My recent study compared what oil companies told two audiences—regulators and investors—about how new environmental rules would affect them. It showed that the companies told the two audiences two very different stories: companies warned the Environmental Protection Agency (EPA) that the rules would be unworkable but securities disclosures reassured investors that the rules would be manageable.
To give EPA industry’s honest view on whether rules are manageable, I suggested that companies should file excerpts from their securities disclosures with their comments.
But what if the comments to EPA are accurate—companies really are terrified about new regulations—and they’re just not telling their investors? After all, shareholder groups and proxy advisory firms have complained that energy companies are ignoring Securities and Exchange Commission (SEC) guidance on disclosing risks from climate regulation.
In a new post at Columbia Law School’s blog on corporations and capital markets, I explain how industry’s comments to regulators can be used to encourage companies to inform their investors of real risks that they face from regulation. Here’s the end of the post:
Investors should use company comments to identify risks that companies may be minimizing in their 10-K disclosures. And the SEC should insist that companies tell investors about any risks that they are stressing to regulators. …
In the meantime, corporate counsel should get ahead of regulators and investors by aligning comments and securities disclosures. When a company’s comments and 10-K disclosures are revealed to be inconsistent, it has put itself in a lose-lose situation. Regulators will discount the company’s pessimistic comments. But if a new rule does harm the company, investors will have evidence to support a Rule 10b-5 lawsuit. Although it is harder to sue a company for “soft” information or predictions about the future, in this case company comments would support an inference that the company did not even believe its own assurances. See Omnicare v. Laborers Dist. Council Constr. Ind. Pension Fund, 575 U.S. _ (2015) (slip op. at 6-9). And few companies would relish the prospect of having to prove in court that their dire warnings to EPA were entirely insincere.
Proactive companies could even bolster their credibility by voluntarily filing excerpts from their securities disclosures along with their comments. If they did so, regulators might be more inclined to take their concerns seriously in crafting final rules.
Thus, aligning corporate comments with corporate securities disclosures would not only improve the information available to regulators; it would also protect companies from liability and enhance industry’s credibility in notice-and-comment rulemaking.
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