The SEC is signaling that it will put a heavy emphasis on investor protection aspects of the agency’s tripartite mission by taking up certain regulatory projects that the commission under the leadership of Jay Clayton had not during the Donald Trump administration.
In a major speech, SEC Acting Chair Allison Herren Lee outlined investor-friendly priorities other than often-mentioned climate change risks, such as restoring curtailed shareholder rights or even adding certain requirements for public companies, such as disclosure of political spending.
The market regulator’s other two missions are maintaining fair, orderly, and efficient markets and facilitating capital formation. During his tenure, Clayton largely pursued a deregulatory agenda, cutting back rules that businesses do not like or say are too burdensome to comply. Investor advocates had been unhappy in the past four years, seeing one rule after another that chipped away shareholder rights or protections.
Since President Joseph Biden was inaugurated on January 20, 2021, and subsequently designated Lee to be the commission’s acting chair, she has announced a series of initiatives and hires to work on climate change, which is a specific area of the overall environmental, social, governance (ESG) landscape. “But we must also make progress on standardized ESG disclosure more broadly,” Lee said at a virtual event hosted by left-leaning Center for American Progress (CAP) on March 15. “That means working toward a comprehensive ESG disclosure framework.”
Coming up with such a framework is expected to take a long time since it will include answering a difficult question about establishing a domestic ESG standard-setter under SEC oversight, among numerous challenges. But in the near term, she said the commission should consider initiatives that can be advanced on a standalone basis.
This would include guidance on human capital management disclosure to encourage disclosure of specific metrics like workforce diversity and more specific guidance or rulemaking about board diversity.
“Another significant ESG issue that deserves attention is political spending disclosure,” Lee said. “The SEC is currently prevented from finalizing a rule in this area, but political spending disclosure is inextricably linked to ESG issues.”
She was referring to a budget rider that Republicans put in to prevent the SEC from writing the rule. With Democratic majority in both chambers, there is a possibility that such rulemaking could happen.
“Consider for instance research showing that many companies that have made carbon neutral pledges, or otherwise state they support climate-friendly initiatives, have donated substantial sums to candidates with climate voting records inconsistent with such assertions,” Lee explained during the CAP event. “Consider also companies that made noteworthy pledges to alter their political spending practices in response to racial justice protests, and whether, without political spending disclosure requirements, investors can adequately test these claims, or would have held corporate managers accountable for those risks before they materialized. Political spending disclosure is key to any discussion of sustainability.”
Gary Gensler, Biden’s pick to run the SEC, is expected to be confirmed by the Senate soon, and Gensler has indicated that he is open to considering ESG rulemaking, including political spending disclosure. He said that this information is increasingly material for investors.
Long History of Political Spending Disclosure Rulemaking Effort
If the SEC does start such a rulemaking, this will not be a new effort.
Following a 2010 Supreme Court decision that allowed corporations to spend freely on political activities, 10 academics in August 2011 asked the SEC to write a disclosure rule. It subsequently garnered 1.2 million letters of support from individuals, but the SEC for one reason or another has not acted on it. The measure is opposed by business groups who say the disclosure requirement is outside the SEC’s legal authority and call it an arbitrary attempt to interfere with company First Amendment rights. The rule would also impose substantial costs without justification, they say.
The agency staff began working on a proposal while Mary Schapiro headed the SEC under President Barack Obama. Shortly after Mary Jo White took over the agency in 2013, the issue was quietly dropped from the regulatory agenda. White, who stepped down in January 2017, said on several occasions that her priority was to complete congressionally mandated rules. She also said that specialized disclosure rules are not necessarily part of the SEC’s core mission to protect investors and promote efficient securities markets. Clayton obviously did not take up the issue.
Now, the SEC staff might get instructed to pick up where it left off eight years ago.
Business Group Concerns
Representatives of the U.S. Chamber of Commerce, which does not want rigid, prescriptive requirements, met with Lee and her staff on March 3, and in a follow-up March 15 letter, emphasized that ESG reporting must be rooted in the concept of materiality established by the Supreme Court. This means companies should disclose information that a reasonable person would find important in the total mix of information to make a voting or investing decision.
Investor advocates, including Gensler, seem to take the view that the focus should be on whether investors believe a piece of information is material rather than corporations deciding what is material for investors. And they believe much of the ESG information, including political spending disclosure, is material even if companies do not think so. Moreover, even if a piece of information by itself is not material, if that information is significant in the aggregate, investors want it disclosed.
However, “We believe all disclosures should provide decision-useful information to investors and be workable for companies of different sizes and industries,” the Chamber’s Tom Quaadman wrote. “While disclosures may be a part of an all of government, comprehensive policy to combat climate change, disclosures should be used to protect investors and should not be used as a means to achieve policy goals outside the scope of the federal securities laws.”
Other Issues Lee Highlighted
Lee said she also wants the commission to take up the following:
improving shareholder proposal process;
shareholder voting rights Revising commission guidance on proxy voting responsibilities of investment advisers;
updating fund voting disclosures; and
finalizing a universal proxy rule.
