Article by Jeffrey Karp and Katherine Rolph
Petition Filed With Sec Urges Adoption Of New Environmental Liability Disclosure Standards
A petition was recently filed with the Securities and Exchange Commission ("SEC") by the Rose Foundation for Communities and the Environment ("Rose Foundation"), urging the SEC to adopt new environmental liability disclosure standards and ensure compliance with existing material financial disclosure requirements. Twenty-five other charitable foundations joined the Rose Foundation petition. A joint letter in support of the petition also was filed by executives representing a number of "socially responsible" investment funds who state that they manage in the aggregate more than $13 billion in assets, citing an "urgent need" for SEC attention to the matter of under-reporting of environmental liabilities.
Existing Sec Material Environmental Disclosure Requirements
Material environmental liabilities may be subject to disclosure generally in the Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section of public company SEC filings. Publicly traded companies also must disclose in their SEC 10-K filings material effects that compliance with federal, state and local environmental protection regulations may have on the company’s capital expenditures, earnings and on the competitive position of the registrant and its subsidiaries. In addition, any material legal proceedings, including those relating to environmental damages, must be disclosed by public companies in their 10-Ks. However, the Rose Foundation’s petition cites a 1998 Environmental Protection Agency ("EPA") Study that found that "74 percent of companies failed to report in their 10-Ks cases where environmentally related legal proceedings could result in monetary sanctions over $100,000." The Rose Foundation cites such under- reporting of environmental liabilities as a reason for establishing a new rule specifying how public companies must estimate the costs and liabilities of compliance with environmental laws, response actions, defense and legal fees, as well as estimating ecological damage, property damage, and damages arising from relatedbusiness effects and tort claims.
Petitioner’s Proposed Rule Would Require Corporations To Aggregate All Environmental Liabilities
The petition urges the SEC to adopt proposed rules based on the American Society for Testing and Materials International’s ("ASTM") "2001 Standard Guide for Disclosure of Environmental Liabilities" and the ASTM’s "2001 Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters." Petitioner argues that the use of the proposed standardized methodology would allow investors to undertake a "side-by-side comparison of different companies’ liabilities and costs in the same industry sector." Petitioner’s proposed rule would require public companies to report environmental liabilities on SEC Form 10-K, and would require companies to utilize the expected value method for estimating known costs. The proposed rule also would require corporations to aggregate all environmental liabilities to determine whether the SEC’s materiality threshold is met. The Rose Foundation asserts that "piecemeal accounting of environmental liabilities" is a loophole in reporting under the current rules that should be closed.
No Deadline For Sec Consideration Of Petition
While there is no deadline for SEC consideration of the petition, the SEC likely will place the petition on the public record for comment. Please let us know if you would like us to keep you advised regarding the status of the Rose Foundation petition and any opportunity to comment. Please also let us know if you would like us to provide you with a copy of the petition.
Please Contact Us For Assistance In Connection With Reporting Environmental Liabilities And Related Legal Proceedings In Sec Filings
In light of recent scrutiny of company accounting practices, it is particularly important that public companies ensure compliance with SEC reporting and disclosure requirements, including the reporting of environmental liabilities and legal proceedings. Please do not hesitate to call us if you need assistance in this regard. We have extensive experience and expertise both in environmental and corporate matters, including SEC filings, and we can assist you with such reporting and related filings.
This Environmental Regulation Update merely summarizes the law or rules discussed and should not be relied upon as legal advice. For further information about the new accelerated filing rules or other corporate compliance matters, please contact the authors.
