Greenwashing is when a company overstates its efforts towards its sustainability goals. In other words, a company engages in greenwashing when it deceptively advertises that its products, goals, and policies are environmentally friendly.

According to Frankfurter prosecutors, DWS engaged in greenwashing from mid-2020 to the end of January 2023. “The impression given to the capital market that DWS Group was supposedly the market leader in sustainable financial products was not, or not completely, fulfilled by the business’s organization itself,” the prosecutors said. DWS didn’t monitor the situation carefully enough and instead advertised itself as being a “leader” in the ESG field or incorporating ESG as an “integral part of our DNA.” They didn’t correspond to reality, according to prosecutors.

According to the investigation, the first documented instance of the alleged greenwashing occurred when DWS fired an executive who claimed that the company inflated its sustainability targets to investors. Shortly after, the firm was charged with similar greenwashing allegation by the Securities and Exchange Commission in which it agreed to pay a fine of $25 million. Specifally, DWS was charged for making “materially misleading statements” in connection to its ESG research and investments. The firm did not admit or deny the SEC’s findings.

DWS agreed to the terms of the settlement fine and said that it will not appeal. “We have already publicly stated in recent years that our marketing was sometimes exuberant in the past,” the firm said in a statement. “We have already improved our internal documentation and control processes and will continue to work on making further progress in this area.”  

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According to the new rule, Nasdaq will require that companies raise at least $15 million in order to list on its exchange. Nasdaq appears to have set an exceptionally high standard for microcap companies and other firms seeking to provide liquidity to their investors.

Nasdaq is changing the way it calculates public float, which refers to shares available for trading that are not held by insiders or restricted due to lockups. Previously, Nasdaq included shares registered for resale by existing investors at the time of an IPO in these calculations. Under the new rule, only newly issued IPO shares will be counted.

In its letter to the SEC, Nasdaq stated that “it has observed that the companies that meet the applicable Market Value of Unrestricted Publicly Held Shares requirement through an IPO by including Resale Shares have experienced higher volatility on the date of listing than those of similarly situated companies that meet the requirement with only the proceeds from the offering.”

As a result, Nasdaq is now only including newly issued IPO shares when making calculations in connection to its listing requirements as opposed to additionally including resale shares. The Exchange hopes that by doing so, it will not list companies exposed to high volatility. “As such, it is appropriate to modify the rules to exclude the resale shares from the calculation of market value,” Nasdaq told the SEC.

According to many in the capital markets industry, this rule could revive the dying Special Purpose Acquisition Company (SPAC) market. With the newly set bar, many companies will look to engage in reverse mergers which provides an alternate pathway towards an IPO.

Furthermore, companies seeking to uplist from over-the-counter markets, such as those operated by OTC Markets Group Inc., must now raise at least $5 million through a firmly underwritten public offering to list on the Nasdaq Capital Market, or $8 million to list on the Nasdaq Global Market. Previously, Nasdaq’s public offering requirement for both tiers was $4 million.

Ultimately, Nasdaq is implementing this rule to reduce the listing of highly volatile companies on its exchange. By excluding certain insider shares from its calculations, Nasdaq has established a higher threshold for companies seeking to qualify for listing.  

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In February, acting SEC Chair Mark Uyeda requested that the court pause a lawsuit that challenged the validity of the disclosure rules in order for the SEC to assess whether it would like to proceed with its defense of the rules. Uyeda requested that the court give the SEC 45 days to decide whether it would like to move forward with the case. Now that the 45 days is up, Uyeda informed the court that the SEC decided to drop its defense of the climate disclosure rules.

“The rule is deeply flawed and could inflict significant harm on the capital markets and our economy,” according to Uyeda “The goal of today’s Commission action and notification to the court is to cease the Commission’s involvement in the defense of the costly and unnecessarily intrusive climate change disclosure rules.”

SEC’s Decision Faces Criticism from One Commissioner 

Although, a majority of the SEC Commissioners opposed the rules, Commissioner Caroline Crenshaw, who originally voted in favor of the rules, denounced the Agency’s decision to step away from the lawsuit. According to Crenshaw, the SEC’s decision to step away goes against the procedures set out by the Administrative Procedure Act in effectively rescinding the rules.

“In effect, the majority of the Commission is crossing their fingers and rooting for the demise of this rule, while they eat popcorn on the sidelines,” Crenshaw said in a statement. “We are now firmly in a period of policy-making through avoidance and acquiescence, rather than policy-making through open, transparent, and public processes. This approach does not benefit the markets, capital formation, or investors.”

Crenshaw now requests that the court appoint someone else to take the SEC’s former place in defending the rules. It is not clear whether the court will do so or if someone will voluntarily step up to the plate.

For now, the climate disclosure rules will not be defended in terms of their validity and legality. As a result, unless someone is appointed or voluntarily takes action, the rules will be rescinded, and companies will no longer be required to disclose the impact of climate change on their businesses.  

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According to Uyeda, Gensler was too quick to enact rules. The “shortcuts” Gensler took led to numerous legal challenges which posed unnecessary expenses, according to Uyeda.

The Acting SEC chair now wants to adopt a different approach to SEC rulemaking- one that he believes will be more efficient and effective in its purpose. “Turning to future rulemaking, the Commission should act like a super-sized freighter, not a speed boat — and that means returning to a smoother regulatory course than the rapid changes that have been promulgated over the last four years, “Uyeda said.

The Administrative Procedure Act requires proposed rules to have a “notice and comment” period. While the duration of such a period is not explicitly provided, a comment period of at least 60 days has been endorsed by the Administrative Conference of the United States for significant regulatory actions. However, Uyeda pointed out that a large number of proposals were afforded comment periods well below 60 days under Gensler. “45-day, and even 30-day, comment periods were the norm… which “represented a significant deviation from everything that I had been taught about rulemaking as a member of the staff in my nineteen years with the Commission,” according to Uyeda.

Uyeda’s Steps Toward Implementing the “Blueprint” to Reform SEC Rulemaking

Uyeda has already taken a number of actions in pursuit of his “blueprint’s” implementation. The SEC Chair granted private fund advisers additional time to comply with newly expanded reporting requirements and extended compliance deadlines for a marketing rule aimed at environmental, social, and governance (ESG)-focused funds.

He also directed his staff to develop recommendations on re-proposing certain aspects of the recently-adopted Form N-PORT reporting requirements. This requirement mandates that certain funds regularly report their holdings to the SEC, with last year’s update requiring more frequent and detailed disclosures.

“Commenters raised concerns about more-frequent public disclosure of funds’ portfolio holdings,” Uyeda said in connection to the Form N-PORT changes. “Among other issues, are these concerns heightened by continuing advances in artificial intelligence?”

Uyeda also mentioned a possible change to crypto regulations including the added requirement for investment advisers to place customers’ crypto assets with a qualified guardian.

Ultimately, Uyeda emphasized how SEC rulemaking must “respect the limits of our statutory authority.” He understands that while this may take some time and patience, it is significantly more important that the SEC “take the time to do things carefully and methodically, rather than rush and risk actions that are not fully thought through.” This approach will ultimately help the SEC mitigate legal challenges, reducing costs, and most importantly, ensure that the agency stays within the scope of its authority.  

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The SEC announced in its final rule that it has decided to eliminate the delegation of authority to issue formal orders of investigation.” Such formal orders designate the enforcement staff authorized to issue subpoenas in connection with investigations under the Federal securities laws,” according to the rule. As a result of the amendment, the Director of Enforcement can no longer authorize his staff to open investigations pertaining to the Federal securities laws.

In supporting of its decision to rescind the Director’s authoritative power, the SEC said that this amendment comes as a “result of the commission’s experience with its nonpublic investigations.” The Commission additionally said that it me the amendment “to more closely align the commission’s use of its investigative resources with commission priorities.” The SEC did not further elaborate on its reasoning and left it up to public opinion as to its meaning.

Now, only the SEC itself can issue formal orders of investigation that authorize specifically-designated enforcement staff to exercise the Commission’s power to subpoena witnesses and take other authorized actions. This power no longer belongs to the Director unless specifically authorized by the SEC.

Although the Director initially had this power since 2010, such power was not delegated before then. “The Division of Enforcement operated for 40 years without delegated authority,” according to an SEC spokesperson. “We are returning to how the division operated for most of its existence, ensuring the commission has the utmost insight into the cases we bring throughout the process.”

In order to request for an investigation to be opened, the enforcement staff must now go through the SEC rather than being assigned to the leadership of the Enforcement Division.  

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The SEC announced its decision in a Staff Legal Bulletin, rescinding a previous bulletin that had restricted companies from excluding proposals with “broad societal impact.” Due to this rescission, the SEC is expected to take a more company-specific approach and as a result, companies are expected to be increasingly successful in excluding such proposals.

An Overview of Shareholder Proposal Exclusion Rules

The exclusion of shareholder proposals is governed by Rule 14a-8 of the SEC. Although this rule has many factors to it, the SEC’s announcement mainly focuses on Rule 14a-8(i)(5) and Rule Rule 14a-8(i)(7).

Rule 14a-8(i)(5), also known as the “Economic Relevance” rule, provides that a company may exclude a shareholder proposal if the proposal relates to operations that account for less than 5% of the company’s total assets at the end of its most recent fiscal year, and for less than 5% of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.

Under the former Legal Bulletin, the SEC was directed to analyze whether a proposal fell under this rule by focusing on whether the issue covered by the proposal has broad societal impact rather than the significance of the issue to the company. Under the new framework, proposals that raise issues of social or ethical significance may now be excludable, despite their importance in the abstract.

Meanwhile, Rule 14a-8(i)(7), also known as the “Ordinary Business” rule, provides that a company may also exclude a shareholder proposal if the proposal deals with a matter relating to the company’s ordinary business operations.

When analyzing whether a proposal fits such a description, the significant question is whether a proposal raises matters that are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.”

With the SEC’s announcement, its staff will take a company-specific approach in evaluating significance, as opposed to focusing solely on whether a proposal raises a policy issue with broad societal impact or whether particular issues or categories of issues are universally significant.

“A policy issue that is significant to one company may not be significant to another,” according to the bulletin. “The Division’s analysis will focus on whether the proposal deals with a matter relating to an individual company’s ordinary business operations or raises a policy issue that transcends the individual company’s ordinary business operations.”

The SEC is seemingly shifting towards a pro-company approach when analyzing an exclusion of certain shareholder proposals. In support of its change in policy the Commission provided its interpretation of Rule 14a-8.

“Because the rule allows exclusion only when the matter is not ‘otherwise significantly related to the company,’ we view the analysis as dependent upon the particular circumstances of the company to which the proposal is submitted,” the bulletin states. “That is, a matter significant to one company may not be significant to another. On the other hand, we would generally view substantive governance matters to be significantly related to almost all companies.”  

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The task force’s focus will be to assist the SEC in defining clear rules and boundaries for regulatory oversight and develop practical and achievable ways for companies, securities, or financial products to comply with SEC registration requirements. It will also create guidelines for companies to provide necessary and meaningful disclosures to investors without being overly burdensome or impractical.

The SEC perceives such the task force as way to both ensure that the agency itself performs better and to provide more clarity when it comes to crypto regulation. According to the SEC the task force will collaborate with agency staff and the public to “set the SEC on a sensible regulatory path that respects the bounds of the law.”

While under the leadership of former Chair Gary Gensler, the SEC faced much criticism on its approach to crypto regulation. Until the launch of this task force, the SEC primarily relied on enforcement actions that would have a retroactive regulatory effect on crypto rather than proposing clearcut rules.

“To date, the SEC has relied primarily on enforcement actions to regulate crypto retroactively and reactively, often adopting novel and untested legal interpretations along the way,” according to a SEC press release. “Clarity regarding who must register, and practical solutions for those seeking to register, have been elusive. The result has been confusion about what is legal, which creates an environment hostile to innovation and conducive to fraud. The SEC can do better.”

The Task Force’s Specific Focuses

According to the SEC, the task force’s undertaking will “take time, patience, and much hard work. It will succeed only if the task force has input from a wide range of investors, industry participants, academics, and other interested parties.” Many crypto firms have already begun submitting proposals such as allowing traditional broker-dealers to operate in the cryptocurrency market. in its mission to create a regulatory framework

Although it has and continues to receive ideas from crypto firms, the task force will prioritize the following objectives  its mission to create a regulatory framework:

• Security Status: The task force is studying different types of crypto assets to determine how securities laws apply to them, as this affects many other regulatory questions.
• Defining Jurisdiction: The task force is identifying areas that may not fall under SEC oversight.
• Coin and Token Offerings: The task force is considering temporary rules to allow certain token offerings to operate without uncertainty, as long as the issuer provides regular, accurate disclosures and agrees to SEC oversight in fraud cases. This would offer clarity until permanent rules or legislation are established.
• Registered Offerings: The task force will explore ways to improve existing registration options, to make it easier for token issuers to comply with SEC rules.
• Special Purpose Broker-Dealer: The task force is looking at revising the special-purpose broker-dealer framework, including allowing firms to hold both securities and non-securities crypto assets, and identifying other registration challenges.
• Custody Solutions for Investment Advisors: The task force will work with investment advisers to provide an appropriate regulatory framework within which advisers can safely, legally, and practically custody client assets themselves or with a third-party.
• Crypto Lending and Staking: The task force aims to clarify whether crypto lending and staking programs are subject to securities laws and, if so, how they can be structured to comply with regulations.
• Crypto Exchange-Traded Products (“ETPs”): The task force will help the SEC clarify its decision-making process for approving or rejecting new crypto ETPs. It will also consider updates to existing ETPs, like allowing staking or different ways of handling fund shares, but custody and other issues must be addressed first.
• Clearing Agencies and Transfer Agents: The task force will explore how blockchain and crypto assets fit within clearing and transfer rules, including their role in modernizing traditional financial markets.
• Cross-Border Sandbox: Since many crypto projects operate globally, the task force is considering ways to support limited, temporary international regulatory experiments, with the possibility of long-term solutions.

Although the task force initially said that it is open to ideas from industry participants and academics, it also welcomes public input. Anyone who would like to submit a comment to the task force can do so at Crypto@sec.gov.  

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Under the original board diversity rules, companies listed under the Nasdaq were required to disclose information regarding the diversity of the board of directors and to have at least two directors that were of a “diverse” background or explain why they do not. Additionally, the rule required that companies also disclose how board members identify in those categories.

In its ruling to vacate the board diversity rules, the Fifth Circuit found that the SEC went beyond the scope of its authority in requiring such information disclosure. “It is obviously unethical to violate the law or to disregard a contractual promise,” the court had said. “It is not unethical for a company to decline to disclose information about the racial, gender and LGTBQ+ characteristics of its directors.”

The court additionally found no reason as to why a company would need to disclose why their board of directors are not “diverse.” “We are not aware of any established rule or custom of the securities trade that saddles companies with an obligation to explain why their boards of directors do not have as much racial, gender or sexual orientation diversity as Nasdaq would prefer,” the court added.

Board Diversity Rules Repealed

The SEC agreed in its notice Friday to waive the usual 30-day operative delay and allow the proposed rule change to become effective on February 4^th. Under the applicable law, the SEC may elect a shorter time for a proposed rule to go into effect if such action is consistent with protection of investors and the public interest.

The SEC found that in this case, “waving the 30-day operative delay is consistent with the protection of investors and the public interest because it will allow the Nasdaq to repeal its board diversity listing requirements consistent with the effective date of the federal court’s decision, which is February 4, 2025.”

Until then, the SEC has opened up the proposed rule to public comment which can be found on the agency’s website.  

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The actions filed in the first quarter addressed a wide range of violations, including financial misstatements, misleading disclosures to brokerage customers, failures by advisory firms to disclose conflicts of interest, alleged bribery schemes, frauds targeting retail investors, misleading statements about artificial intelligence, and more.

The flurry of activity may have resulted from a mindset of wrapping up enforcement activity before a change in presidential administrations. “Investors and issuers alike benefit from the Commission’s efforts to hold wrongdoers accountable,” said SEC Chair Gary Gensler, who resigned as Donald Trump was sworn in as President. “I’m proud of the incredible work of the Division of Enforcement and colleagues around the agency to track down misconduct and protect the investing public.”

“As these impressive figures reflect, the Division has not taken its foot off the pedal in the new fiscal year,” said Sanjay Wadhwa, acting director of the Division of Enforcement at the SEC. “On the contrary, the hard work of the dedicated staff in the Division, with assistance from throughout the Agency, has resulted in the busiest start to a fiscal year that I have witnessed in my 20-plus years at the Commission, providing invaluable protections to investors and promoting fairness and integrity in the securities markets.”

The SEC also continued its emphasis on crediting companies that self-police, self-report, remediate, and otherwise cooperate with the SEC’s investigations. The agency filed more than 40 enforcement actions from Jan. 1, 2025, though Jan. 17, 2025, indicating that the Division’s high level of productivity continues into the second quarter of fiscal year 2025.

Enforcement Actions Expected to Decline Under Trump

Although the SEC began the first quarter with a tremendous amount of enforcement actions, such numbers are expected to decline as the transition to the Trump administration has begun. President Trump has long expressed his intention of rolling back regulations and shifting towards a pro-business approach. To this end, Trump has appointed SEC Commissioner Mark Uyeda, a Republican, to serve as acting chairman of the agency.

Uyeda will likely serve as acting chair until Trump’s nominee for Gensler’s successor, Paul Atkins, completes his Senate confirmation process. Both Uyeda and Atkins are considered more pro-business, as well as friendly to the cryptocurrency community than Gensler.

According to a spokesperson at Jones Day, the firm expects the SEC to utilize enforcement actions as a last resort rather than a first. “The agency also may move away from what some have characterized as an “enforcement-first” approach toward a model that provides more upfront guidance,” according to the firm. “Moving forward, the SEC may leverage its examinations and policy divisions to identify areas of widespread noncompliance and then issue rules and guidance to effect change.”

Another law firm, Hogan Lovells, anticipates a reduction in regulations, citing historical trends under a Republican-led Commission as the basis for this expectation.

“Historically, Republican-led Commissions have prioritized reducing compliance costs for public companies and enforcing rules more narrowly,” according to a Hogan Lovells spokesperson. Under President Trump’s new SEC Chairman, Mark Uyeda, such priorities are expected to be focused on. “Although the goals of the SEC’s agenda under the Trump administration remain unknown, the firm expects “a renewed focus on reducing regulatory burdens, adhering to established materiality standards, a curbing of perceived enforcement overreach, and an effort to adopt an enforcement agenda that, broadly speaking, will be more favorable to corporations.”

As the SEC transitions under new a new administration, the agency’s enforcement priorities and regulatory approach are expected to shift significantly. While the first quarter of fiscal year 2025 saw unprecedented levels of enforcement activity, the upcoming years may bring a more measured approach, with an emphasis on reducing regulatory burdens and promoting corporate compliance through guidance rather than enforcement.  

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In the case of Alliance for Fair Board Recruitment v. SEC, the Fifth Circuit court held that the SEC’s approval of the Board Diversity Rules was “arbitrary and capricious” and as a result an overreach of power. In reaching its decision, the court found that the SEC did not give adequate reasons as to why such rules were in line with the Securities Exchange Act of 1934. The court held that such Diversity Rules were unnecessary and unimportant within the context of the 1934 Act and overruled the SEC’s approval on a constitutional basis.

Case Analysis

The court consistently noted that the purpose of the 1934 Act is to protect investors from fraud and other similar types of harm. Due to this, the court held that such disclosures are permitted to be required “only if it is related to the elimination of fraud, speculation, or some other Exchange Act-related harm.” Ultimately, the court found that since the Rules (i) did not “promote just and equitable principles of trade” because they are not directed toward the unethical practices this Exchange Act language addresses, (ii) did not “remove impediments to” or “perfect the mechanism of a free and open market” because they are not related to a free and open market in the execution of securities transactions as the Exchange Act intends, and (iii) were not “designed . . . in general, to protect investors and the public interest”  they were not related to the more specific purposes states in the 1934 Act.

“SEC has intruded into territory far outside its ordinary domain,” U.S. Circuit Judge Andrew Oldham who wrote for the majority opinion. “It is not unethical for a company to decline to disclose information about the racial, gender, and LGTBQ+ characteristics of its directors,” the ruling stated. “We are not aware of any established rule or custom of the securities trade that saddles companies with an obligation to explain why their boards of directors do not have as much racial, gender, or sexual orientation diversity as Nasdaq would prefer.”

Under the original rule, companies were required to have at least one woman, racial minority or LGBTQ person on the board or explain why they do not. Additionally, the rule required that companies also disclose how board members identify in those categories.

This case represents the ongoing of court rulings overturning SEC rulemaking such as share repurchase rules and the private fund rules. The Fifth Circuit has, for a while, been known to limit agencies’ authority to make rules as was seen when the court affirmed a case using the Loper Bright approach, also known as the case that overruled the Chevron Doctrine. This case once again indicates that judicial system seems to be leaning away from agency rulemaking and authority.  

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