Release No. 33-6130

Release No. 34-16224

September 27, 1979

Environmental Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Interpretative Release.

SUMMARY: The Securities and Exchange Commission today published an interpretative release focusing attention on existing requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934 concerning environmental disclosure to assist registrants in complying with those requirements and to alert them that the Commission will continue, in appropriate cases, to take enforcement action in instances of non-compliance. This release, in particular, addresses these issues: (1) the need to disclose total estimated expenditures for environmental compliance beyond two years in the future, (2) the obligation to disclose particular types of environmental proceedings, and (3) the circumstances under which companies must disclose their policies or approaches concerning environmental compliance.

DATE: September 27, 1979.

FOR FURTHER INFORMATION CONTACT: Catherine Collins, Office of Disclosure Policy and Proceedings, Division of Corporation Finance, Securities and Exchange Commission, Washington, D.C. 20549, (202) 272-2589.

SUPPLEMENTARY INFORMATION: The Commissions disclosure requirements impose significant obligations with respect to information concerning environmental protection. Registrants are required to disclose, in certain registration statements filed under the Securities Act of 1933 and in annual and quarterly reports filed pursuant to the Securities Exchange Act of 1934, the material effects that compliance with Federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the registrant. The Commission today concluded an administrative proceeding involving its environmental disclosure requirements ¹ and in that context reviewed its policies with respect to such requirements. In order to ensure effective dissemination of those policies, the Commission has determined to publish this statement reviewing the environmental disclosure provisions and reiterating the Commissions views as to their scope and applicability.

A. The Commissions Releases Concerning Environmental Disclosure

As far back as 1971, the Commission was aware that requirements imposed by environmental statutes could have a material economic impact on those corporations that were subject to the statutes. Accordingly, it issued a release informing registrants that the Commissions existing rules requires disclosure of material ² environmental information, including: (1) the existence and nature of pending environmental litigation; and (2) instances in which compliance with environmental laws "may necessitate significant capital outlays, may materially affect the earning power of the business, or cause material changes in registrants business done." ³

After monitoring the disclosure which this general release elicited, the Commission in 1973 adopted environmental disclosure rules ⁴ which require all corporations to disclose specific items of information related to environmental matters in addition to the disclosures required by the Commissions existing rules that were explained in the 1971 Release. More specifically, the new rules require:

(1) disclosure of the material effects that compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries; ⁵ and

(2) disclosure of any administrative or judicial proceeding known to be contemplated by governmental authorities and arising under federal, state or local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment or any other material pending administrative or judicial proceeding. Any proceeding brought by a governmental authority is deemed material. ⁶

After these rules were promulgated, certain public interest groups brought an action against the Commission seeking to require it to promulgate additional environmental rules, and the court directed the Commission to undertake further environmental rulemaking. ⁷ Following these further proceedings, the Commission determined, among other things, to add to its requirement that registrants disclose the effects of compliance with environmental laws a proviso that:

Registrant shall disclose any material estimated capital expenditures for environmental control facilities for the remainder of its current fiscal year and its succeeding fiscal year; and such further periods as the registrant may deem material. ⁸

In the same release, the Commission also admonished registrants that its existing rule requiring disclosure of pending proceedings contemplated by governmental authorities encompassed a requirement to disclose Notices of Violation, in the nature of cease and desist orders, issued by the Environmental Protection Agency. ⁹

B. Interpretation of the Commissions Environmental Disclosure Releases

As a matter of policy, in light of its mandate under the National Environmental Policy Act of 1969 to consider environmental values and its mandate under the federal securities laws for investor protection, the Commission "has issued several releases alerting public companies of their legal obligation to disclose any and all environmental *** information that would be material to investors or shareholders." ¹⁰ Additionally, the Commission promulgated specific environmental rules. Compliance with the Commissions specific environmental disclosure rules does not necessarily constitute full compliance with the disclosure requirements of the federal securities laws. ¹¹ Moreover in order to carry out their objectives, the Commission construes its existing specific environmental disclosure rules broadly and liberally.

To assist registrants in complying with these specific environmental disclosure rules and the application of its general disclosure requirements to environmental matters, the Commission addresses below three significant interpretive questions:

(1) When must a corporation disclose, in addition to its planned environmental expenditures for the next two fiscal years, the total costs of compliance with environmental statutes? (2) What disclosures must be made concerning administrative proceedings involving environmental matters which are contemplated by government authorities and what is an administrative proceeding that must be disclosed? (3) When is a corporation required to disclose its policies concerning, or approach toward, compliance with environmental laws?

1. The Necessity to Disclose the Total Costs of Complying with Environmental Laws

The Commissions releases in 1971 and 1973 required that registrants indicate the material effects compliance with environmental protection requirements would have on capital expenditures and earnings. Many registrants, in response to these releases, disclosed only prior actual and presently authorized capital expenditures. However, where a registrant expected that additional material capital expenditures would have to be authorized to achieve compliance for the periods beyond that for which information was given, and had in fact developed or received estimates with respect thereto, such estimates were generally required to be disclosed in order to make the disclosures made not misleading.

These principles were not changed in 1976, when, to achieve more uniform minimum disclosures, the Commission prescribed disclosure of estimated capital expenditures for minimum periods. Thus, if the registrant has estimates suggesting that after the two-year period there will nevertheless remain material capital expenditures necessary to comply with such requirements, or material penalties or fines for non-compliance are reasonably likely to be imposed, disclosure of such additional known or estimated penalties, or fines may be necessary to prevent the mandatory disclosure from being misleading. ¹² Further, if the registrant reasonably expects that these costs for any future year will be materially higher than the costs disclosed for the mandatory two-year period, the registrant may, if it has not already done so, be obligated to develop estimates with respect to such costs. Disclosure of such estimates may be required in order to describe adequately the material effects of complying with environmental regulations and in order to prevent from being misleading the mandatory disclosures on capital expenditures and earnings for the minimum two year period. It may also be necessary for the registrant to set forth the source of its estimates, the assumptions and methods used in reaching the estimates, and the extent of uncertainty that projected future costs may occur in order for the disclosure made not to be misleading. ¹³

2. Disclosure of Administrative Proceedings

The Commissions environmental rules, adopted in 1973, require, among other things, disclosure of administrative proceedings pending or contemplated by governmental authorities, and the relief sought in such proceedings. ¹⁴

The meaning of an administrative proceeding for the purposes of this rule has never been construed narrowly by the Commission. As the Commission stated in explaining that this rule required disclosure of Notices of Violation issued by the Environmental Protection Agency,

By requiring a description of all governmental litigation regardless of whether the amount of money involved is itself material, the Commission believes it has given recognition to both the importance of the national environmental policy and to the far-reaching effects, both financial and environmental, of violations of environmental laws. Further, the fact that legal action, both pending and known to be contemplated, must be disclosed serves to foreshadow potentially serious environmental problems facing registrants. ¹⁵

In light of the foregoing, the Commission interprets its rule to require disclosure of administrative proceedings which are initiated by the registrant, as well as those initiated by the government. The obligation to disclose is triggered whenever a governmental authority is a party to any administrative proceeding. For example, requests for an adjudicatory hearing to contest the provisions of an NPDES permit ¹⁶ constitute an administrative proceeding that must be disclosed where an adjudicatory hearing is held or actually to be held.

Similarly, the Commission interprets its rule as requiring disclosure of all administrative orders relating to environmental matters, whether or not those orders literally follow a "proceeding." An administrative order may be entered without a "proceeding" where a corporation directly consents to the entry of an order or where the order is the product of negotiation between the parties. In this regard, the consequences of an administrative consent order, just as those of a judicial consent order, may be just as significant as the consequences of a fully litigated proceeding. The Commission does not hinge its disclosure requirements on the technical issue of whether a registrant chooses to contest the entry of an order.

An additional matter related to disclosure of pending proceedings is the obligation to disclose the "relief sought" by the government. The Commission does not consider mere disclosure that the government seeks to compel new pollution control efforts to constitute adequate disclosure of relief sought. Instead, the Commissions regulations contemplate that an estimate of the level of expenditures required to install the pollution control equipment sought by the governmental authority be provided if such expenditures are likely to be material.

3. Requirements to Disclose Policy

In its environmental proceedings, ¹⁷ the Commission declined to impose an across-the-board requirement that all corporations disclose their general environmental policy, because such a requirement "would result in subjective disclosures largely incapable of verification." ¹⁸ But, notwithstanding the lack of a general rule that environmental policy be disclosed, two circumstances may give rise to disclosure obligations in this area.

First, if a corporation voluntarily makes disclosures concerning its environmental policy, such disclosures must be accurate, and the corporation must make any additional disclosures necessary to render the voluntary disclosures not misleading. ¹⁹

Second, if a corporation has a policy or approach toward compliance with environmental regulations which is reasonably likely to result in substantial fines, penalties, or other significant effects on the corporation, ²⁰ it may be necessary for the registrant to disclose the likelihood and magnitude of such fines, penalties, and other material effects in order to prevent from being misleading the required disclosures with respect to such matters as descriptions of the corporations business, financial statements, capital expenditures for environmental compliance or legal proceedings.

General

In light of the Commissions longstanding concern about the adequacy of disclosure with respect to environmental protection requirements, and particularly in light of the requirements of the National Environmental Policy Act, registrants should be aware that the Commission will continue to monitor environmental disclosure as well as to bring enforcement actions in appropriate cases of non-compliance.

Accordingly, 17 CFR Part 231 and 17 CFR Part 241 are amended by adding "Environmental Disclosure Requirements."

By the Commission.

George A. Fitzsimmons

Secretary

In the context of its environmental releases, the Commission has interpreted these rules as requiring that all material information relating to environmental information must be disclosed. See, Release 5171, supra, at 1; Securities Exchange Act Release No. 5627 (October 14, 1975, at 2). This approach reflects the Commissions belief that omissions of material environmental information would render misleading the required disclosures concerning financial matters and the nature of a registrants business.

¹See, In the Matter of United States Steel Corporation, Securities Exchange Act Release No. 16223 (September 27, 1979).

²See, e.g., Securities Act Rule 405, 17 CFR 230.405; Securities Exchange Act Rule 12b-2, 17 CFR 240.12b-2.

³Securities Act Release No. 5170 (July 19, 1971).

⁴ Securities Act Release No. 5386 (April 20, 1973).

⁵ This amendment was made to Securities Act registration Forms S-1, Item 9(a), Instruction 5, 17 CFR 239.11; S-7, Item 5(a), 17 CFR 239.26; S-9, Item 3(c), 17 CFR 239.22; to Securities Exchange Act registration Form 10, Item 1(b), Instruction G, 17 CFR 249.210; and to periodic reporting Form 10-K, Item 1(b)(7), 17 CFR 249.310.

⁶ This amendment was made to Securities Act registration Forms S-1, Item 9(a), Instruction 5, 17 CFR 239.11; S-7, Item 5(a), 17 CFR 239.26; S-9, Item 3(c), 17 CFR 239.22; to Securities Exchange Act registration Form 10, Item 1(b), Instruction G, 17 CFR 249.210; and to periodic reporting Form 10-K, Item 1(b)(7), 17 CFR 249.310.

⁷See Natural Resources Defense Council, Inc. v. Securities and Exchange Commission 389 F. Supp. 689 (d.D.C., 1974). See also Natural Resources Defense Council, Inc. v. Securities and Exchange Commission 432 F. Supp. 1190 (D.D.C. 1977), reversed and remanded No. 77-1761 (D.C. Cir. April 20, 1979).

⁸ Securities Act Release No. 5704 (May 6, 1976), at 15.

⁹ Id. at 13, n. 22.

¹⁰ Reply Brief of the Securities and Exchange Commission, Natural Resources Defense Council, Inc. v. Securities and Exchange Commission, supra note 7.

¹¹ The Commissions general disclosure rules require disclosure of any additional material information, beyond that for which disclosure is specifically required, necessary to make required statements not misleading. See Securities Act Rule 408, 17 CFR 230.408; Securities Exchange Act Rules 12b-20 and 14a-9, 17 CFR 240.12b-20 and 240.14a-9.

¹² Under certain circumstances, substantial fines or penalties may be imposed under the existing environmental laws. In particular, monetary sanctions may be imposed for failure to comply with the requirements of either the Clean Water Act or the Clean Air Act or for violations of state or local law. Under the 1977 Amendments to the Clean Air Act, EPA is given authority to seek civil fines up to $25,000 per day of violation. Under the Clean Water Act, civil fines of as much as $10,000 per day may be imposed for each violation. Civil fine actions may be resolved by settlement. Criminal penalties can be greater under both statutes. The Clean Air Act Amendments of 1977 have added, in addition to federal civil fines, an administrative "noncompliance penalty" for existing facilities which do not achieve state implementation plan requirements inter alia, by July 1, 1979. These penalties are to be designed to remove any economic benefits which might be derived from noncompliance or delayed compliance with the law. Such penalties may be offset in some manner by sums actually expended for control at the offending facilities during the period of time for which they are being assessed. In addition to the foregoing sanctions, continuing or recurring violations of either the Clean Air Act or the Clean Water Act may subject the violating facility to possible placement on an EPA "List of Violating Facilities ("List"). If a facility is placed on the List, no federal agency may contract for goods, materials or services at the offending facility for as long as the violation continues.

¹³ Such estimates may involve contingencies which may not be predicted with certainty, and in this regard the Commission notes the applicability of the Financial Accounting Standards Boards Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, March 1975.

¹⁴ Enforcement responsibilities under both the Clean Air Act and the Clean Water Act are shared by federal, state, and local environmental authorities. These authorities may choose among a number of approaches in addressing violations of laws or regulations, and enforcement activity can follow various courses. Certain of these enforcement actions may be pursued consecutively or concurrently. Under the Clean Water Act, the EPA may issue an administrative order, seek a civil injunction or civil fines, or prosecute criminally in appropriate circumstances in which a willful violation is believed to have occurred. Under the Clean Air Act, EPA may provide an informal Notice of Violation; issue a formal "Notice of Violation" ("NOV"); issue an administrative order; or seek civil fines, a civil injunction, or criminal penalties. State and federal authorities often cooperate in enforcement activities under both the Clean Air Act and the Clean Water Act. Enforcement activities generally proceed simultaneously with negotiations with alleged violations. See, e.g., Section 113(a)(4) of the Clean Air Act which provides that an order relating to a violation "shall not take effect until the person to whom it is issued has had an opportunity to confer with the Administrator concerning the alleged violation." 42 U.S.C. §7413(a)(4).

¹⁵ Securities Act Release No. 5704, supra, at 12-13.

¹⁶ The basic mechanism for regulating effluent discharges to bodies of water is the National Pollutant Discharge Elimination System ("NPDES") permit program. This program is administered either by EPA or by the state in question, depending upon whether the state has an EPA-approved NPDES program. Under the permit system, each discharger must obtain a permit before discharging pollutants into the "waters of the United States"; these permits are required to embody the most stringent limitations required by federal effluent limitations guidelines, state water quality standards, or other state laws or regulations.

¹⁷ Securities Act Release Nos. 5569, 5627 and 5704.

¹⁸ Securities Act Release No. 5627, supra, at 33.

¹⁹See note 10, supra.

²⁰see note 12, supra.