The US Supreme Court issued a narrow ruling siding with businesses regarding Securities and Exchange Commission (SEC) liability requirements. Justice Sonia Sotomayor delivered the unanimous decision, emphasizing that a securities class action cannot be based solely on a “pure omission” in an SEC filing without any misleading statement to reference.

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Background of the Case

The case revolves around Item 303 of the SEC’s Regulation S-K, also known as Management’s Discussion and Analysis (MD&A), which mandates that management provide investors with insights into trends or events potentially impacting the business’s financial condition.

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Plaintiff Allegations

Moab Partners filed a lawsuit against Macquarie Infrastructure Corp., now Macquarie Infrastructure Holdings LLP, alleging failure to disclose a new rule that would significantly impact its business, leading to substantial losses for shareholders.

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Court’s Interpretation

The Supreme Court, in its ruling for Macquarie, distinguished between “half-truths” and “pure omissions.” It clarified that liability under Regulation S-K only applies to “half-truths,” where statements are made but critical information is omitted. “Pure omissions,” where no meaningful statement is made, do not incur liability.

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Implications of the Decision

While the court clarified the requirement for statements to support securities class actions, it did not specify how detailed these statements must be. Plaintiffs are now tasked with identifying “affirmative assertions” to establish misleading conduct before further legal consideration.

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Conclusion

The case underscores the nuanced interpretation of SEC regulations and highlights the importance of clarity in corporate disclosures. The ruling sets a precedent for future cases involving SEC filings and shareholder lawsuits.

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Case Details

Case Title: Macquarie Infrastructure Corp. v. Moab Partners
Case Number: No. 22-1165

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In a recent statement, Gary Gensler, the chairperson of the U.S. Securities and Exchange Commission (SEC), emphasized the critical importance for companies to uphold accuracy in their disclosures, particularly in the realm of artificial intelligence implementation. This proclamation follows an incident involving Lyft (LYFT.O), which saw a significant forecast error necessitating correction.

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Ensuring Accuracy in Public Disclosures

During an interview with CNBC, Chairman Gensler refrained from commenting on the specific case involving Lyft but underscored the overarching responsibility of companies to disseminate precise information regarding their operations and financial status. He emphasized, “It’s the responsibility of companies to ensure that they put out information in the public that’s accurate.”

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Lyft’s Forecast Error and Subsequent Corrective Measures

The incident involving Lyft unfolded with the company’s erroneous forecast being publicized in a press release on Tuesday. This error temporarily inflated Lyft’s shares by 67%, only to be rectified later. Industry analysts and experts have since pointed out that such occurrences are likely to attract heightened scrutiny from regulators and stakeholders alike.

Integrating AI with Cautionary Measures

Chairman Gensler further elaborated on the necessity for companies, especially those leveraging artificial intelligence (AI), to establish robust safeguards to prevent inaccuracies. He emphasized the importance of having “certain guardrails in place” to ensure the integrity of information released to the public.

In essence, the Lyft incident serves as a stark reminder of the accountability incumbent upon corporations to furnish accurate and reliable data to investors and the public. With the rapid integration of AI technologies into corporate processes, the imperative for stringent oversight and adherence to disclosure standards becomes increasingly paramount.

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Governor Newsom Signs Landmark Climate Bills

California Governor Gavin Newsom has signed two groundbreaking climate bills into law in a significant move to address climate change. The Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261) aim to enhance transparency, standardize disclosures, align public investments with climate goals, and elevate standards for businesses to combat climate change.

Scope of Application and “Doing Business in California”

The new laws apply broadly to large companies, both public and private, engaged in business activities within California. The definition of “doing business” includes various parameters such as financial transactions, organizational domicile, and specified sales, property, or payroll levels within the state.

SB 253 — Climate Corporate Data Accountability Act

SB 253 mandates U.S. companies with annual revenues exceeding $1 billion and operating in California to disclose Scope 1 and 2 greenhouse gas (GHG) emissions data by 2026 and Scope 3 GHG emissions data by 2027. The law sets no minimum emissions threshold, focusing solely on revenue and business activities in California. This groundbreaking legislation requires emissions data to be publicly accessible, following Greenhouse Gas Protocol standards. Companies failing to comply may face penalties of up to $500,000 annually.

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SB 261 — Climate-Related Financial Risk Act

SB 261 targets U.S.-based companies with annual revenues over $500 million, requiring them to submit climate-related financial risk reports by 2026, according to Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. The reports must detail vulnerabilities related to employees, supply chains, consumer demand, and shareholder value. Non-compliance may result in penalties of up to $50,000 per year.

Implications for Asset Managers

The broad application of SB 253 and SB 261 raises questions about how these laws apply to asset managers. Asset managers may need to disclose their operational emissions and the emissions of companies whose funds hold securities. Reporting Scope 3 emissions involves collecting data from third parties in the supply chain, presenting potential challenges for asset managers.

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Governor Newsom’s Concerns and Next Steps

Governor Newsom has expressed concerns about the feasibility of implementation deadlines and potential inconsistent reporting across businesses. His administration plans to collaborate with the Legislature to address these issues. Additionally, concerns about the financial impact on businesses have prompted CARB to monitor costs and provide recommendations to streamline the program.

Engagement with legal counsel is advisable for affected companies, including asset managers. Ongoing monitoring of developments in the rulemaking associated with these laws will ensure companies are prepared to meet the required information disclosures by the implementation dates. The evolving landscape of climate legislation in California underscores the importance of staying informed and proactive in addressing environmental responsibilities.

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