If you own a share of a company, how much information about the company are you entitled to? That is the question embedded in the debate over a proposed Securities and Exchange Commission rule that would force publicly traded companies to disclose their political spending to their shareholders.
As of this month, a 2011 petition to the SEC proposing the rule has received more than 1 million comments -- most of them in favor of the mandate. Supporters of the rule, some of whom demonstrated outside the SEC last week, say that's the highest number of public comments ever submitted in response to a petition for a SEC rule. That level of public engagement, the proponents say, means the agency must stop delaying and implement the proposal. They also say that as hundreds of millions of dollars flood into politics through anonymous "dark money" sources, the rule is more needed than ever.
If adopted, the proposal, written by law professors, would codify and standardize disclosures shareholders have long been requesting from various companies. Those requests have been among the most common proposals at annual shareholder meetings. At the same time, major institutional investors such as the New York state and city pension funds have used their shares to press companies to disclose their political expenditures.
Thanks to that pressure, the Center for Political Accountability reports "almost 70 percent of companies in the top echelons of the S&P 500 are now disclosing political spending made directly to candidates, parties and committees," and "almost one out of every two companies in the top echelons of the S&P 500 has opened up about payments made to trade associations." The center calls that a dramatic increase from a decade ago when "few, if any, companies disclosed their political spending."
In early 2013, the SEC placed the proposal on its regulatory calendar, signaling that the agency would be moving towards a formal rule to make such disclosures a legal requirement rather than a voluntary act. However, major corporate lobbying groups like the American Petroleum Institute and the U.S. Chamber of Commerce filed comments opposing the proposal. Those lobbying groups represent corporations that would have to disclose their political spending under the new rule -- including the budget spent on those lobbying groups themselves. Following the pressure from those groups, the SEC removed the proposal from its calendar.
In combating the proposed SEC disclosure rule, business groups are making a constitutional argument, claiming imposing disclosure rules only on one type of entity -- publicly traded corporations -- violates the First Amendment. In a 2012 Georgetown Law Journal article, two of the lawyers pressing for the SEC rule countered that claim.
"The court's First Amendment analysis has long given the SEC considerable deference in the development of rules that provide investors with information necessary to facilitate the functioning of securities markets," wrote Lucian A. Bebchuk of Harvard University and Robert J. Jackson Jr. of Columbia University. They noted the Supreme Court's Citizens United decision reaffirmed the right of the government to mandate disclosure of political spending.
Though the complex legal arguments are important, this all comes back to the aforementioned question: Should shareholders have the right to know how their money is being spent? That question will ultimately be contingent on the answer to an even more fundamental question: Is the government going to side with shareholders or management?
On the merits, it should be an easy call. But a political system dominated by big money rarely is motivated by the merits of an argument. It is anyone's guess how or whether the SEC will act.