The House Financial Services Committee voted on April 21, 2021, to advance bills to broaden corporate disclosure requirements on political spending, board diversity, and sustainability, among other environmental, social, and governance (ESG) measures.
The votes, which fell largely along party lines, represent an opening salvo for Democratic lawmakers looking to give direction to the SEC under new Chair Gary Gensler as the commission carves out a new path on ESG disclosures. Critics say current ESG requirements are insufficient to fully information investors on a wide array of subjects that include climate risk, human capital management, and how a company spends its money to influence elections.
The panel also voted 30-23 to approve its budget views and estimates document, which calls for budget-makers to set “robust” funding for the SEC for Fiscal 2022 and restates a host of Democratic policy recommendations for the commission. (See House Democrats to Urge ‘Robust’ Funding for the SEC in the April 2, 2021, edition of Accounting and Compliance Alert .
Republicans opposed the ESG bills as efforts to “name and shame” public companies without providing useful information to investors. Rep. Patrick McHenry of North Carolina, the panel’s top Republican, in opening remarks called out two specific bills: The Improving Corporate Governance Through Diversity Act and the ESG Disclosure Simplification Act.
“Neither one of these bills helps investors make better choices,” McHenry said. “Neither one of these bills will help everyday Americans save for retirement, help send their kids to college, or help them build a better life.”
The bills passed during the markup session include:
- H.R. 1277, the Improving Corporate Governance Through Diversity Act, to expand public company disclosures of board diversity. The measure, sponsored by Rep. Gregory Meeks, a New York Democrat, amends the Securities Exchange Act of 1934 to require public companies to disclose, in proxy statements and any information statement relating to the election of directors, data based on “voluntary self-identification” on the racial, ethnic, and gender composition of the board of directors, board nominees, and executive officers, among other information, including veteran status. The measure also directs the SEC to set up a Diversity Advisory Group that would “carry out a study on strategies that can be used to increase gender, racial, and ethnic diversity among the members of the board of directors of issuers,” and to issue a report to the commission and Congress within nine months of its creation, according to the bill text.Today, under Item 407(c)(2)(vi) of Regulation S-K, a publicly-traded company must disclose whether and how it considers diversity in identifying director nominees. The provision does not provide a definition of diversity. Critics of Item 407(c)(2)(vi) have spent years arguing the provision provides little useful information to investors and believe it should be broadened to include more information about corporate board diversity.The bill has the backing of the U.S. Chamber of Commerce. It passed the committee by voice vote.
- H.R. 1087, the Shareholder Political Transparency Act, would amend the Exchange Act to direct the SEC to issue rules requiring disclosure of expenditures for political activities in the preceding quarter, including a description of that expenditure, the date, the amount, and the name and party affiliation of the recipient. The reports must be made available over the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The bill is sponsored by Rep. Bill Foster, an Illinois Democrat.Also under the bill, SEC would issue rules requiring public companies to include in annual reports a summary and description of each political expenditure in the preceding year above $10,000, and a forecast of the political expenditures for the coming year.The bill comes as Democratic lawmakers are trying to scrub a longstanding budget rider preventing the SEC from implementing a corporate political spending disclosure rule under its own authority. Congress has for years slipped riders into Financial Services and General Government (FSGG) appropriations bills, which fund the SEC, prohibiting the agency from launching the rulemaking, to the protest of political spending transparency activists. They say the rule is sorely needed following the Supreme Court’s 5-4 decision in Citizens United v. Federal Election Commission in 2010, which lifted restrictions on independent political expenditures by corporations and unions.
The measure passed on a 28-23 vote.
- H.R. 1187, the ESG Disclosure Simplification Act, to set up a Sustainable Finance Advisory Committee at the SEC. The bill, introduced by Rep. Juan Vargas, a California Democrat, sets out that ESG metrics are material and requires their disclosure, with the SEC in charge of establishing those metrics using recommendations from the newly created advisory panel. Public companies would also need to disclose their views “on the link between ESG metrics and long-term business strategy,” among other disclosures.Under the bill, the Sustainable Finance Advisory Committee would be made up of no more than 20 members, with representation from experts on sustainable finance; operators of financial infrastructure; “entities that provide analysis, data, or methodologies that facilitate sustainable finance;” insurance companies, banks, pension funds, asset managers or credit unions; and other intermediaries in sustainable finance. Each SEC commissioner would select an equal number of committee members from the pool of applicants.The creation of the Sustainable Finance Advisory Committee has the backing of the U.S. Chamber of Commerce, which in a February letter suggested the SEC set up the panel to function “on the bipartisan basis of other advisory committees within the SEC,” such as the Investor Advisory Committee (IAC) and Small Business Capital Formation Advisory Committee. Both of those panels, the Chamber wrote, “created important opportunities for consideration of all viewpoints and market perspectives and have both produced reasoned and productive recommendations to the Commission.”
The measure passed on a 28-22 vote.
This article originally appeared in the April 23, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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