SEC Reporting of Environmental Liabilities

James G. Archer, Thomas M. McMahon, and Maureen M. Crough

Editors' Summary: Since the 1930s, the Securities and Exchange Commission (SEC) has imposed various disclosure obligations on companies that publicly offer securities. These disclosure requirements are intended to aid investors in making informed investment decisions. Beginning in 1971, the SEC has issued guidance and regulations concerning the circumstances under which companies must disclose environmental liabilities. This Article analyzes a recent SEC interpretive release concerning the disclosure required in Management's Discussion and Analysis of Financial Condition and Results of Operation (MD&A) in SEC filings. The authors analyze the significance of the MD&A Release to the disclosure of environmental liabilities. They conclude that the MD&A Release has increased management's burden in making disclosures and leaves several important issues unresolved. Companies may thus wish to perform more thorough environmental investigations in connection with SEC filings.

James G. Archer and Thomas M. McMahon are partners with Sidley & Austin. Mr. Archer practices securities and corporate law and has had significant experience with matters relating to the reporting of environmental liabilities. Mr. McMahon is the head of Sidley & Austin's Chicago Environmental Group and devotes the majority of his practice to the environmental aspects of business transactions. Maureen M. Crough is an associate with Sidley & Austin. Ms. Crough handles a variety of matters in the areas of environmental compliance counseling, transactions, and environmental litigation.

[20 ELR 10105]

On various occasions since the beginning of modern environmental law in 1969 with the passage of the National Environmental Policy Act (NEPA),¹ the Securities and Exchange Commission (SEC) has taken action regarding reporting of environmental liabilities. The most recent action was the publication in May 1989 of an interpretive release² concerning the disclosure required in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)³ in SEC filings. The MD&A Release makes several important points regarding disclosure of environmental matters, while leaving some difficult questions unanswered. This Article analyzes the significance of the MD&A Release to disclosure of environmental liabilities by briefly tracing the development of the SEC's environmental disclosure requirements, discussing the significant points the MD&A Release makes about environmental disclosures, and exploring the issues it leaves unresolved. Because of the complexity of this topic, this Article is informational only and is no substitute for consultation with an attorney regarding legal issues and specific questions.

Overview of SEC Environmental Disclosure Requirements

Since the passage of the Securities and Exchange Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (1934 Act),⁴ the SEC has imposed disclosure obligations on companies that publicly offer securities. In particular, the 1933 Act governs disclosures that must be made in connection with the sale of securities, and the 1934 Act establishes periodic reporting requirements for publicly held companies, such as the filing of annual and quarterly reports.⁵ A primary goal of the SEC's disclosure requirements is to provide investors with material information that will aid them in making investment decisions. Regulation S-K contains many of the SEC's specific disclosure requirements.⁶ However, compliance with specific disclosure obligations is not necessarily full compliance with the requirements of the 1933 and 1934 Acts. Registrants are obligated to disclose material information, beyond that specifically required, needed to make required statements not misleading.⁷ The 1933 and 1934 Acts impose liability on corporations and individuals who do not comply with disclosure requirements.⁸ In addition, shareholders may bring a private cause of action alleging loss because of failure to disclose material information.⁹

The SEC first addressed the issue of environmental disclosure in a 1971 interpretive release entitled "Disclosures Pertaining to Matters Involving the Environment and Civil Rights."¹⁰ In this release, the SEC stated that existing general disclosure requirements mandated disclosure of (1) circumstances 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 registrant's business" and (2) "proceedings," if material, arising under environmental laws.¹¹ In 1973, the SEC issued specific environmental disclosure requirements. These requirements have since been modified and are incorporated in two disclosure items in the current SEC regulations: Regulations S-K, Item 101 (Description of Business) and Regulation S-K, Item 103 (Legal Proceedings).¹²

[20 ELR 10106]

Under Item 101, the registrant must make appropriate disclosure of the material effects that compliance with environmental laws may have on the capital expenditures, earnings, and competitive position of the registrant and its subsidiaries. Environmental laws are defined broadly to include federal, state, and local provisions that regulate "the discharge of materials into the environment, or otherwise relat[e] to the protection of the environment." The registrant must disclose material estimated capital expenditures for environmental control facilities for the remainder of its current fiscal year, succeeding fiscal year, and further periods the registrant may deem material.¹³

Item 103 mandates disclosure of a pending administrative or judicial proceeding, or one that is known to be contemplated by the government, arising under environmental laws and to which the registrant or any of its subsidiaries is a party, or to which any of their property is the subject, in any one of three circumstances.¹⁴ First, disclosure is required if the proceeding is material to the registrant's business or financial condition. Second, disclosure is necessary if the proceeding involves "primarily a claim for damages, or involves potential monetary sanctions, capital expenditures, deferred charges or charges to income and 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."¹⁵ Finally, disclosure of a proceeding is required if a governmental authority is a party, and csuch proceeding involves potential monetary sanctions, unless the registrant reasonably believes that such proceeding will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, of less than $ 100,000 . . . ."¹⁶

Under any of these three circumstances, the disclosure of the proceeding must include the name of the relevant court or agency, the date the proceeding was instituted, the principal parties, the alleged factual basis for the proceeding, and the relief sought. However, registrants may group and describe generically proceedings that are similar in nature. In addition, registrants should consider proceedings that "present in large degree the same issues" as one proceeding when determining whether the threshold levels for reporting under the first two circumstances have been met. However, registrants are not required to aggregate potential monetary sanctions when determining whether disclosure of a proceeding is necessary under the third circumstance.¹⁷ Finally, the second and third circumstances of Item 103 focus on the claims made or relief sought and do not by their terms require prediction as to effect. However, as a matter of general good disclosure policy, SEC lawyers often require the registrant to state whether it considers the potential effect of the proceeding to be material.

In 1979, the SEC clarified its environmental disclosure requirements in an interpretive release arising out of an administrative proceeding against United States Steel Corporation.¹⁸ The U.S. Steel Release makes several important points about environmental disclosure. First, companies may have to develop and disclose estimates of future costs of environmental compliance if they expect future costs to be materially higher than current costs. Second, the SEC interprets "proceeding" broadly, so that a proceeding with the government as a party must be disclosed, even if initiated by the registrant.

Third, according to the U.S. Steel Release, companies that volunteer disclosure of their environmental policies must ensure that their disclosures are accurate and must make any additional disclosures needed to prevent the voluntary disclosures from being misleading. Disclosure of a company's environmental policy and its financial implications may be necessary if the policy is likely to result in substantial fines or other significant effects on the corporation. Finally, the U.S. Steel Release reminds registrants that "[c]ompliance with the Commission's specific environmental disclosure rules does not necessarily constitute full compliance with the disclosure requirements of the federal securities laws."¹⁹ Other than the proceeding against United States Steel Corporation, the SEC has been involved in few administrative proceedings concerning environmental disclosure requirements.²⁰ In addition, there have been few cases involving the SEC's environmental disclosure requirements.²¹

MD&A Release and Environmental Disclosures

Since 1980, the provisions of Item 303 of Regulation S-K, have required registrants filing annual or quarterly reports under the 1934 Act, or registration statements under the 1933 Act, to include a narrative discussion of the registrant's financial condition known as Management's Discussion and Analysis of Financial Condition and Results of Operations. In addition to review of historical financial results, the MD&A requires discussion of "known trends . . . events or uncertainties that . . . are reasonably likely" to have a material impact on liquidity, capital resources, or operating results. The SEC instructs registrants that the MD&A should "focus specifically on material events and uncertainties known to management that would cause [20 ELR 10107] reported financial information not to be necessarily indicative of future operating results or future financial condition."²²

In 1987, in response to proposals from the accounting profession, the SEC began an extensive review of MD&As reported by registrants within various industry groups. This review led to the publication on May 24, 1989, of the MD&A Release. The portion of the release that is important for environmental reporting is the discussion of disclosure of prospective information.

A starting concept in the MD&A Release is the apparent need to prove a negative: to conclude that a known environmental problem is not reasonably likely to have a material effect in the future. While the MD&A regulations contemplate disclosure of uncertainties that are "reasonably likely to have material effects" on the registrant's condition or results of operations, the MD&A Release appears to expand this legal standard by requiring disclosure of known uncertainties unless management can determine that a material effect "is not reasonably likely to occur."²³

The MD&A Release sets forth the following analytical approach for determining whether a known uncertainty must be disclosed. First, the SEC states that where an uncertainty is known, management must decide whether it is reasonably likely to occur. This has always been the relevant question for MD&A disclosure, but the SEC appears to shift the burden of proof by stating: "If management determines that it is not reasonably likely to occur, no disclosure is required."²⁴ If management cannot prove the negative, seemingly it must objectively evaluate the consequences of the uncertainty with the assumption that it will occur. Management apparently must then disclose the uncertainty unless it "determines that a material effect on the registrant's financial condition or results of operations is not reasonably likely to occur."²⁵

In other words, the MD&A Release states that once management knows of a potentially material environmental problem, it must disclose it unless it can determine that the problem is not reasonably likely to cause a material effect, either because the event is not likely to happen or if it does happen, the effect is not likely to be material. By contrast, accounting standards for disclosure of uncertainties, the effects of which cannot be reasonably estimated, state that footnote disclosure is required where "there is at least a reasonable possibility that a loss . . . may have been incurred."²⁶ Even though the MD&A Release and accounting standards now utilize different standards for disclosure of uncertainties, if the MD&A discloses an uncertainty that may have a material effect, it seems likely to be discussed or cross-referenced in the financial statement footnotes in view of the practical difficulties in applying either standard to specific facts. With regard to enforcement, the MD&A Release states that if a registrant's future filings reveal a material effect from an event that was a known uncertainty in a prior period, the SEC staff will "inquire as to the circumstances existing at the time of the earlier filings to determine whether the registrant failed to disclose a known . . . uncertainty."²⁷

The MD&A Release specifically rejects the probability/magnitude test for materiality adopted by the United States Supreme Court in Basic, Inc. v. Levinson²⁸ as "inapposite" to MD&A disclosure. Basic makes clear that the significance of a possible occurrence to an investor, the touchstone of materiality for many disclosure obligations, will depend on a balancing of both the indicated probability the event will occur and its anticipated magnitude. However, the SEC states that for MD&A disclosure purposes, the only relevant question is whether an event "is reasonably likely to have a material effect."²⁹

The MD&A Release poses difficulties for management that is trying to determine whether an environmental liability must be disclosed in the MD&A. First, management that is dealing with significant uncertainties, as it frequently is in the environmental area, often will have difficulty determining that a material effect is not reasonably likely to occur. Second, the MD&A Release states that each determination must be "objectively reasonable"³⁰ when made. Thus, intuition and "gut feel" will not be enough for management to rely on even though it is dealing with environmental issues about which it may have few facts. However, if management has had experience with similar environmental problems, such experience may be part of an objectively reasonable basis for making decisions regarding MD&A disclosure.

Although it has been advisable for registrants to investigate their potential environmental liabilities to help them prepare SEC filings, the MD&A Release makes such investigations even more important.³¹ The release does not provide an explicit standard for the type of investigation management should conduct, so management will have to develop its own procedures. Regardless of the particular procedures implemented, management should ensure that individuals making environmental disclosure decisions are aware of information known by in-house departments regarding environmental matters, including cost estimates that may be generated routinely in various stages of remedial activities.³² Individuals preparing SEC filings should also be aware that outside consultants as well as inside departments often prepare cost estimates during due diligence reviews for acquisitions and refinancing. In sum, procedures for filing SEC documents should require individuals who prepare them to consult with all sources inside and outside of the registrant that deal with its environmental matters. To facilitate that process, the registrant should develop lines of communication from its environmental managers, and keep an updated summary of reports regarding environmental problems from environmental managers, outside consultants, and counsel. Moreover, it [20 ELR 10108] would obviously be helpful to sensitize environmental managers to the disclosure consequences of their procedures and actions.

As registrants develop their SEC investigatory procedures, they may look to investigations in analogous areas for guidance. For example, directors must often make investigations to meet their duty of care.³³ Prospective purchasers and lenders are routinely conducting environmental due diligence reviews, both as a matter of good commercial practice and for assertion of the innocent purchaser defense under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund).³⁴

Management should preserve the documentation (i.e., "make a record") of its basis for making the determinations, on an "objectively reasonable" basis, required by the MD&A Release. In preparing such documentation, management should be aware that documents prepared during in-house or outside investigations of environmental problems may not be privileged. Even if certain documents are privileged, the facts they contain may ultimately be discovered. Registrants should be careful not to make admissions of liability in documents prepared to facilitate decisionmaking regarding SEC filings.

Difficult Environmental Disclosure Issues

Problems Posed by the Nature of Environmental Contingencies

The unique nature of environmental contingencies raises difficult questions about their disclosure in MD&As and in other sections of SEC filings. At least four major types of environmental contingencies exist. The first is expenditure of funds to comply with environmental laws that impose "command and control" requirements, such as laws requiring the addition of pollution control devices. If compliance with command and control requirements may have a material effect on a registrant, the registrant may have a reporting obligation under Item 101. In addition, proposed command and control requirements present issues regarding MD&A disclosures. Because proposed command and control requirements are presumably a known uncertainty for MD&A purposes, management may have to determine whether it is not reasonably likely they will be adopted and, if adopted, whether it is not reasonably likely they will have a material effect. The MD&A Release presents the following example of disclosure of a known uncertainty regarding proposed regulations:

The Company had no firm cash commitments as of December 31, 1987 for capital expenditures. However, in 1987, legislation was enacted which may require that certain vehicles used in the Company's business be equipped with specified safety equipment by the end of 1991. Pursuant to this legislation, regulations have been proposed which, if promulgated, would require the expenditure by the Company of approximately $ 30 million over a three-year period.³⁵

A second type of contingency is toxic tort liability for personal injury or property damage because of chemical exposure. If toxic tort litigation has been instituted against a registrant, it may have a disclosure obligation under Item 103. However, if toxic tort litigation has not been instituted, but the registrant believes it might, as may be the case if the registrant owns a hazardous waste landfill in a residential neighborhood, management should consider whether the MD&A Release requires disclosure of such potential litigation. The MD&A Release requires disclosure of potential toxic tort litigation unless management can determine that the litigation is not reasonably likely to occur or, if it occurs, that it is not reasonably likely to have a material effect.

A third environmental contingency is remediation issues known only to the registrant. Examples are the registrant's knowledge of past disposal of hazardous substances onsite or the presence of a significant amount of asbestos in a building.³⁶ The MD&A Release raises the issue of how management will determine that it is not reasonably likely that the registrant will be required to address remediation issues that are currently known only to it.

A fourth environmental contingency is the registrant's connection to a facility at which a governmental agency or another private party is involved with a cleanup of hazardous waste. This contingency raises the most questions regarding environmental disclosure. Under CERCLA and similar state laws, the following potentially responsible parties (PRPs) are strictly, jointly, and severally liable for the costs of remediating a facility from which there is a release or threat of release of a hazardous substance to the environment: (1) the current owner or operator of the facility, (2) the owner or operator of the facility when hazardous substances were disposed of on it, (3) generators of hazardous substances disposed of at the facility, and (4) entities that transported hazardous substances to the facility.³⁷ Defenses to Superfund liability are limited and difficult to assert successfully.³⁸ Two major mechanisms [20 ELR 10109] exist for the government to achieve cleanups under Superfund. The first is to issue an order under CERCLA § 106 requiring PRPs to perform remedial activities.³⁹ The second is for the government to perform a cleanup, and then sue PRPs under § 107 to recover its costs.⁴⁰ In addition, Superfund allows private parties to sue PRPs to recover cleanup costs.

Disclosure of Superfund Liability

Despite technical legal questions raised by the language of Items 101 and 103, potential Superfund liability for a site at which the government or another private party is involved with cleanup activities is arguably an environmental liability for which disclosure is required under those Items. Item 101 requires disclosure of certain effects on the registrant of compliance with environmental laws. Because Superfund is a remedial statute, not a "command and control" statute, parties that are liable for response costs under CERCLA § 107 may not technically be incurring costs to "comply" with an environmental statute. However, the incurrence of costs to comply with a § 106 order might be considered an effect of complying with an environmental law.⁴¹

Item 103 requires disclosure of pending or contemplated proceedings arising under environmental laws is certain circumstances. Section 107 cost recovery actions are clearly pending judicial proceedings. Section 106 orders appear to be administrative proceedings.⁴² If the registrant is subject to a pending or threatened CERCLA proceeding, it must disclose this in one of the three circumstances identified in Instruction 5 to Item 103. The first is if the proceeding is material to the registrant's business or financial condition. The other two circumstances raise questions regarding characterization of response costs. One of the circumstances is that disclosure must be made if the proceeding involves "primarily a claim for damages, or involves potential monetary sanctions, capital expenditures, deferred charges or charges to income and the amount involved . . . exceeds 10 percent" of current assets. The other circumstance is a proceeding to which the government is a party and that involves monetary sanctions of $ 100,000 or more. According to the SEC, remedial costs normally would be charges to income or capital expenditures and are not sanctions.⁴³

An issue often discussed regarding disclosure of environmental liability is whether mere notification that a party is a PRP triggers an SEC disclosure obligation. The MD&A Release states: "Designation as a PRP does not in and of itself trigger disclosure under Item 103 . . . because PRP status alone does not provide knowledge that a governmental agency is contemplating a proceeding."⁴⁴ However, a registrant should evaluate all the circumstances surrounding its receipt of a PRP letter to determine whether its PRP status should be disclosed in SEC filings. For example, in the few instances in which a party that received a PRP letter knows that it has no connection to a Superfund site, as might be the case if it never sent waste to the site or never owned or operated it, the party should not have to disclose its PRP status.

In addition, if PRP status will not have a material effect on the registrant because its share of the cleanup costs is de minimis, it may not have to disclose its PRP status. A PRP's share of costs may be de minimis if the PRP is responsible for only a small percentage of the hazardous substances at a facility involving many other solvent PRPs, and these other PRPs have agreed to pay for most of the cleanup. In addition, PRP status may not have a material effect on a PRP if insurance will cover the PRP's cleanup costs.

The MD&A Release recognizes that a registrant may take into account the availability of contribution from other PRPs and insurance when determining whether it has to disclose its PRP status under Item 103 or in the MD&A.⁴⁵ Because of the heavy burden the MD&A Release places on management to make negative determinations on an objectively reasonable basis before deciding that a disclosure is not required, management will want reasonable assurances regarding the availability of contribution and insurance before deciding that disclosure of PRP status is not required. A registrant that has an agreement with other solvent PRPs regarding contribution for cleanup costs can be fairly confident that it will receive contribution. However, without such an agreement and knowledge about the financial condition of other PRPs, management will have to decide on a case-by-case basis what information it should gather about the Superfund site and other PRPs to evaluate how possible contribution will affect its disclosure decision.

The difficulty of factoring insurance coverage into a disclosure decision is that environmental insurance coverage issues are often litigated, and the outcome of such litigation can be difficult to predict.⁴⁶ If relevant coverage issues are being contested, the registrant should receive some assurance from its counsel that it is likely to prevail before concluding that disclosure can be omitted. If counsel cannot opine on the likely outcome, as will often be the case, the possibility of insurance coverage might still be worthy of mention in the disclosure but would not seem to be a ground for nondisclosure.

The MD&A Release provides the following example of a situation requiring a registrant to disclose its PRP status.

A registrant has been correctly designated a PRP by the EPA with respect to cleanup of hazardous waste at three sites. No statutory defenses are available. The registrant is in the process of preliminary investigations of the sites [20 ELR 10110] to determine the nature of its potential liability and the amount of remedial costs necessary to clean up the sites. Other PRPs also have been designated, but the ability to obtain contribution is unclear, as is the extent of insurance coverage, if any. Management is unable to determine that a material effect on future financial condition or results of operations is not reasonably likely to occur.⁴⁷

The MD&A Release states that the registrant in this example should disclose its PRP status, "quantified to the extent reasonably practicable."⁴⁸

Quantification of Potential Liability

One of the most difficult aspects of SEC disclosure of environmental liability is quantifying that liability, regardless of whether the disclosure is required under Item 101 or 103 or in the MD&A.⁴⁹ Several points are relevant regarding disclosure of cost estimates. First, registrants that are disclosing estimated cleanup costs will have to decide whether to decrease those costs by expected contribution from other PRPs or insurance. In making those decisions, registrants should consider the points discussed above regarding the effect of contribution and insurance on a decision regarding whether to even disclose a potential environmental liability.

Second, any estimates presented should be reliable. A registrant will be entitled to the safe-harbor protection of Rule 175(c) under the 1933 Act and Rule 3b-6(c) under the 1934 Act for disclosure of cost estimates in the MD&A if there was a reasonable basis for the estimates and they were disclosed in good faith.⁵⁰ However, a registrant could be held liable for disclosing a cost estimate made without a reasonable basis.⁵¹ If the only cost estimates available to management are "order of magnitude" engineering "guesstimates" for a problem that is not well defined, management should carefully evaluate the reliability of those estimates before disclosing them.

When a registrant discloses cleanup cost estimates, it may decide to include appropriate caveats. for example, a registrant may want to state its estimates are based on an initial study and that further investigation must be performed before better estimates are available. The SEC has recommended the use of caveats in environmental disclosures, where appropriate, by stating in the U.S. Steel Release: "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."⁵²

For internal reasons, companies or consultants sometimes generate so-called worst case cost estimates when analyzing potential Superfund liability. The concept of worst case estimates is a murky one, with no generally accepted definition. If a registrant has prepared such estimates, it will have to decide whether they have sufficient probability that they should be disclosed in SEC filings. Investors may be misled by unduly negative cost estimates, just as they can be misled by unduly optimistic cost estimates. The real issue seems to be whether the worst case is defined to be the upper end of the reasonable range or whether it is beyond that range. If it is beyond the range, then perforce it is not reasonable and probably should not be disclosed (absent unusual circumstances).

Because of the issues that environmental cost estimates raise regarding SEC filings, in-house corporate environmental departments should be informed that cost estimates they generate, internally or through outside consultants, may have to be disclosed in SEC filings. These departments, and the consultants, should be made sensitive to the issues that cost estimates (especially worst case) raise for SEC disclosure purposes. This sensitivity may be especially important when performing a transaction-related due diligence or environmental audit. A cost estimate, hastily prepared in the heat of a short deadline transaction or influenced by the parties' bargaining positions, can create a disclosure minefield (especially if it is highly conservative or worst-case-oriented).

Registrants that do not have actual cost estimates for environmental liability will have to decide whether they can nonetheless quantify the potential liability for disclosure purposes. Quantification of potential liability will help registrants determine whether disclosure is required under Item 101 or 103 or in the MD&A. If disclosure is required, quantification of potential liability may be obligatory. The MD&A regulations provide that the information a registrant must disclose in the MD&A is only that information available to it "without undue effort or expense."⁵³ Note, however, that this statement implies that reasonable effort and expense are affirmatively required. If a registrant is notified that it is a PRP a few days before an SEC filing is due, and no cleanup cost estimate has been prepared for the site, the PRP cannot be expected to generate such an estimate before making its filing. Nevertheless, a registrant that does not complete some type of investigation regarding environmental liability, even liability it has recently learned of, may have to disclose that liability in the MD&A because it will be hard pressed to establish on an "objectively reasonable basis" that the liability was not reasonably likely to have a material effect. If a registrant cannot quantify its potential liability, the registrant can disclose it in the MD&A with the caveat that the registrant cannot determine whether the potential liability will have a material effect, but such a caveat may provoke further questions from the investing public, the company's auditors, and perhaps the SEC.

Conclusion

Registrants hoped that the MD&A Release would lessen the difficulty of preparing environmental disclosures by providing specific guidance about such disclosures. Instead, the MD&A Release has increased the burdens placed on management in making disclosures and left unexplored some important issues. As a result of the MD&A Release, [20 ELR 10111] registrants may find themselves performing more thorough environmental investigators in connection with SEC filings, being more sensitive to the disclosure issues raised by the preparation of cost estimates, and possibly being monitored more closely by the SEC and shareholders for disclosure violations and liabilities.

1. 42 U.S.C. §§ 4321-4370a, ELR STAT. NEPA 001-014.

2. Release Nos. 33-6835, 34-26831 (May 18, 1989), 54 Fed. Reg. 22427 (May 24, 1989) ("MD&A Release").

3. 17 C.F.R. § 229.303. The MD&A is a narrative discussion of the registrant's financial condition. See infra text accompanying note 22.

4. 15 U.S.C. §§ 77a-77aa; 15 U.S.C. §§ 78a-78ll.

5. 15 U.S.C. § 78m.

6. 17 C.F.R. § 229.

7. See, e.g., Release Nos. 33-6130, 34-16224 (Sept. 27, 1979), 44 Fed. Reg. 56924, 56925 n.11. (Oct. 3, 1979) ("U.S. Steel Release").

8. See 15 U.S.C. §§ 77q, 77t, 77x, 78u, 78ff.

9. See 15 U.S.C. §§ 77k, 77l, 78n.

10. Release No. 33-5170 (July 19, 1971), 36 Fed. Reg. 13989 (July 29, 1971).

11. Id.

12. 17 C.F.R. §§ 229.101, .103.

13. 17 C.F.R. § 229.101(c)(1)(xii).

14. 17 C.F.R. § 229.103, Instruction 5.

15. Id., Instruction 5.B.

16. Id., Instruction 5.C.

17. 17 C.F.R. § 229.103, Instruction 5; 47 Fed. Reg. 11388, 11389 (Mar. 16, 1982) (preamble to final rules regarding adoption of intergrated disclosure system — discussion of Regulation S-K, Item 103).

18. U.S. Steel Release, supra note 7.

19. 44 Fed. Reg. 56925 (text accompanying note 13).

20. See, e.g., In re Occidental Petroleum Corp., Administrative Proceeding File No. 3-5936, at 346 (July 2, 1980) (failure to disclose environmental proceedings; failure to disclose effects compliance with environmental laws might have on business; "The total cost of compliance with environmental regulations . . . may include . . . clean up and other costs to remedy past violations."); SEC v. Allied Chemical Corp., Litigation Release No. 7811 (Mar. 4, 1977) (alleged violation of securities laws by failure to disclose potential liability from discharge of toxic chemicals).

21. See, e.g., Levine v. NL Industries, 20 ELR 20197 (S.D.N.Y. July 31, 1989) (company had no duty to disclose that its subsidiary was operating a Department of Energy uranium processing facility in violation of environmental laws); Grossman v. Waste Management, 589 F. Supp. 395 (N.D. Ill. 1984) (alleged breach of duty to disclose environmental proceedings and effects of compliance with environmental regulations; although decision does not elucidate those two requirements); Steiner v. Baxter, No. 89-M-809 (D. Colo. filed May 9, 1989) (pending shareholder suit against corporation and some of its officers and directors for alleged artificial inflations of stock price by failing to disclose in SEC filings the presence of asbestos in property).

22. 17 C.F.R. § 229.303, Instruction 3.

23. 54 Fed. Reg. 22430 (text accompanying note 31).

24. Id. at 22430 (emphasis added).

25. Id. (emphasis added).

26. ACCOUNTING STANDARDS CURRENT TEXT C59.109 (Statement of Financial Accounting Standards No. 5, at P10) (1988).

27. 54 Fed. Reg. at 22430 n.28.

28. 485 U.S. 224 (1988).

29. 54 Fed. Reg. 22430 n.27.

30. Id. (text accompanying note 31).

31. See In re Occidental Petroleum Corp., Administrative Proceeding File No. 3-5936, at 346 (July 2, 1980) (company did not have adequate procedures to assist it in meeting its environmental disclosure obligations).

32. See U.S. Steel Release, supra note 7 (in context of capital expenditure disclosure, disclosure of company's internal estimates necessary to prevent required disclosure from being misleading).

33. See, e.g., Hanson Trust v. ML SCM Acquisition, Inc., 781 F.2d 264 (2d Cir. 1986) (board failed to undertake adequate investigation of an offer from a "white knight"); Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) (directors liable because they acted without reasonable deliberation or inquiry regarding approval of merger).

34. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA 001-075. Under CERCLA, a party that conducts a preacquisition "appropriate inquiry" of property to determine whether the property is contaminated, yet does not discover contamination, will be exempt from CERCLA liability for preacquisition contamination to which it did not contribute. CERCLA §§ 107(b)(3), 101(35), 42 U.S.C. §§ 9607(b)(3), 9601(35), ELR STAT. CERCLA 009, 025. No fixed standard for "appropriate inquiry" has been established. However, proposed legislation would establish a rebuttable presumption of adequate due diligence if a "Phase I" audit is conducted. This Phase I audit would not include testing, but would consist of steps such as a review of recorded chain of title documents, review of reasonably attainable aerial photographs, visual inspection, search for government environmental liens, and review of reasonably attainable government environmental records. H.R. 2787, 101st Cong., 1st Sess. (1989). See, e.g., United States v. Pacific Hide and Fur Depot, 716 F. Supp. 1341, 19 ELR 20897 (D. Idaho 1989) (different types of entities may be held to different standards of inquiry); United States v. Serafini, 711 F. Supp. 197 (M.D. Pa. 1988) (failure to conduct on-site inspection prior to purchase does not necessarily negate defense); Wickland Oil Terminals v. Asarco, 19 ELR 20855 (N.D. Cal. Feb. 23, 1988) (landowner who knew of risk of contamination and who failed to pursue readily available information may not assert defense).

35. 54 Fed. Reg. at 22430.

36. See generally Steiner v. Baxter, No. 89-M-809 (D. Colo. filed May 9, 1989) (pending shareholder suit against corporation and some of its officers and directors for alleged artificial inflations of stock price by failing to disclose in SEC filings the presence of asbestos in property).

37. CERCLA § 107(a), 42 U.S.C. § 9607(a), ELR STAT. CERCLA 024; see United States v. Chem-Dyne Corp., 572 F. Supp. 802 (S.D. Ohio 1983) (Superfund liability is strict, joint, and several).

38. See CERCLA § 107(b), 42 U.S.C. § 9607(b), ELR STAT. CERCLA 025; see, e.g., United States v. Conservation Chemical Co., 619 F. Supp. 162, 203, 16 ELR 20193, 20199 (W.D. Mo. 1985) (CERCLA's list of defenses is "narrow").

39. 42 U.S.C. § 9606, ELR STAT. CERCLA 024.

40. EPA may also enter into settlements with PRPs. CERCLA § 122, 42 U.S.C. § 9622, ELR STAT. CERCLA 054.

41. See Letter from SEC to Thomas A. Cole, Esq. (Jan. 17, 1989) (suggesting that cleanup costs have to be disclosed under Item 101) [hereinafter Cole Letter].

42. See U.S. Steel Release, supra note 7, 44 Fed. Reg. 56926 (disclosure of all environmental administrative orders is required under Item 103).

43. MD&A Release, supra note 2, 54 Fed. Reg. 22430 n.30; see also Cole Letter, supra note 41 (cleanup costs are not sanctions).

44. 54 Fed. Reg. 22430 n.30.

45. Id. at 22430.

46. See, e.g., United States Fidelity & Guaranty Co. v. Star Fire Coals, Inc., 856 F.2d 31 (6th Cir. 1988) (standard pollution exclusion clause in comprehensive general liability insurance policy bars coverage); New Castle County v. Hartford Accident & Indemnity co., 673 F. Supp. 1359 (D. Del. 1987) (standard pollution exclusion clause does not bar coverage).

47. 54 Fed. Reg. 22430.

48. Id.

49. The MD&A must contain a discussion of all material impacts, including those arising from disclosure provided elsewhere in the filing. Id. at 22428 n.14. Thus, responses to Items 101 and 103 may require further discussion or at least cross-referencing in the MD&A, a practice not always followed in past filings.

50. 17 C.F.R. § 230.175(c); 17 C.F.R. § 240.3b-6.

51. See In re United States Steel Corp., Administrative Proceeding File No. 3-5819 (Sept. 27, 1979).

52. 44 Fed. Reg. 56925.

53. 17 C.F.R. § 229.303(a), Instruction 2.