New Corp.Finance boss unlikely to slack off on controversy, rulemaking

There’s no way to say for certain how a change in leadership will change the way fund boards interact with the division responsible for the bulk of the SEC’s most-controversial recent rulemaking.

But an 18-page analysis the new director posted almost a year before the climate-risk disclosure rule was formally proposed could give some indication of the regulatory priorities of Erik Gerding, the former law professor who will take over as director of the Division of Corporation Finance following the Feb. 3 departure of Renee Jones, who has led the division since mid-2021.

Gerding posted his analysis in June, 2021, along with hundreds of others submitted in response to the request for public comment following the March, 2021 launch of the SEC’s Enforcement Task Force on Climate and ESG Issues in March of 2021.

Gerding was still a corporate and securities law professor at the University of Colorado Law School; he wouldn’t join the SEC to work directly on the language in new regulations for another three months. His opinion carried no more legal weight than any other public comment, but it demonstrate a lot of overlap between Gerding’s interpretation of the SEC’s climate rule as overcautious and the more aggressive rulemaking pace the Division of Corporation Finance set during late 2021 and 2022.

Gerding argued that opponents of climate-risk disclosure are wrong in claiming the SEC has no authority to regulate climate change; its mandate is to protect investor interests, so issues involving threats to the interests of investors, whether they come from climate change, cybersecurity or other potential sources, are fair game for SEC regulation.

He also suggested the SEC should think about extending its efforts at climate-risk regulation than it had in the past, rather than moving cautiously and pulling back in response to opposition to the move. Investors for whom climate-risk data is materially relevant in making investment decisions are likely to have trouble pricing climate risk accurately because the data they had or that the SEC planned to collect wasn’t complete enough to tell investors about the location of specific corporate assets that could be at risk from floods, hurricanes or other disasters.

In fact, if investors had access not only to detailed information about the location of an asset, but also information about the length of time the asset would be there or the time it would be under threat of climate-related disaster, the more likely they were to uncover “hidden correlations of risks” that would make the process even more valuable to them, according to portions of the paper highlighted in a Jan. 17 blog by  Cooley LLP attorney Cydney Posner.

Gerding also suggested the SEC should apply climate-disclosure rules to private companies as well as public, for example, to avoid the risk that “even the best-designed climate disclosures will have a deteriorated impact if the rules apply only to public companies and registered offerings while capital continues to migrate from public markets to private markets.”

The SEC should also push back against opponents suggesting that the SEC should mitigate the cost and effort of climate-risk data analysis by doing things like relaxing the risk-analysis criteria, raising the cost threshold so only the most expensive potential risks would be considered, or mixing climate-risk analysis with the possibility the companies might be sued for reasons that are not related to risk from climate change.

Changes like those, which are still mentioned in debates over the specifics of the rule proposed in early 2022, would make the risk analysis less precise and result in standards that are vague and risk-evaluation data that may be inaccurate or simply difficult to interpret in ways that allow it to be used as a broadly useful evaluation of risk from climate-related disasters.

Using less precise, less objective “principles-based” analysis would be fine, he wrote, if those methods were added to more objective standard methods rather than replacing them with a less effective alternative.

“These under-the-radar changes may negatively impact high quality, comparable disclosures on climate risk,” he wrote.

Parallel Priorities

Gerding’s comments didn’t conflict directly with the version of the actual rule proposed in early 2022, by which time he’d been working in the division responsible for the climate rule for more than half a year. His suggestion that the SEC be more aggressive about extending regulations, rather than less, also fit into the aggressive, fast-paced tactics SEC chair Gary Gensler was introducing to the rulemaking process at the SEC.

But Gerding’s has been quite directly involved in the development of quite a few of the rule proposals, judging by the number that include his name among staffers acknowledged as having worked on the projects. And he was promoted from deputy to director of the division quickly and smoothly enough following Jones’ resignation that the PR staffers who wrote the announcement were able to give equal billing to the news of her departure and his elevation.

Gensler reinforced the assumption that the division, and, by extension, Gerding in particular, was doing something right by praising Jones for making the division an aggressive, prolific success during her time as director.

During the 20 months Renee Jones was director the division managed to finalize nine rules, while developing and proposing 12. Many of those were complex; some were also extremely controversial. Those Gensler called out specifically included those on climate risk, cybersecurity, special purpose acquisition companies (SPAC), insider trading, compensation clawbacks and conflicts of interest in the market for asset-based securities (ABS).

The ABS rule, which was originally proposed in 211 but never finalized, became No. 13 on Jones’ list after the SEC “re-proposed” the rule Jan. 25, less than two weeks before Jones last day at the SEC before leaving to resume the professorship she left behind at Boston College School of Law when she joined the SEC in 2021.

Corporation Finance “was a division that had actually been shrunk considerably in the five years before [Jones] got there,” Gensler said while praising Jones’ work during the meeting in which the ABS rule was re-proposed. He also praised Jones for adding a unit focused on cryptocurrency and played a key advisory role for the Office of the Chief accountant during negotiations over China-based securities.

Jones led the division “during an incredibly active time of capital formation, of initial public offerings and was able to help the core of that division, which is [devoted to] disclosure review,” Gensler said about Jones’ period of “remarkable service.”

Gensler welcomed Gerding, but didn’t say much about his background as a public introduction,  or set any specific goals for the division under his leadership as he might have done with a director who hadn’t served as No. 2 at the division for 16 of the 20 months Jones was in charge.

The two have quite a bit of background, or at least professional history, in common.

Both can boast about solid Ivy League educations at both graduate and undergraduate levels. Both spent the requisite five-to-ten years after law school doing practical work at respectable firms while focusing mostly on corporate and securities law.

Both went directly from there into academic careers but put on hold the secure professorships they had worked toward for years in order to work at the SEC, helping to implement the aggressive regulatory agenda Gensler has been talking about since he was appointed in April of 2021, though the rulemaking train didn’t really get up to speed until early 2022, when the pace of rulemaking really picked up.

Gensler and other SEC officials had warned that the agency’s rulemaking and its enforcement efforts would likely be just as aggressive and fast-paced during 2023 as they were during 2022, when both drew complaints from lawmakers, industry lobbyists and the investment-adviser community.

As of Feb. 6, however, the former academic leading the division carrying the heaviest workload and most intense level of controversy among the SEC’s rulemaking divisions will be Erik Gerding rather than Renee Jones, whose resignation and return to academia goes into effect Feb. 3.