April 26, 2013
Is Mandatory Political Activities Disclosure Coming from the SEC?
Posted by Christine Hurt

Two summers ago, a group of well-known law professors (no Glommers) submitted a proposal to the SEC to require disclosure of political contributions by Exchange Act filers.  The arguments for new rulemaking were valid and persuasive:  investors are increasingly interested in the political contributions corporations make; even a diligent investor would have a difficult time finding this information independently; many corporations voluntarily disclose such information; and disclosure rules have historically evolved to require disclosure in various areas.

Wedneady, the NYT ominously declared that "S.E.C. officials have indicated that they could propose a new disclosure rule by the end of April, setting up a major battle with business groups that oppose the proposal and are preparing for a fierce counterattack if the agency’s staff moves ahead."  That sounds very dramatic.  The article reports that half a million comments have been submitted to the proposal; I did not count, but you can try here.  The NYT also reports that the majority of the comments are in favor of the proposal; again, feel free to count yourself!

The proposal's authors are correct in stating that investors want to know this information.  On the SEC website, I searched for 14a-8 shareholder proposals that related to political activities and came up with many requests from companies to exclude proposals relating to political contributions and lobbying activities.  In March alone, the SEC responded to requests for no-action letters relating to excluding political contribution proposals from Target; CVS Caremark (no letter given); Western Union (no letter given); Bank of America (no letter given); JP Morgan (included voluntarily); Goldman Sachs (no letter given); Bristol-Myers; Exxon-Mobil (proposal withdrawn); and CBS Corp. (shareholder ineligible).  According to this post on the HLS Forum on Corporate Governance and Financial Regulation,  this Spring has seen a "renewed blitz of resolutions on corporate campaign finance, particularly indirect lobbying activities, following the record spending in the 2012 election cycle."

But, as the NYT not-so-subtly-hints, a lot of groups, perhaps groups that receive the monies, vehemently oppose the bill, including Americans for Prosperity, the U.S. Chamber of Commerce, the American Gaming ASsociation, the National Retail Federation, and the National Mining Association.  The arguments against, though, just aren't that compelling.  As you might imagine, saying "our shareholders don't need to know this" or "we don't want our shareholders to know this because then they might sell" doesn't sound very good. 

One argument is that the amount of money involved is "immaterial to the company's bottom line."   I have two responses.  First, executive compensation may be immaterial to the company's bottom line, at least the top 5 compensated that are disclosed under Item 402.  Second, in reading the requests for no-action letters from companies that want to exclude shareholder proposals for political activity disclosure, no company cited 14a-8(i)(5), which allows proposals to be excluded if amounts "account for less than 5 percent of the company's total assets" or "net earnings and gross sales" and "is ot otherwise significantly related to the company's business."  Companies moved to exclude proposals because they were vague or misleanding (i)(3) or duplicative of past, failed resolutions (i)(11).  So, I'm not convinced either that the amounts are immaterial or whether quantitative materiality is necessary.

The other argument is, of course, free speech.  I love free speech, but that argument doesn't ring true to me.  The SEC wouldn't be limiting or prohibiting political speech, just mandating that corporations tell their owners about it.  Their owners.  Now, when publicly-held corporations communicate with their owners, that information becomes public, so the mechanism is not perfect.  Not only will current and prospective owners know about political activity, but so will consumers and the public at large.  But arguing against this potential rule seems to fall under the "protests too much" category.

Finally, last Thursday, the House of Representatives passed the "Focusing the SEC on its Mission Act," to prohibit the SEC from requiring corporations to disclose information regarding political activities.  Apparently, that is the SEC's mission -- to not require corporations to disclose information regarding political activities.

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