Our Take: financial services regulatory update – September 13, 2024

• What happened? On August 31st, the California State Legislature approved amendments to the climate disclosure laws originally signed into law in October 2023: Senate Bill (SB) 253, the Climate Corporate Data Accountability Act and SB 261, Greenhouse gases: climate-related financial risk.
• What amendments were passed? The amendments are largely administrative in nature. One adds a subsidiary reporting exemption similar to the provision already included in SB 261. Under this provision, a subsidiary that meets the criteria for reporting on its own would not be required to report its greenhouse gas (GHG) emissions separately if its parent prepares a consolidated report that meets all of the reporting requirements of SB 253.
  Although the governor of California had proposed a two-year extension of the timing for certain disclosures, no such extension was included in the final amendments. However, the bill does extend the deadline for the California Air Resources Board (CARB) to develop and adopt regulations implementing SB 253 from January 1st, 2025 to July 1st.
• What do the laws require and when?
  • SB 253 requires reporting on GHG emissions starting in 2026, and independent third-party assurance over a company’s GHG emissions reporting, starting with limited assurance (a review) and moving to reasonable assurance (an audit) in subsequent periods. SB 253 currently requires scope 3 to be reported 180 days after the due date for scope 1 and scope 2 emissions,¹ although that timing is not specified in the law. Companies are still required to initially report their scope 3 (i.e., indirect emissions such as financed emissions) emissions in 2027.
  • SB 261 requires additional disclosures related to the measures a company has adopted to reduce and adapt to the disclosed climate-related financial risks. The disclosures under SB 261 include metrics related to GHGs but the nature of the disclosures and assurance requirements differ. SB 261 requires a company to make its report publicly available on its website by January 1, 2026 and biennially thereafter.
• What’s next? The amendments will become law unless vetoed by California Governor Newsom on or before September 30th, 2024. No further delays can be proposed until the 2025 legislative session.

Our Take

California still moving full steam ahead on climate disclosures. With the SEC’s climate risk disclosures still on hold, the California sustainability laws remain the primary source of climate disclosure requirements in the U.S. With the legislature formally declining to delay the regulations, impacted companies, which include both public and private companies that meet certain revenue thresholds and "do business" in California, should not wait for CARB’s implementing regulations to assess what they may need to report and prepare the necessary data. Larger companies will likely be familiar with global climate disclosure standards but may not be ready to meet the standard of mandatory requirements that face public and investor scrutiny as well as potential legal liability.

Companies that have already begun to voluntarily disclose or comply with international disclosure regimes may need to assess where the California requirements align and diverge in order to leverage systems, processes, and resources most efficiently. Those without an existing climate disclosure strategy should develop one to account for both the California requirements as well as the EU Corporate Sustainability Reporting Directive (CSRD), if applicable. Companies should then (1) define key elements and reporting needs, (2) establish a process to collect relevant internal and external data, (3) expand risk, controls and governance to climate data collection and reporting, (4) identify opportunities for tech-enablement in order to prepare to publish investor-grade climate disclosures that can withstand third-party assurance.

For more, see our: In brief: California advances amendments to sustainability reporting laws and In the loop: California’s not waiting for the SEC’s climate disclosure rules

¹ _{Scope 1 emissions are defined as “direct GHG emissions that occur from sources owned or controlled by the company,” and Scope 2 emissions are defined as “emissions primarily resulting from the generation of electricity purchased and consumed by the company.”}

These notable developments hit our radar recently:

• FDIC to meet on proposed rulemaking and bank merger policy. On September 17th, the FDIC board of directors will meet to discuss a notice of proposed rulemaking on custodial deposit accounts with transaction features and a final statement of policy on bank merger transactions.
• Agencies extend the comment period for RFI on bank-fintech arrangements. On September 13, the federal bank regulatory agencies announced that they will be extending the comment period on a request for information on bank-fintech arrangements involving banking products and services to October 30, 2024. Comments were originally due by September 30th.
• Governor Bowman speaks on the future of stress testing and the stress capital buffer framework. On September 10th, Fed Governor Michelle Bowman gave a speech on the future of stress testing and the stress capital buffer framework. She outlined concerns regarding (1) volatility in year-over-year results, (2) linking stress testing outcomes with capital through the stress capital buffer, (3) transparency, and (4) the overlap with other capital requirements like the market risk changes under Basel III endgame proposal. She also suggested several potential policy changes to address these concerns, such as averaging results over multiple years, constraining variability in annual stress test scenario design, providing more detailed descriptions of the Fed’s models, and extending the compliance time frame for adjusting to new stress capital buffers.
• SEC to finalize market structure reforms. On September 18th, the SEC will meet to finalize market structure reforms that were originally proposed in December 2022, including amending the minimum pricing increments for the quoting of certain stocks, reducing access fee caps, and enhancing the transparency of order pricing.
• CFTC approves Part 40 final rule. On September 12th, the CFTC approved a final rule to amend Part 40 of the CFTC’s regulations which implement Section 5c(c) of the Commodity Exchange Act and govern how registered entities submit self-certifications, and requests for approval, of their rules, rule amendments, and new products for trading and clearing, as well as the CFTC’s review and processing of such submissions. The amendments are intended to clarify, simplify and enhance the utility of the Part 40 regulations for registered entities, market participants and the CFTC. The final rule will be effective 30 days after publication in the federal register.
• CFTC approves final compliance exemptions for commodity pools and commodity trading advisors. On September 12th, the CFTC approved a final rule that amends the CFTC regulation that provides exemptions from certain compliance requirements for commodity pool operators (CPOs) regarding commodity pool offerings to qualified eligible persons (QEPs) and for commodity trading advisors (CTAs) regarding trading programs advising QEPs. The final rule increases the monetary thresholds that certain persons may use to qualify as QEPs; codifies exemptive letters allowing CPOs of funds of funds to choose to distribute monthly account statements within 45 days of the month-end; includes technical amendments designed to improve its efficiency and usefulness for intermediaries and their prospective and actual QEP pool participants and advisory clients, as well as the general public. The final rule will be effective 60 days after publication in the Federal Register. CPOs and CTAs must comply with the final rule by six months after publication in the Federal Register.