Securities Regulation Daily Wrap Up, STRATEGIC PERSPECTIVES—Securities Regulation Daily’s top 10 developments for January 2024, (Feb 6, 2024)

By Mark S. Nelson, J.D.

In case you missed the in-depth coverage in the January issues of Securities Regulation Daily, we have provided a recap of the most notable stories.

Welcome to the latest edition of Securities Regulation Daily’s “Top 10” covering key developments in January 2024. Despite the cold and snow that gripped much of the U.S. last month, many securities regulation topics remained hot going into the start of 2024, including environmental, social, and governance (ESG) issues, artificial intelligence (AI), and securities enforcement. Supreme Court cases argued in January also have the potential to further upend administrative law and change the relationship between Congress, the executive branch, and the courts and, by extension, how companies are regulated across many practice areas.

That said, January also had a few honorable mention stories and late-breaking updates that may suggest broader themes and trends to watch for in the February Top 10 list and throughout the remainder of the year. In many instances, these were stories that set the stage and provide context for the biggest stories of January 2024, including:

• ESG—Exxon Mobil Corporation’s plan to sue a shareholder directly in federal court rather than wait for SEC staff to potentially determine that a proposal on climate risk could not be excluded may have backfired when the proponent withdrew the proposal after Exxon filed its lawsuit, although Exxon responded that it has concerns about the proposal being re-proposed in a slightly different form and that the proponents’ withdrawal does not amount to a concession that the proposal is excludable so Exxon wants the case to continue through at least the motion to dismiss stage so the court can address the proponents’ likely reply that the case is moot (See below). That was not the only time someone backed away from an ESG initiative: NYSE withdrew a proposal to list natural asset companies, a result Republican state attorneys general had sought despite support for the proposal from other quarters. Elsewhere in the ESG world, the International Ethics Standards Board for Accountants (IESBA) proposed standards to reduce the incidence of greenwashing.

• Artificial intelligence—Justice Elena Kagan raised the question of how Congress and federal agencies might deal with AI if the Chevron doctrine is overturned (See below). Meanwhile, the CFTC asked for comments on the use of AI in commodities markets (See below). These stories were but two of many that addressed AI last month. For example, Erik Gerding, Director of the SEC’s Division of Corporation Finance, told an audience at Northwestern University Pritzker School of Law’s annual Securities Regulation Institute that companies are ultimately responsible for their SEC filings and not to “go blame Sam Altman [CEO of OpenAI] if your 8-K is full of crazy talk.” SEC staff opined that Apple and Disney cannot exclude shareholder proposals on AI transparency. The House Financial Services Committee announced the formation of an AI working group. And Michael Cohen’s lawyers tried to explain why Cohen cited AI-generated, but false, cases in a court filing.

• Enforcement—The director of the SEC’s Enforcement Division offered views on top enforcement priorities at a securities conference in Coronado, California (See below). Crypto cases last month produced mixed results, with my colleague Anne Sherry reporting that, in a federal case in Utah, “the SEC wrote that it admits and regrets the error [making false statements to get a TRO] but that sanctions are not warranted because its staff did not act in bad faith and its actions fall short of the Rule 11 misconduct standard.” My colleague Lene Powell reported that the SEC obtained a big win in another crypto case involving Terraform Labs Pte Ltd., in which she said the court “held as a matter of law that there was no genuine dispute that crypto tokens issued by Terraform were securities and investment contracts under the Howey test.” In other enforcement matters, J.P. Morgan Securities LLC settled charges that its confidentiality agreements with clients violated whistleblower protection rules, SAP SE settled FCPA charges for $220 million, a court upheld verdicts in the Commonwealth Edison Company FCPA case, and Robinhood Financial LLC paid $7.5 million to Massachusetts regulators for violations related to its digital engagement and cyber practices. And last but not least, the Commission denied a rulemaking petition and, thus, retained its no admit/no deny policy for settling enforcement matters.

• Looking back, looking ahead—Just four more items to mull as 2024 gets under way: (1) my colleague John Atwood published a Strategic Perspectives story packed with data noting that 2023 was the weakest year for IPOs since 2016; (2) SEC Chair Gary Gensler reminded a global audience that the U.S. will switch to a T+1 settlement cycle over this year’s Memorial Day weekend; (3) SEC Commissioner Mark Uyeda urged the agency to expand who can be an accredited investor; and (4) NERA observed the first increase in securities class action filings in four years, which it said was largely driven by cases involving banks and other financial institutions.

And finally, now that you have seen a few stories worthy of honorable mention and a few trends to follow in the weeks and months ahead, here are the ten biggest stories of January 2024:

1. AI NEWS

Relentless, Loper, and Chevron through the lens of artificial intelligence

The Supreme Court heard oral argument today in two cases that pose the question of whether the Court’s Chevron doctrine should be overruled. The Court’s opinion in Chevron set forth the approach federal courts must follow in cases in which an executive branch agency interprets ambiguities in the agency’s governing statute. Chevron hasbeen controversial because of the deference courts must accord to a federal agency under a two-step test: first, is the statute ambiguous, and second, if so, is the agency’s interpretation of the statute permissible or reasonable. It is widely expected that a majority of the justices could strike down Chevron, but there are other, narrower outcomes that remain possible in both cases currently before the justices. See our full coverage.

2. FRAUD AND MANIPULATION

Supreme Court mulls whether omission of “known trends and uncertainties” is securities fraud

The U.S. Supreme Court heard oral argument on whether a failure to disclose “known trends and uncertainties” under Item 303 of Regulation S-K can give rise to a private securities fraud action. Justices explored whether Item 303 omissions require a misleading statement and if private rights of action are authorized in this context. See our full coverage.

3. SHAREHOLDER ACTIVISM NEWS

ExxonMobil goes to court to exclude GHG proposal

Unusually, a company is asking a Texas district court for a declaratory judgment allowing it to exclude a shareholder proposal, rather than proceeding through the SEC’s no-action process. Several activist investors submitted a proposal that would have ExxonMobil come up with a more aggressive timetable for reducing greenhouse gas emissions. SEC staff have previously denied no-action requests seeking to exclude similar proposals. See our full coverage.

4. INITIAL PUBLIC OFFERINGS

SEC approves final rules that expand SPAC IPO disclosure requirements

The SEC has adopted final rules, by a 3-to-2 vote, that seek to strengthen investor protections in initial public offerings by special purpose acquisition companies, known as SPACs, and in subsequent business transactions between SPACs and target companies they seek to merge with, commonly called de-SPAC transactions. See our full coverage.

5. BLOCKCHAIN

SEC approves bitcoin exchange-traded products (ETPs)

Ending months of speculation, the SEC issued an omnibus order approving the listing of 11 exchange-traded products (ETPs) based on bitcoin. The approvals are the first for bitcoin ETPs, meeting pent-up demand after the SEC previously denied several listing applications. The SEC appears to have reconsidered its approach to bitcoin ETPs after the

D.C. Circuit vacated the SEC’s rejection of an application by Grayscale Investments, finding the SEC did not adequately explain its reasoning. See our full coverage.

6. ESG NEWS

U.S. Chamber takes on California’s twin climate disclosure laws

In October 2023, California Governor Gavin Newsom signed into law SB 253 and SB 261 to require reporting of greenhouse gas (GHG) emissions, including Scope 3 emissions, by companies doing business in California that meet separate revenue thresholds contained in each law. Those laws are now being challenged in federal court by the U.S. Chamber of Commerce and its members in a lawsuit brought against the California Air Resources Board (CARB) asserting that SB 253 and SB 261 violate the First Amendment, the Supremacy Clause, and the dormant commerce clause of the U.S. Constitution. The lawsuit does not allege any supplemental state-law-based claims. The Chamber of Commerce seeks a declaratory judgment that California’s climate laws are unconstitutional, injunctive relief, and attorney’s fees and costs. The case could serve as a preview of a future legal challenge if, and when, the SEC finalizes its own climate risk regulation, or it may help to inform the SEC’s widely expected efforts to harden its final regulation against such legal challenges. See our full coverage.

7. ESG NEWS

Could implementation of California’s twin climate laws be in jeopardy?

When California enacted twin climate disclosure bills last year that seemed to jump far ahead of what could become a scaled-back SEC climate risk disclosure regime that has faced numerous delays since it was proposed in March of 2022, some analysts began to question whether the SEC’s proposal may become obsolete before it was finalized.

Even SEC Chair Gary Gensler had suggested that the enactment of the California laws could require the SEC to recalibrate its economic baselines for its own climate regulation. This week, however, California Governor Gavin Newsom put forth a 2024-25 budget plan that the sponsor of one of California’s climate bills said could jeopardize implementation. That may rob California of the chance to quickly implement nation-leading climate change disclosure laws and could prompt renewed SEC efforts to further refine the economic impact of its proposed regulation before a final version is issued. See our full coverage.

8. EXECUTIVE COMPENSATION

Court rescinds Musk's $56 billion compensation package

Was Elon Musk overpaid? A Delaware Chancery judge took the side of a Tesla shareholder who said that he was. Tesla's directors awarded Musk a performance-based compensation plan with a $55.8 billion maximum value. In this case, the defendants had to prove the fairness of the largest potential compensation plan in the history of the public markets and failed to do so. The court ordered that the plan be rescinded after concluding that the company board was unable to show that the plan was fair, particularly in light of Musk's control over Tesla. See our full coverage.

9. ENFORCEMENT

SEC enforcement director gives thoughts on Division priorities

Strong enforcement is important to maintain confidence in financial institutions and markets, said SEC Director of Enforcement Gurbir Grewal. He gave his thoughts on Division actions and priorities over the past year, including on cybersecurity, whistleblowers, and internal controls. Grewal made his remarks at a panel of the 2024 Securities Regulation Institute hosted by Northwestern University Pritzker School of Law. The panel was moderated by Dixie Johnson, a partner in securities enforcement and investigations at King & Spaulding. See our full coverage.

10. AI NEWS

CFTC seeks input on AI uses and risks for regulated derivatives markets

The CFTC’s Divisions of Market Oversight, Clearing and Risk, Market Participants, and Data and the Office of Technology Innovation have issued a request for comment (RFC) on current and potential uses and risks of artificial intelligence (AI) in CFTC-regulated derivatives markets. The RFC seeks the public’s input on the definition of AI and its applications, including its use in trading, risk management, compliance, cybersecurity, recordkeeping, data processing and analytics, and customer interactions. See our full coverage.

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