SEC Comment Letter: Shining Light on Corporate Political Spending

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law and Milton Handler Fellow at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending, discussed on the Forum here. Bebchuk and Jackson are also co-authors of Corporate Political Speech: Who Decides? and Shining Light on Corporate Political Spending, coming out this month in the Georgetown Law Journal. This post is based on a comment letter that Bebchuk and Jackson filed with the SEC in further support of the rulemaking petition. The comment letter, available here, submitted Shining Light on Corporate Political Spending for SEC consideration and is largely based on it.

We recently submitted a comment letter in connection with a rulemaking petition, currently before the SEC, urging the development of rules to require public companies to disclose the use of corporate resources for political activities. The Petition was submitted by the Committee on Disclosure of Corporate Political Spending, a group of ten corporate and securities law experts that we co-chaired. In further support of the rules advocated by the Petition, our comment letter submitted for consideration by the SEC our Article Shining Light on Corporate Political Spending, which was published recently in the Georgetown Law Journal.

The submitted Article puts forth a comprehensive, empirically-grounded case for the rules advocated in the Petition. The Article also provides a detailed response to each of the ten objections that have been raised by the Petition’s opponents, either in the comment file or elsewhere. The Article shows that none of these objections, either individually or collectively, provides a basis for opposing rules requiring public companies to disclose political spending.

The main part of our comment letter discusses and reviews the analysis in the attached article as follows:

“Since the Petition was submitted in July 2011, it has attracted about 500,000 comment letters filed with the Commission. The overwhelming majority of these letters support the Petition. However, the Petition has also attracted significant opposition, both in letters to the comment file as well as in comments made outside the file. Opponents of the Petition include legal academics, prominent members of Congress, and commentators such as the Wall Street Journal’s editorial page.

Given the SEC’s consideration of the Petition, and the strong views expressed in favor of and against it, in Shining Light on Corporate Political Spending we offer a detailed case for the rules advocated in the Petition. The Article also provides a framework for analysis of the desirability of disclosure rules in this area. We conclude that the case for requiring disclosure of public companies’ political spending is strong, and that the Commission should promptly develop such rules.

The Article proceeds in seven Parts. In Part I, we show that the Commission’s disclosure framework for public companies is not static. Rather, SEC disclosure rules have evolved over time in response to increased shareholder interest in particular information about their companies. The SEC has always had broad authority to adopt disclosure rules, and the body of SEC requirements has developed considerably over time. Historically, we show, the SEC has adopted new disclosure requirements when shareholder interest in certain information grew—or in light of external events that made such information relevant to investors.

Part II presents and evaluates empirical evidence about the extent to which corporate spending on politics is not transparent. For one thing, public companies can, and do, engage in political spending that is never disclosed by channeling such spending through intermediaries. We present evidence indicating that public companies engage in substantial political spending through these intermediaries. Furthermore, although other types of corporate spending on politics is occasionally disclosed in public filings, collecting the information necessary to identify the amount or targets of a public company’s spending would require a review of a wide range of disparate sources. As a result, it is currently impractical for a public company’s investors to have a complete picture of the company’s political spending. Indeed, this task is sufficiently demanding that there is currently no dataset that provides information about the aggregate political spending of particular public companies.

In Part III of the Article, we show that public-company investors have expressed significant interest in receiving information about corporate political spending. We present evidence that disclosure of political spending has in recent years been a more frequent subject of shareholder proposals at U.S. public companies than any other corporate governance issue. This evidence of shareholder interest is similar to, but stronger than, the evidence from shareholder proposals that led the SEC to overhaul its executive-pay disclosure rules in 1992. Furthermore, this evidence is consistent with views that institutional investors have expressed in polls, policy statements, and comments on the Petition these investors have filed with the Commission.

Part IV explains why disclosure rules are necessary to ensure that corporate political spending is consistent with shareholder preferences. We show that the interests of directors and executives with respect to political spending may frequently diverge from those of shareholders. Moreover, because of the expressive significance of political spending, shareholders may attach greater importance—beyond the amounts spent—to political spending that deviates from their preferences. Disclosure, we argue, is indispensable to addressing these concerns. Without disclosure of information about public companies’ spending on politics, corporate-governance procedures that could help address such concerns cannot function.

Part V of the Article considers voluntary disclosure of political spending. First, we present evidence that, in response to significant interest from investors, more than fifty of the largest U.S. public companies have voluntarily agreed to publicly disclose their spending on politics. We explain why, although such voluntary disclosure is a useful development, voluntary disclosure cannot serve as a substitute for SEC rules that would require all public companies to disclose their political spending.

Part VI focuses on the design of these rules. We identify and examine several issues that the Commission and its Staff will need to consider in designing the rules, including the scope of the political spending and companies covered, the treatment of spending channeled through intermediaries, the setting of de minimis exemptions, and the frequency and timing of disclosure. We explain that the Commission’s Staff will be able to address these issues in light of the agency’s experience with the design of other disclosure rules raising similar questions.

In Part VII, we systematically consider ten objections raised by opponents to rules that would require public companies to disclose their spending on politics, including the claims that:

  • The Constitution prohibits the SEC from developing such rules;
  • Shareholders’ freedom to sell their stock and vote out directors provides sufficient protection from corporate political spending that is contrary to shareholder interests;
  • The Commission is prohibited from developing such rules because political spending does not meet the securities-law definition of materiality;
  • Political spending is generally beneficial for shareholders;
  • Labor unions are not required to disclose their political spending, and requiring public companies to do so would give an important political advantage to unions;
  • Shareholder proposals requesting disclosure of corporate political spending generally receive less than majority support;
  • The Commission should stay out of political debates, and making rules in this area would therefore compromise the Commission’s regulatory independence;
  • Public companies would incur substantial costs in collecting and reporting the information required to be disclosed by such rules; and
  • The costs of such rules would not be justified by their benefits.

The Article shows that none of these objections, either individually or collectively, provides any basis for opposing rules requiring public companies to disclose their political spending. We conclude that the case for rules requiring disclosure of political spending is strong.”

The comment letter is available here.

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