Last Friday, SEC Commissioner Hester Peirce issued a statement titled “Rat Farms and Rule Comments.” Yes, you read that right. It is a short read that one can interpret a few ways, but here is my take on it: it is a reminder that SEC rulemaking follows an established and defined process, and it takes time for that process to run its course. The more complicated and controversial a matter is, the longer the process requires. And when the topic is outside of those that have traditionally been covered by the SEC’s “investor protection” mission, even more time is needed.
Environmental and social matters (the “E” and “S” in ESG) – being technical topics beyond traditional financial disclosure – are examples of this. I remember the conflict minerals rules being proposed in December 2010 and issued as final in August 2012. The Commission even held a “Roundtable” – a day of expert testimony on the proposal (I was one of the expert panelists that day) – in October 2011. Commissioner Peirce points out that:
“[A] comment period … should generally be at least 60 days. For complicated rulemakings or at times when we have many rulemakings outstanding simultaneously, 90-day comment periods are likely more appropriate.”
“The notice and comment process is intended to be a dialogue” that “affords the commenting public sufficient time both to review and analyze proposals thoroughly and to formulate fully articulated opinions and suggestions.” One of the benefits of this dialog is to prevent or minimize “unintended consequences [that] sometimes overwhelm the rules’ worthy objectives.”
Among other current Commission initiatives, Commissioner Peirce is not a supporter of SEC wading into the ESG/climate pool. She wasn’t a fan of IFRS doing so either. In terms of what she sees as potential unintended consequences, she offered a preview back in July. Regardless, she respects the rulemaking process.
SEC Chair Gary Gensler has continued to signal that a climate disclosure proposal is in the works for public companies. Even if a proposal is issued in the first quarter of 2022, as some are predicting, that does not mean that companies will immediately have to start providing new information. Many E & S practitioners are accustomed to working with company policies, industry standards or other forms of voluntary ESG frameworks, and have less experience with legal requirements or governmental rule making processes. Some may believe that because ESG/climate standards or laws have been issued by other countries or international organizations, that should help speed the process for the SEC and Staff.
Whether the proposed rule adopts an existing international standard wholly by reference or is totally new and written from a clean piece of paper, the U.S. rulemaking process must still be followed. I think everyone expects a deluge of public comments on the proposal, which will extend the date of a final rule issuance even further, and then there may be an additional effective period that is even further down the road. I wouldn’t be surprised if the final takes 9-12 months to publish with another 6-8 months before it becomes effective. If the rules are challenged in court, those proceedings will delay things even further.
In my opinion, Commissioner Peirce is recapping SEC’s rulemaking framework to – among other things – remind everyone of the importance of the feedback process for proposed rulemaking, which applies to several open initiatives. Her statement may also help manage timing expectations concerning a final climate disclosure rule.
