The House in early August passed an appropriations package that would jettison a persistent Republican rider, one that for years has barred the SEC from undertaking a corporate political spending disclosure rulemaking. If the Senate follows suit, Gary Gensler would become the first SEC chair in years in a position to make those rules a reality.
Democratic control of the House, Senate, and White House has all but doomed the U.S. Chamber-of-Commerce-supported budget rider for the coming fiscal year, clearing a path for progressives to achieve a long-standing corporate disclosure goal. Gensler, who will head up the market regulator through 2026, is elevating public company environmental, social, and governance (ESG) disclosures as a rulemaking priority, a category that includes political spending transparency. During his confirmation hearings in early March, he told the Senate Banking Committee the commission should consider the rules, “in light of the strong investor interest,” while the two other commissioners who make up the SEC’s current Democratic majority – Allison Herren Lee and Caroline Crenshaw – have also voiced support for the reforms.
Precisely when the SEC will get around to those rules is still hazy, and other ESG matters, especially corporate climate change risk, have so far taken up a greater share of the conversation. When the SEC in June released its near- and long-term rulemaking priorities, commonly referred to as the Reg-Flex agenda, it front-loaded climate and human capital management disclosures as its initial ESG priorities.
“I would hope that political activity would follow up right behind those,” said Rachel Curley, Democracy Advocate at Public Citizen’s Congress Watch, which has taken the lead among reform groups on the SEC political spending disclosure issue.
Public Citizen, which also supports the other ESG reforms, wants the political spending disclosure rules to move forward “as soon as possible,” Curley said
A Post-Citizens United Reaction
The rider has appeared in federal budget legislation every year since 2015 when Republicans – fresh off electoral victories the prior year that left them with control of both chambers of Congress – attached this language to the SEC’s annual funding: “ None of the funds made available by any division of this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.”
At the time, the rider provided cover to SEC Chair Mary Jo White, who never showed any appetite for the political spending rulemaking, to focus on other priorities. Still, White’s apathy toward the rules was one of several reasons why progressives, including Sen. Elizabeth Warren, called for President Barack Obama to replace her. White’s successor as chair, Trump-nominated Jay Clayton, likewise ignored the issue. Gensler is the first chair in years to have expressed any interest in taking up political spending disclosure.
“There is certainly, with Gensler in charge, reasons for optimism that the SEC will play more of a role in fostering campaign transparency,” said Dan Weiner, deputy director of the election reform program of the Brennan Center at New York University Law School and a former senior counsel to FEC Commissioner Ellen Weintraub.
The SEC has faced consistent pressure to undertake the disclosure rulemaking since the Supreme Court’s 2010 ruling in Citizens United v. Federal Election Commission, which lifted restrictions on independent political expenditures by corporations and unions. Former Justice Anthony Kennedy, who wrote the majority opinion in Citizens United, wrote that “with the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters.”
Kennedy’s expectations, however, never manifested. More than a year after the ruling, a group of 10 academics – including now-former SEC commissioner Robert Jackson – called on the SEC to issue the rules, arguing that “absent disclosure, shareholders are unable to hold directors and executives accountable when they spend corporate funds on politics in a way that departs from shareholder interests.” That petition has since garnered more than 1.2 million comments.
The budget rider, however, bound the hands of the SEC on the rulemaking, whether or not the chair actually wanted to initiate it.
What the Rules Might Look Like
The SEC, should it move forward with the rules, will face a delicate balance in its role as a primary regulator of capital markets, not elections. The content of the rules – and how they overlap with existing election disclosures – will be closely scrutinized by both sides.
Curley said Public Citizen is interested primarily in three categories of information from the disclosures. First, the general company policy around disclosing their political activity: “Do they have a general commitment to being transparent, and then who inside the company makes these spending decisions, and anything else that relates to their policy around their political activity,” she said.
Second, the group wants to know more about a public company’s board oversight over political spending decisions.
And third, the expenditures themselves: “We are definitely interested in information that goes beyond current FEC filings and current lobbying disclosures.” She pointed to dues paid to trade associations and 501(c)(4) “social welfare” groups – two major sources of dark money due to inadequate donor disclosure requirements – as particularly important.
As is a public company’s state-by-state spending, she said, which is today complicated to understand due to the information being spread across state-level databases.
Opponents Lean in on Materiality
As corporate political spending disclosure rules and other ESG disclosures build momentum, opponents have coalesced around a materiality-centered counterargument. Fundamentally, they argue that information meeting meet the definition of financial materiality must already be disclosed to investors and question whether disclosures of a company’s political spending would meet that standard.
Those critics want Gensler to hew closely to the definition of materiality established in 1976 Supreme Court ruling in TSC Industries, Inc. v. Northway, Inc.. In that ruling, the Supreme Court set out a test for whether an omitted fact is material based on “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”
The Chamber, in a late June letter unsuccessfully asking the House Appropriations Committee to preserve the anti-spending-disclosure rider, argued that “electioneering activities that are the subject of such a rulemaking petition are already disclosed under election law, and such a petition is outside the jurisdiction of the SEC.”
“Furthermore, shareholders have routinely rejected these disclosures when they have been proposed by shareholder resolution,” the Chamber wrote.
Proponents of the rules point to growth in political spending transparency proposals by shareholders as evidence that investors do, in fact, want public companies to make the disclosures.
“It starts from a broad principle, that particularly when it comes to publicly traded companies, transparency is a positive good,” Weiner said. “Folks on the other side often, I think, struggle a little bit to come up with principled arguments for why this is bad. It’s one thing to argue about whether an individual’s small contribution, what’s advanced by that being disclosed. But when you are talking about a publicly traded company that is spending other people’s money, I think there is a pretty good argument for broad transparency rules.”
Among those companies where investors forced new political disclosures this year was Netflix Inc., where – despite the board urging a no vote – an overwhelming majority of investors in early June backed a nonbinding proposal on the disclosures.
The latest CPA-Zicklin Index of Corporate Political Disclosure and Accountability, published by the Center for Political Accountability, found 260 companies on the S&P 500 in 2020 disclosed “as least some corporate political contributions or expenditures.”
The report found 251 companies disclosed full or partial information on memberships or payments to trade associations, or told trade organizations not to use their payments for political activities, while 198 companies did so for 501(c)(4) groups.
The reports named 79 companies on the S&P 500 that are “setting model corporate governance best practices for operating in an incendiary political arena,” including Honeywell International Inc. and HP Inc., while branding Netflix as a resistant “bottom-tier” company.
Some companies are out front of the issue, interested in working with shareholders and understanding the reputational risks, Curley said, “but there’s always going to be folks lagging behind, so investors can’t look at the entire market and understand who has a risky political activity profile and who doesn’t if there’s a whole chunk of companies that aren’t required to disclose that information.”
“So that’s why we really need something that’s mandated,” she said. “So that investors can get a full picture from every company about their political activity.”
This article originally appeared in the August 17, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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