinds: (1) “Big R” restatements, which involve restatements of previously filed financial statements that have been deemed unreliable by the company or its auditors and are subject to mandatory disclosure under Item 4.02 of Form 8-K; and (2) “little r” restatements, which involve restatements to correct immaterial errors to prior period financial statements that, if uncorrected, would cause the current period financial statements to be materially misstated.  Of the 5,793 restatements identified by CAQ from 2013 to 2022, 1,352 were “Big R” restatements and 4,441 were “little r” restatements.

Read more about the key findings from the CAQ’s study.

In August 2022, the Delaware General Assembly amended the Delaware General Corporation Law to allow corporations to adopt charter provisions exculpating certain officers from personal liability for monetary damages for breaches of the duty of care. Since that time, observers have considered to what extent Delaware public company boards would propose officer exculpation amendments (“OEAs”) to their stockholders. In this Legal Update, we examine the latest data with respect to Delaware public companies proposing and adopting OEAs, recent judicial developments relating to OEAs, and the results of OEA proposals in light of proxy advisor recommendations. Read our Legal Update.