Responding to Objections to Shining Light on Corporate Political Spending (1): The Claim of Immateriality

A committee of academics that we co-chaired has submitted a rulemaking petition urging that the SEC develop rules requiring disclosure of corporate political spending. Our petition has attracted more than 490,000 comment letters, the overwhelming majority of which support the petition. The petition has also attracted opponents, including prominent members of Congress, the Wall Street Journal editorial page, legal academics, and intermediaries that facilitate undisclosed corporate political spending such as the U.S. Chamber of Commerce. And the SEC has indicated that the agency plans to address the petition’s request for rules in this area during 2013.

Given the expected SEC consideration of the subject, we have written an article, Shining Light on Corporate Political Spending, coming out this month in the Georgetown Law Journal, that puts forward a comprehensive case for the rulemaking we advocated in the petition and responds to each of the ten objections that opponents have raised in comment letters filed with the SEC or elsewhere. We show in this article that these objections, either individually or collectively, provide no basis for opposing rules requiring public companies to disclose political spending to their investors.

In this post, we focus on one objection that has been raised to rules requiring disclosure of corporate political spending: the claim that such spending is immaterial. Opponents of the petition have argued that the Commission lacks the statutory authority to adopt the proposed disclosure rules because the magnitude of corporate political spending is not sufficient to meet the securities-law standard of materiality. For example, in a comment letter submitted by the U.S. Chamber of Commerce together with other organizations, opponents of the petition claimed that the Commission’s authority is limited to mandating disclosure of material matters and that “there is no basis whatever for finding [information on political spending] material.”

This argument provides little support for opposing rules requiring disclosure of corporate political spending. First, the claim simply asserts a contestable empirical proposition—that public companies’ spending on politics is not financially significant— but fails to provide any factual basis for this assertion. Indeed, we present evidence in Shining Light indicating that the amounts companies spend on political spending may well be significant. As we document in that article, political spending by just eight of the most active intermediaries that use corporate funding for politics exceeded $1.5 billion between 2005 and 2010, which is hardly a trivial sum.

Of course, until public companies are required to disclose their political spending, it is impossible to know the full amount of corporate spending on politics. Opponents of transparency in this area should not rely on the lack of disclosure to assert that the amounts not disclosed are not economically significant.

Second, even assuming that the amounts that public companies spend on politics are not consequential for their financial results, a finding that political spending is financially significant is not a necessary condition for SEC rules mandating disclosure of that spending. Many SEC rules have long mandated disclosure of amounts that are unlikely to be financially significant for most large public companies.

For example, the SEC’s rules on executive pay require disclosure of “[a]ll compensation” paid to executives, including elements of compensation that are not financially significant for the company; indeed, the rules expressly mandate disclosure of amounts as small as $25,000 in some cases. Similarly, the SEC’s rules on related-party transactions require disclosure of spending of more than $120,000, although such sums are not financially significant for most large public companies.

The SEC requires these disclosures because the Commission has long recognized that investors may well have an interest in matters beyond the issue’s direct relevance to the company’s profits and losses. As we show in Shining Light, public company investors have expressed considerable interest in having additional information on political spending at the companies they own; for example, shareholder proposals requesting disclosure of political spending are now the most common type of shareholder proposals at large public companies.

Consistent with this evidence, the SEC recognized long ago that political activity is among the issues that “may be significant to an issuer’s business, even though such significance is not apparent from an economic viewpoint.” Thus, even assuming hypothetically that (as opponents of the petition assert without any evidence) the financial magnitude of corporate political spending is by itself insufficient to meet the standard of securities-law materiality, that assumed fact would not provide a basis for opposing an SEC rule on grounds that the SEC lacks authority to mandate such a rule.

In sum, the assertion that corporate spending on politics is “immaterial” as a matter of federal securities law provides no basis for opposing rules requiring disclosure of corporate political spending.