As part of the SEC Division of Corporation Finance’s focus on climate-related disclosure in public company filings, and as a follow up to guidance on this topic issued in 2010, the Division posted an illustrative letter containing sample comments that the Division may issue to companies regarding their climate-related disclosure or the absence of such disclosure. These sample comments impact several sections of company filings, including most significantly management’s discussion and analysis of financial condition and results of operations (MD&A):

General

1. We note that you provided more expansive disclosure in your corporate social responsibility report (CSR report) than you provided in your SEC filings.  Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.

Risk Factors

2. Disclose the material effects of transition risks related to climate change that may affect your business, financial condition, and results of operations, such as policy and regulatory changes that could impose operational and compliance burdens, market trends that may alter business opportunities, credit risks, or technological changes.
3. Disclose any material litigation risks related to climate change and explain the potential impact to the company.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

4. There have been significant developments in federal and state legislation and regulation and international accords regarding climate change that you have not discussed in your filing. Please revise your disclosure to identify material pending or existing climate change-related legislation, regulations, and international accords and describe any material effect on your business, financial condition, and results of operations.
5. Revise your disclosure to identify any material past and/or future capital expenditures for climate-related projects. If material, please quantify these expenditures.
6. To the extent material, discuss the indirect consequences of climate-related regulation or business trends, such as the following:
   • decreased demand for goods or services that produce significant greenhouse gas emissions or are related to carbon-based energy sources;
   • increased demand for goods that result in lower emissions than competing products;
   • increased competition to develop innovative new products that result in lower emissions;
   • increased demand for generation and transmission of energy from alternative energy sources; and
   • any anticipated reputational risks resulting from operations or products that produce material greenhouse gas emissions.
7. If material, discuss the physical effects of climate change on your operations and results. This disclosure may include the following:
   • severity of weather, such as floods, hurricanes, sea levels, arability of farmland, extreme fires, and water availability and quality;
   • quantification of material weather-related damages to your property or operations;
   • potential for indirect weather-related impacts that have affected or may affect your major customers or suppliers;
   • decreased agricultural production capacity in areas affected by drought or other weather-related changes; and
   • any weather-related impacts on the cost or availability of insurance.
8. Quantify any material increased compliance costs related to climate change.
9. If material, provide disclosure about your purchase or sale of carbon credits or offsets and any material effects on your business, financial condition, and results of operations.

The full letter may be found here.

Yesterday, the SEC announced that in fiscal year 2018 the fees that public companies and other issuers pay to register their securities with the Commission will be set at $124.50 per million dollars. This is an increase from the current rate of $115.90/million. The new higher rate goes into effect on October 1, 2017.

In March 2016, the Securities and Exchange Commission announced that AVEO Pharmaceuticals, Inc., a Massachusetts-based biopharmaceutical company, agreed, without admitting or denying the allegations, to pay $4 million to settle fraud charges alleging that AVEO and three of its officers misled investors regarding their dealings with the U.S. Food and Drug Administration. Companies and their officers can be held liable for any untrue statement of a material fact or omission to state a material fact required or necessary to make a statement not misleading.  The AVEO case serves as a cautionary reminder that when a company is telling investors about its dealings with regulators, it must be accurate and tell the whole story.

AVEO is focused on developing and commercializing cancer drugs. To date, none of its drugs have been brought to market. However, in 2012, AVEO had a drug called Tivozanib relatively far along in the FDA approval process. Tivozanib was developed with the intention of treating kidney cancer and had already undergone a clinical trial in Europe.

With that trial completed, AVEO was prepared to move forward in seeking FDA approval for Tivozanib by submitting a New Drug Application (NDA). In preparation for filing its NDA, AVEO had an initial meeting with the FDA in May 2012. At this meeting, the FDA expressed concerns about the data from Tivozanib’s clinical trial in Europe. Particularly, the FDA was concerned that although Tivozanib appeared to slow cancer’s progression in patients, the lifespan of patients taking the drug was shorter than those taking another drug already on the market. The FDA expressed its belief that a second clinical trial would likely be necessary before it could approve Tivozanib.

In the month that followed AVEO’s meeting with the FDA, AVEO conducted additional analyses of the data from the clinical trial in Europe. AVEO estimated that a second trial would cost approximately $83 million and last roughly 3 years. AVEO’s officers believed that they could explain the data that concerned the FDA without conducting a second clinical trial and avoid undue delay and expense. Ultimately, AVEO decided against conducting the second clinical trial.

In August 2012, AVEO issued a press release discussing AVEO’s progress in submitting an NDA for Tivozanib. In this press release, AVEO mentioned that the FDA was concerned about the lifespan of patients taking Tivozanib, but failed to mention that the FDA had recommended a second study be conducted or that AVEO had considered conducting such a study.

That same day, AVEO held an earnings call with investors and analysts where it discussed Tivozanib’s progress. During the call, several analysts asked officers of AVEO about the meeting with the FDA and whether the FDA had made any recommendations for getting Tivozanib approved. The officers participating in the call did not discuss the second trial recommended by the FDA, but instead said that they “can’t speculate on what the agency might want [AVEO] to do in the future.”

AVEO continued to believe that it could explain the shorter lifespans of the patients in the clinical study in Europe through certain of its analyses. Moreover, Tivozanib appeared effective at slowing the progression of cancer. Accordingly, AVEO submitted its NDA for Tivozanib in September 2012 without conducting a second clinical trial.

In January 2013, AVEO raised $53 million in a public equity offering. Approximately three months later, in April 2013, the FDA publicly disclosed its prior recommendation to AVEO to conduct a second trial for Tivozanib. That same day, AVEO’s stock price dropped 31% and roughly one month later, the FDA denied approval of Tivozanib.

Fast forward three years later: in March 2016, the SEC filed a complaint charging AVEO and three former officers with fraud for failing to disclose to investors the FDA’s recommendation that a second clinical trial be conducted. The SEC also announced that AVEO agreed to pay $4 million to settle these charges without admitting or denying the allegations in the complaint. The charges against the former officers continue. In a press release, Paul G. Levenson, Director of the SEC’s Boston Regional Office stated, “Companies must be forthcoming about their communications with regulators so investors can make informed investment decisions while knowing what challenges may lay ahead.”

Considering what to disclose – and what not to disclose – presents some of the most difficult decisions for companies. What’s “material” lacks a bright line and is instead based on decades old case law about what’s important to reasonable investors. Companies should always be careful in choosing how and when they disclose to investors communications with regulatory bodies and ensure that they are telling the whole story. Companies and their officers should strive to accurately represent their dealings with regulators, so as not to mislead investors since they can be held liable for material misstatements or omissions.

The SEC has adopted a final rule under the Dodd-Frank Act requiring that public companies present the ratio of their chief executive officer’s total annual compensation to their median worker’s compensation. This rule comes nearly two years after being proposed, in a divided vote on an issue that has also divided public opinion.

Click below to read the complete Client Advisory, co-authored by Sullivan attorneys Howard Berkenblit and Natalie Lederman.