United States
Environmental Protection
Agency
Office of Enforcement
and Compliance
Assurance (2248A)
EPA300-N-01-008
&EPA Enforcement Alert
Volume 4, Number 3
Office of Regulatory Enforcement
October 2001
U.S. EPA Notifying Defendants of
Securities and Exchange Commission's
Environmental Disclosure Requirements
Environmental information such as
a company's compliance history
or involvement in a federal environmen-
tal enforcement action may be used by
the public to guide its purchasing and
About
Enforcement Alert
Enforcement Alert is published
periodically by the Office of
Regulatory Enforcement to
inform and educate the public
and regulated community of
important environmental
enforcement issues, recent
trends and significant
enforcement actions.
This information should help
the regulated community
anticipate and prevent violations
of federal environmental law
that could otherwise lead to
enforcement action.
Reproduction and wide
dissemination of this
publication are encouraged.
For information on how you can
receive this publication
electronically, see page 3.
Eric V. Schaeffer
Director, Office of
Regulatory Enforcement
Editor: Virginia Bueno
(202) 564-8684
bueno.virginia@epa.gov
(Please email address and
name changes or subscription
requests for this newsletter)
investment deci-
sions.
While gov-
ernmental disclo-
sure require-
ments do not promote one type of in-
vestment over another, they do facili-
tate the free flow of information be-
tween regulated companies and the pub-
lic.
The United States' federal securi-
ties regulatory system relies on U.S. Se-
curities and Exchange Commission
(SEC) registrants to fully disclose ma-
terial information to actual and poten-
tial shareholders to ensure they can
make informed investments, and for
proper market functioning. Moreover,
full and fair disclosure of material in-
formation related to a firm's environ-
mental performance, compliance, and
liabilities is essential if stock markets
are to accurately reflect the financial
condition of publicly traded companies.
The availability of this information also
enables investors to consider issues of
corporate governance and management
attitudes toward the environment in
making investment decisions.
EPA believes that enforcement of
environmental disclosure requirements
helps ensure that companies comply-
ing with these obligations are not dis-
advantaged in the market by firms that
ignore the duty to disclose their envi-
ronmental liabilities. EPA further be-
lieves that public availability of infor-
mation regarding environmental perfor-
mance and compliance will result in
Public Disclosure of Information Can
Create an Incentive for Increased
Environmental Compliance
market forces that can positively in-
fluence environmental behavior. Con-
sequently, the Environmental Protec-
tion Agency (EPA) is taking steps to
increase the regulated community's
awareness of existing disclosure re-
quirements.
In this issue, EPA highlights:
v' U.S. SEC Regulation
S-K's Legal Proceedings
Disclosure Requirements;
v' Other SEC
Environmental Disclosure
Requirements;
•S Consequences of Failing
to Disclose; and
v' U.S. EPA's Notification
Efforts
SEC Regulation S-K:
Environmental Legal
Proceedings Disclosure
Requirement
The Securities and Exchange
Commission's Regulation S-K, Item
103 (17 CFR 229.103), requires that
SEC registrants disclose, on at least a
quarterly basis, pending proceedings
or proceedings known to be contem-
on is found on the Internet at http://www. epa.gov/oeca/ore/enfalert/
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Enforcement Alert
plated by a governmental authority, such
as EPA, to which they are a party that
arise under federal, state or local provi-
sions that have the primary purpose of
protecting the environment.
SEC registrants must disclose pro-
ceedings that meet any of the follow-
ing three qualifying conditions:
Materiality: Any legal proceeding
that is "material" to the business or fi-
nancial condition of the registrant must
be disclosed. No bright-line test exists
for establishing the materiality of infor-
mation. The U.S. Supreme Court has
held that information is "material" if
there is a substantial likelihood that a
citizen suits should be considered when
determining if this reporting threshold
has been met.
Monetary Sanctions: If a govern-
mental authority is a party to the legal
proceeding and the registrant has a rea-
sonable belief that the proceeding will
result, or has resulted in, monetary
sanctions of $100,000 or more, the le-
gal proceeding must be disclosed.
The same disclosure of environmen-
tal legal proceedings is required by Item
103, Instructions 1-4 of the SEC's
Regulation S-B (17 CFR 228.103), ap-
plicable to those businesses using the
SEC's small business issuer reporting
system.
EPA believes that full and fair
disclosure helps ensure that
companies complying with these
obligations are not disadvantaged in the
market by firms that ignore the duty to dis-
close their environmental liabilities.
SEC registrants should
note that the duty to disclose
information related to these
legal proceedings may exist
before the actual initiation of
a proceeding, so long as the
registrant reasonably expects
that the qualifying proceeding
will be initiated.
reasonable investor would find the avail-
ability of the information to significantly
alter the total-mix of information avail-
able in the decision-making process.
The SEC has also provided some guid-
ance on applying the materiality stan-
dard.
10 Percent of Current Assets: Le-
gal proceedings that involve primarily a
claim for damages, or that involve po-
tential monetary sanctions, capital ex-
penditures, deferred charges, or
charges to income for which the
amount involved, exclusive of interest
and costs, exceeds 10 percent of the
current assets of the registrant and its
subsidiaries on a consolidated basis
must be disclosed. Among other things,
the costs of penalties, injunctive relief,
and supplemental environmental
projects ordered in EPA enforcement
proceedings or environmentally based
SEC registrants have a
duty to disclose in their SEC
filings a brief description of the pro-
ceeding, the factual circumstances that
form the basis of the proceeding, and
the relief that is sought or has been
granted.
Additional SEC
Environmental Disclosure
Requirements
SEC registrants also should be
aware that environmental information
may need to be disclosed under Regu-
lation S-K's Item 101 (Description of
Business), which requires registrants to
disclose, among other things, the ma-
terial effects of complying or failing to
comply with environmental require-
ments on the capital expenditures, earn-
ings and competitive position of the reg-
istrant and its subsidiaries. Similarly,
Regulation S-K Item 303
(Management's Discussion and Analy-
sis of Financial Condition and Results
of Operations) requires the disclosure
of environmental contingencies that
may reasonably have a material impact
on net sales, revenue, or income from
continuing operations.
Failure to Disclose: The
Consequences
The antifraud provisions of federal
securities laws are designed to protect
investors and ensure that information
about companies does not contain ma-
terial omissions or misstatements. Fed-
eral securities laws authorize the SEC
to investigate any person or entity sus-
pected of violating federal securities
laws or SEC rules. In addition, the fed-
eral securities laws also grant express
private rights of action for some spe-
cific types of violations. The SEC has
authority to issue cease-and-desist or-
ders and to seek injunctive orders in
federal district court against persons for
violations of the securities laws, includ-
ing violations of the fraud provisions.
In addition, SEC may seek mon-
etary penalties in federal district court
from persons who have violated a
cease-and-desist order or federal secu-
rities laws. The court determines the
penalty based upon the facts and cir-
cumstances of the case. The monetary
penalties may consist of fines ranging
from $5,000 to $500,000 for each vio-
lation. Generally, the maximum fine for
each violation is $100,000 for a natural
person and $500,000 for entities. How-
ever, a court can impose a greater fine
than the maximum penalty to match the
amount of the defendant's gross mon-
etary gain, if it exceeds the maximum
penalty amount.
October 2001
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Enforcement Alert
EPA Notifying Parties in
Enforcement Actions of
Disclosure Requirements
EPA has begun notifying parties to
certain EPA-initiated enforcement ac-
tions of their potential duty to disclose
the proceeding to the public by filing
with the SEC. Recipients of EPA's "No-
tice of Securities and Exchange Com-
mission Registrants' Duty to Disclose
Environmental Legal Proceedings" WQ
provided information about SEC's dis-
closure requirements that may apply to
the EPA-initiated legal proceeding.
Greater awareness of these disclo-
sure requirements is expected to result
in increased compliance, and, conse-
quently, may improve the ability of
market forces to influence environmen-
tal performance. EPA intends to moni-
tor the disclosures made by parties to
its enforcement actions and will share
this information with SEC.
EPA also is developing a centralized
webpage with information related to
environmental financial disclosure re-
quirements. The webpage will include
information on recently concluded EPA
enforcement actions that may be sub-
ject to SEC disclosure requirements,
and a link to SEC's Electronic Data
Gathering, Analysis, and Retrieval
(EDGAR) system that enables users to
access annual (10-K) and quarterly (10-
Q) disclosure statements, and other
forms electronically.
For information about SEC disclo-
sure requirements contact the SEC's
Office of Senior Special Counsel for
Disclosure Operations at (202) 942-
1888. This line is dedicated to answer-
ing questions related to environmental
disclosure issues. Information about
SEC disclosure requirements and ac-
cess to the EDGAR system can be
found on the SEC website at
www.sec.gov.
For information about EPA's activi-
ties encouraging greater awareness of
environmental disclosure requirements
contact Shirin Venus, Office of Plan-
ning, Policy Analysis and Commu-
nications, (202) 564-0177.
EPA's "Notice of Securities and Ex-
change Commission Registrants' Duty to
Disclose Environmental Legal Proceedings"
can be found at http ://www.epa.gov/oeca/
main/strategy/oppac_notice.html.
Get News and Information Electronically
EPA's Office of Enforcement and Compliance Assurance, now offers an email,
subscription-based information service called "OCORELINK." Subscribers to
this electronic service (known as a "listserv") will receive periodic news and information
about Office of Compliance products and compliance trends designed to help the
regulated community meet its compliance requirements. You'll also receive important
information from the Office of Regulatory Enforcement on enforcement issues, recent
trends and significant enforcement actions, and will be notified when issues of its
newsletters, Enforcement Alert and the Audit Policy Update, have been posted on the
web.
How to Subscribe:
1. Send email to the listserver@unixmail.rtpnc.epa.gov.
2. Leave the subject line blank, or put a period in the subject area.
3. Type the following in the body of the message
subscribe ocorelink Your First Name Your Last Name
4. Send the email with no further text in the body of the letter.
Useful Corrmliance
Assistance Resources
U.S. Securities and Exchange
Commission:
http://www.sec.gov
SEC Staff Accounting Bulletin, No.
99-Materiality (17 CFR Part 211),
Aug. 1999:
http://www.sec.gov/interps/account/
sab99.html
EPA Notice of SEC Registrants' Duty
to Disclose Environmental Legal
Proceedings:
http://www.epa.gov/oeca/main/
strategy/oppac_notice.html
Electronic Data Gathering, Analysis,
and Retrieval (EDGAR) system
(designed to increase the efficiency
and fairness of the securities market
for the benefit of investors, corpora-
tions, and the economy by accelerating
the receipt, acceptance, dissemination,
and analysis of time-sensitive informa-
tion filed" with the SEC):
http://www.sec.gov/edgar.shtml
OECA's Office of Planning, Policy
Analysis, and Communications:
http://www.epa.gov/oeca/main/offices/
oppac.html
Sector Facility Indexing Project
(brings together environmental and
compliance and enforcement
information from a number of data
systems to produce facility-level
profiles for five industry sectors):
http://www.epa.gov/oeca/sfi
EPA EnviroFacts Warehouse
(facility-level information in multiple EPA
databases):
http://www.epa.gov/enviro/indexjava.html
Audit Policy Information:
http://www.epa.gov/oeca/ore/
apolguid.html
Compliance Assistance Centers:
http://www.epa.gov/oeca/mfcac.html
Small Business Gateway:
http://www.epa.gov/smallbusiness
major_environmental_laws.htm
October 2001
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SEPA
United States
Environmental Protection Agency
Office of Regulatory Enforcement
(2248A)
Washington, D.C. 20460
Official Business
Penalty for Private Use $300
'Enforcement Alert' newsletter
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