SEC to Consider New Rules on Political Spending Disclosures

Even the most ardent supporters of rules requiring publicly traded companies to disclose more information about their political contributions and lobbying efforts didn't expect much movement on the issue from a Securities and Exchange Commission that is well behind on writing Dodd-Frank Act and JOBS Act rules.

Now, however, activists have received a dose of unexpected optimism, while companies have reason to prepare for more public scrutiny of their political giving efforts. Earlier this month, the SEC updated its unified agenda, a roadmap for rulemaking in the coming months, adding a political disclosure rule with the projected timeline of April for a first proposal on the topic.

That action comes as proponents of more transparency of corporate political giving were preparing to put the issue to shareholder votes at several companies this proxy season. And, another punch was thrown in the fight on Jan. 3 by New York State Comptroller Thomas DiNapoli when he announced that the $150 billion New York State Common Retirement Fund had filed a lawsuit in a Delaware court against Qualcomm for the right to inspect the company's records for politically motivated spending.

Why Qualcomm? DiNapoli says it spent more than $4.5 million on lobbying efforts in 2012 and has repeatedly “refused the fund's request to inspect the company's books relating to the use of corporate resources for political activities.” In a statement issued just after the suit was filed, Qualcomm said it was surprised by the legal action.

This isn't a new battleground for DiNapoli and the retirement fund. In 2011 and 2012, it filed 27 shareholder resolutions asking for disclosure of political spending, reaching agreement with 10 companies, including Marriott International, Limited Brands, Yum Brands, and KeyCorp.

Congress is also taking up the fight for more transparency. On the same day DiNapoli's suit was announced, U.S. Rep. Chris Van Hollen (D-Md.) reintroduced legislation, known as the DISCLOSE Act, which calls for all corporations, unions, and Super PACs to report to the Federal Election Commission, within 24 hours, any campaign spending totaling $10,000 or more. Leaders of such organizations would also have to identify themselves in any political advertising (announcing a variation of “I approve this message”). These expenses would have to be disclosed in annual financial reports and an online database that would be available to the public.

The SEC and Congress may be responding to a wave of support for political spending disclosures that has surfaced ever since the Supreme Court's Citizens United decision opened the door in 2010 for companies and other organizations to make unlimited campaign contributions. Robert Jackson, an associate professor at Columbia Law School, and Harvard Law School professor Lucian Bebchuk circulated a petition in 2011 calling for such rulemaking, later filed with the SEC, which has received more than 323,000 public comments from supporters and opponents of political giving disclosure.

“To our knowledge it is the most commented on petition in the history of the SEC,” Jackson says. “It made it clear that this is one of the most important issues in corporate governance right now.”

“Recent developments do suggest that the SEC is really thinking seriously about making a rule here,” Jackson says. “It would just be surprising for the SEC, which has no obligation to put anything like this on its agenda, to commit to a date that is relatively soon if they really had no interest in the issue or proposing a rule. This issue has made their agenda without a motion from Congress or anybody else, just from investor interest.”

“With the 2012 elections behind us, the SEC is freer to act without the risk of being accused of acting politically if it takes up the issue.”

—Amy Borrus,

Deputy Director,

Council of Institutional Investors

With the next major national elections two years away, the SEC may see a window of opportunity to get political giving disclosure rules on the books. “With the 2012 elections behind us, the SEC is freer to act without the risk of being accused of acting politically if it takes up the issue,” says Amy Borrus, deputy director of the Council of Institutional Investors, whose members manage more than $3 trillion in assets. “I think the Commission has always been responsive to a groundswell of investor interest. Something has to reach critical mass and we may be there.”

Calls for proxy proposals from shareholders seeking disclosure of political contributions have been growing every year and “increasingly we are seeing large companies agreeing to disclose what they give and how they determine those giving decisions,” Borrus says.

Jackson stresses that any SEC rule or proxy vote is not meant to stifle free speech or political activity, some of which can be in a company's best interest. “What investors are asking for is not to limit political spending, or to prohibit it, but to just understand it,” he says. “Indeed, Justice Kennedy in the Citizens United decision said we don't have to be worried about corporations spending money on politics because the mechanics of corporate governance will allow investors to check corporate spending on politics.”

Eleanor Bloxham, CEO, of The Value Alliance and Corporate Governance Alliance, a board and senior executive advisory firm, similarly sees a potential disclosure rule as “playing catch-up” following the controversial Supreme Court ruling. In a “best case scenario,” she says, the SEC will require disclosure on “all political spending and they are not going to carve out pieces that might not have to be disclosed.”

“You don't want a rule that papers over the problem and only provides quasi-disclosure, so you still don't know what you've got,” she says.

Bloxham says it is important that a disclosure rule also address situations where donations may be bundled and parsed out to a variety of causes by an intermediary. “Investors need to understand when they buy into a company where their money is going and the people who sit on boards also need to know,” she says.

What Should be Covered?

In a recent research paper, “Shining Light on Corporate Political Spending,” Bebchuk and Jackson outlined some of what they expect the SEC will have to address as it proceeds with rulemaking. First, it will need to determine the types of political spending covered by a rule and which public companies will be subject to it. Should smaller companies be exempted from the rules, for example, or is a scaled disclosure requirement warranted?

CHAMBER OF COMMERCE LETTER

The following is a selection from a comment letter to the Securities and Exchange Commission from the U.S. Chamber of Commerce urging it to reject rules pertaining to the disclosure of corporate political donations that were urged in a petition drafted by a group of law professors.

A rule of the type urged in the petition cannot be promulgated by the Commission, because there is no rational and non-arbitrary justification for adoption of a rule requiring only public companies to disclose political and lobbying expenditures not required to be disclosed under generally-applicable laws—especially in light of the Commission's statutory obligation to apprise itself about the economic consequences of a proposed regulation and to make a rational and non-arbitrary decision in light of those consequences.

A number of recent Commission regulations have been set aside by the courts for failing to satisfy this standard—the Commission should not waste precious public resources on a rulemaking exercise that is similarly doomed to failure. That is especially true given the significant cost of such a rulemaking—the Commission indicated that a recent failed rulemaking cost taxpayers $2.5 million—as well as the significant number of Commission rulemakings mandated under the Dodd-Frank Act and the JOBS Act that have not been completed, or even commenced.

[An] alternative justification for a rule—that a company's board and management cannot be trusted to ensure that the corporation's political and lobbying activities are actually in the corporation's (and therefore the shareholders') interest—is similarly meritless.

Fundamental principles of corporate governance entrust the board with responsibility to oversee management's activities, and there is no reason why the board cannot carry out that responsibility with respect to these activities, as it does in connection with a myriad of other corporate activities that, if not properly targeted and managed, could expose the corporation to serious risk.

The absence of any rational justification for the rule sought by the petition is confirmed by the real purpose of the advocates of special disclosure requirements for public companies: to eliminate, or at least substantially reduce corporate political and lobbying activity by using the one-sided disclosures mandated by the rule to attack corporations that engage in the political arena. It is no coincidence that the principal proponents of shareholder resolutions advocating increased disclosure, and of this rule, are minority “special interest” shareholders—union pension funds, social investment funds, and government pension funds controlled by elected officials with policy positions hostile to those of most companies. Their goal is to use the disclosures to mount attacks on public companies—and damage shareholder value—in order to force companies to stop policy engagement that would benefit the company and increase shareholder value. The Commission should not allow its regulatory process to be hijacked for this illegitimate purpose.

Source: SEC.

Jackson says the SEC should consider a de minimis exception, “which would appropriately balance the benefits of disclosing corporate spending on politics with the costs of disclosing very small amounts of spending that are unlikely to be important to investors.”

Another question: How often should public companies disclose political spending to investors? Reporting too often “would be disruptive and costly for many firms,” while too infrequently would make disclosures “ineffective for purposes of transparency and accountability,” says Jackson. He suggests requiring disclosure in the proxy statement provided to shareholders prior to annual meetings.

No matter how the SEC proceeds, one thing is certain: There will be plenty of opposition, and it will be well-funded. According to the Corporate Reform Coalition, a group supporting new disclosures for political spending, the U.S. Chamber of Commerce spent more than $36 million on the 2012 elections as an intermediary.

In a comment letter to the SEC, the Chamber stressed its opposition to a disclosure rule, citing the Fist Amendment protections extended to corporations as a result of the 2010 Supreme Court decision, as well as the need for companies to support candidates and issues that benefit their interests.

“Fundamental principles of corporate governance entrust the board with responsibility to oversee management's activities, and there is no reason why the board cannot carry out that responsibility,” it wrote, adding that “minority ‘special interest' shareholders” such as union pension funds, social investment funds, and government pension funds, are looking to squelch political speech and “hijack” the regulatory process.

Also count SEC Commissioner Daniel Gallagher in opposition to a disclosure rule. Speaking before the Chamber last week, he pledged to fight against any such rule, alongside his fellow Republican on the Commission, Troy Paredes, who has also indicated his opposition.

Gallagher said the SEC has “been led astray by politically charged issues” and a political disclosure rule is an example of bending to such a “wish list” offered by activists. He urged the Commission to instead better deploy its resources, even amid the pressures of Dodd-Frank Act-required rulemaking, to focus on “the everyday, core blocking-and-tackling issues that affect investors most.”