Is SEC Regulation of Political Spending Dead?

It is unlikely that it is dead, but it certainly is on life support.  But, I believe that board oversight, and disclosure, of corporate political expenditures will continue to increase.

In 2011, the Committee of Corporate Political Spending, a group of ten academics focusing on corporate and securities law, submitted a petition for rulemaking to the SEC asking the SEC to adopt rules to require public companies to disclosure to shareholders the use of corporate resources for political activities. In the following months, the SEC received in excess of one million comments to the petition. Reportedly, most of the comments expressed support for the requested rulemaking. In 2012, the SEC placed disclosure by public companies of their political expenditures on its rulemaking agenda. It would seem that with disclosure of political expenditures being on the SEC’s rulemaking agenda, combined with broad public interest in such a rule (as evidenced by other one million comments on the petition), the SEC would move forward with rulemaking. But, that didn’t happen.

The SEC dropped from its rule making agenda political expenditures disclosure in 2013.   But, the issue was not dead; press coverage continued.   For example, on October 29, 2014, the New York Times published an editorial advocating for an SEC rule requiring disclosure of corporate political expenditures. In a letter to the editor of the New York Times responding to the editorial, Commissioner Daniel M. Gallagher stated “[m]andatory political contribution disclosure deserves no place on the agency’s agenda, and I will fight to keep it that way.” Given the removal of political expenditures disclosure from the SEC’s rulemaking agenda and Commissioner Gallagher’s public opposition to any such rule, it is probably a fairly safe bet that, unless prodded by congress, the SEC will not take any rulemaking action with respect to disclosure of corporate political expenditures in the near future.

While it appears that the SEC will not take action any time soon, the idea of requiring public companies to disclose political expenditures has certainly not gone away. As we have written about in the past, Institutional Shareholder Services continues to generally recommend that shareholders vote for proposals to require greater disclosure of a company’s political contributions and trade association spending policies and activities. Further, a majority of companies reviewed by the Center for Political Accountability and the Zicklin Center for Business Ethics Research (generally, the top 300 companies in the S&P 500) continue to have some level of board oversight of their political contributions and expenditures. The Shareholders Protection Act of 2015 was also recently introduced in the House of Representatives. If passed (which is unlikely), the bill would amend The Securities Exchange Act of 1934 to require not only disclosure, but shareholder approval of political expenditures and require national securities exchanges and associations to require a board of directors vote for political expenditures in excess of $50,000.

I, for one, hope that Commission Gallagher is successful in his efforts to keep political expenditures disclosure off the SEC’s rulemaking agenda. Existing disclosure documents are already far too long and far too complex. Heaping more disclosure obligations on public companies would simply contribute to that problem. While new SEC rulemaking appears to be unlikely, pressure from shareholders, shareholder groups and others will likely lead to increasing board oversight, and increased voluntary disclosure, of corporate political expenditures.

Board Diversity and Political Contributions Disclosure Continue to Get ISS Support

On December 19, 2013, ISS published its U.S. Proxy Voting Summary Guidelines that are effective for meetings of stockholders held on or after February 1, 2014.  This blog post highlights ISS’ position on two social issues: board diversity and political contributions.  

Board Diversity

Consistent with its guidelines last year, ISS continues to recommend voting for stockholder requests for reports on a company’s efforts to diversify the board unless:

  • the gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and
  • the board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company.

ISS will make recommendations on a case-by-case basis on proposals asking a company to increase the gender and racial minority representation on its board.  In providing its recommendation, ISS will take into account the following factors:

  • the degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
  • the level of gender and racial minority representation that exists at the company’s industry peers;
  • the company’s established process for addressing gender and racial minority board representation;
  • whether the proposal includes an overly prescriptive request to amend nominating committee charter language;
  • the independence of the company’s nominating committee;
  • whether the company uses an outside search firm to identify potential director nominees; and
  • whether the company has had recent controversies, fines, or litigation regarding equal employment practices.

Political Contributions

In connection with proposals related to political contributions, ISS continues to generally recommend voting for proposals requesting greater disclosure of a company’s political contributions and trade association spending policies and activities, considering:

  • the company’s current disclosure of policies and oversight mechanisms related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes, including information on the types of organizations supported and the business rationale for supporting these organizations; and
  • recent significant controversies, fines, or litigation related to the company’s political contributions or political activities.

However, recognizing that businesses are affected by legislation at the federal, state and local level, ISS recommends voting against proposals barring a company from making political contributions. ISS is being practical and concedes that barring political contributions can put the company at a competitive disadvantage.

Board Oversight of Political Contributions Is Steadily Rising

In September 2013, the Center for Political Accountability and the Zicklin Center for Business Ethics Research published their third annual index of political accountability and disclosure (2013 Index), which focuses on political spending disclosure of the top 200 companies in the S&P 500 Index. The Index reviews companies’ policies disclosed on their websites and describes:

  • the ways that companies manage and oversee political spending;
  • the specific spending restrictions that many companies have adopted; and
  • the policies and practices that need the greatest improvement.

The 2013 Index demonstrates that of the 195 companies reviewed in both 2012 and 2013, 78% of companies improved their overall scores for political disclosure and accountability.  In particular, data from the 2013 Index indicates that a growing number of companies have some level of board oversight of their political contributions and expenditures.  For example,

  •  62% of companies said that their boards of directors regularly oversee corporate political spending in 2013, compared to 56% in 2012;
  • 57% of companies said that a board committee reviews company policy on political spending in 2013, compared to 49% in 2012; and
  • 56% of companies said that a board committee reviews company political expenditures in 2013, compared to 45% in 2012.