Are New Political Giving Disclosure Rules in the Offing?

While the final figures are still being tallied, the 2012 election cycle is certain to go down as the most expensive ever.

The Center for Responsive Politics estimates the total cost at $6 billion. That figure includes the typical largess of business executives and wealthy insiders, but a bigger piece of the pie is now supplied directly by companies, labor unions, and business-supported entities, freed to make unlimited donations by the 2010 Supreme Court decision on the Citizens United case.

As Karl Rove may well know, money doesn't guarantee political victory, but still the Center's analysis shows that candidates who spend more money typically have a much better chance of winning. This year's congressional elections proved to be no different, with the bigger spenders taking 93 percent of House races, and 64 percent of Senate races. Indeed, President Obama had outspent rival Mitt Romney $853 million to $752 million as of Oct. 17 on his way to securing four more years in the White House, according to the Federal Election Commission.

Now that the balloons are deflated, the concession speeches aired, and—thankfully for most—the television signals and radio airwaves have returned to carrying messages hocking cars and electronics, shareholders and other stakeholders are looking to access where all the money came from and how it was spent.

Those massive campaign contributions are causing some groups to put added pressure on companies to disclose more about the money they are spending on political activities. Investor groups have been agitating for such changes through a steadily increasing number of shareholder resolutions in past years, and are expected to continue the efforts in the upcoming proxy season.

Recently, the Securities and Exchange Commission staff let it be known that they are paying attention, too. Speaking at a conference during election week, Paula Dubberly, deputy director for the SEC's Division of Corporation Finance, said that her division is now considering whether to ask SEC commissioners to propose rules that would require companies to disclose payments related to political activities.

Experts caution that such rules are a long way from becoming a reality at this point. But if they come to pass, “the complexities of what they could be and could create are somewhat mind-numbing,” says D. Mark Renaud, a partner with the law firm Wiley Rein LLP and an expert in lobbying and campaign finance law. 

The main issue: Will companies have to disclose the payments they make to trade associations and other special interest groups, which may or may not be used for political purposes? If so, the SEC would have to grapple with identifying “the fine line between supporting an organization and supporting specific political points of view,” says Matthew Leland, partner with the law firm McDermott, Will & Emery.

Political giving defined very broadly could create a huge burden for corporate compliance departments. “If the rules only cover giving to candidates, PACs, and Super-PACS, I don't think any company would be upset with that; it's already disclosed,” says Renaud. “But once we get beyond that into lobbying and indirect payments, where you're guessing what other people are doing with the money, that's of more concern.”

If they come to pass, the requirements would be a direct response to a rule-making petition that 10 prominent law school professors submitted to the SEC last August. In it, they note that the currently required disclosures about corporate political spending are limited, and “scattered among several federal, state, and local government agencies, presented in widely varying formats, and ill-suited to giving shareholders a good picture of a particular corporation's political spending.” The SEC received over 300,000 comments on the petition, most of which voiced support for it. (Notably, however, another group of top law professors wrote their own letter last March saying that rules on political disclosures would be inappropriate.)

Rules from the SEC “could codify and provide some uniformity around what many companies are already doing.”

—Bruce Freed,

President,

Center for Public Accountability

Indirectly, such rules would respond to the 2010 Supreme Court ruling known as Citizens United that loosened the rules for corporate political donations without requiring any additional corporate disclosures. While companies still cannot contribute directly to federal political campaigns, post-Citizens United, they can contribute unlimited sums to influence elections—either directly or through trade associations and special-purpose political entities known as super PACS and 501(c) (4)s, not all of which must be reported to election officials.

On the Proxy Ballot    

Citizens United has already catalyzed investors into action in other ways, causing political spending disclosure to dominate the past two proxy seasons. According to the research group Proxy Monitor, shareholder resolutions on the matter doubled between 2010 and 2011 for Fortune 200 companies, and increased another 20 percent in 2012. Such resolutions have in fact been very successful in yielding more information, says Bruce Freed, president of the Center for Public Accountability (CPA), which assists investors in furthering political spending disclosure resolutions. Currently, about 60 percent of the S&P 200 now voluntarily offer some form of disclosure, up from about 40 percent in 2008, according to the CPA-Zicklin Index of corporate political spending practices.  

Rules from the SEC “could codify and provide some uniformity around what many companies are already doing,” says Freed. For example, Merck, the highest-rated company in the index, offers an expansive explanation on its Website of its business reasons for getting involved in politics, as well as the governance process it follows for political donations. Part of the process: Merck's general counsel sends its board an annual report on the company's political contributions (both corporate and through its employee PAC) that includes the name of each candidate, committee or event, and amount disbursed, according to its Website. This report is then published on its Website; open to the public for comments and questions.

DISCLOSURE BREAKDOWN

The following chart from the CPA-Zicklin 2012 Index shows how companies rank disclosure by expenditure type.

Source: CPA-Zicklin Index 2012.

Others have taken the approach of limiting their spending on politics to varying degrees. Four companies—Colgate-Palmolive, Goldman Sachs, IBM, and Praxair—report they do not make any payments to influence political activity, while another 20 said political spending came only or primarily through their employee-funded PAC. 

Corporate disclosures around indirect payments to trade associations and special-purpose groups are far less common than the direct payments to campaigns and events, however. Only 36 percent of companies studied for the index provided some detail on this aspect; a slim 5 percent said that the company restricts such payments from being used for political purposes.

Freed says that “the full range of direct and indirect spending is the standard ask” of corporations. Other supporters say SEC rules that require anything less would not be very meaningful, supporters say, since most companies' political spending goes through such groups as the Chamber of Commerce or others with multiple purposes.

Considering the level of analysis and judgment that reporting all spending would likely entail, though, such rules could at the very least chill support for trade associations and other lobbying groups, says Renaud, which may impinge on a corporation's First Amendment rights.  “Trade associations represent every section of society to rulemakers; that's what makes the whole democratic process work,” he says. Without such representation, public companies could find themselves “at a political disadvantage to non-public companies and to labor unions.”

Perhaps the best news is that legal departments can rest easy for the moment. At least one expert—and petition co-signer—suggests that rules are a long way off. “I don't expect any action to come out of the SEC in the near term,” says James Cox, a professor at Duke Law School who was one of the 10 proposing the rules. For one, the agency is still struggling to keep up with the glut of rules it is obligated to write for the Dodd-Frank Act and the JOBS Act. In addition, now that current SEC Chair Mary Schapiro is planning to step down next month, it's unclear if her successor, current Commissioner, Elisse Walter will prioritize the issue—particularly since, as Cox notes, “it's a very hot potato for any regulator to handle.”