Citizens United and the SEC (Part 1)

Whatever one thinks of Citizens United and the opinion by Justice Kennedy, the impact seems ubiquitous.  Super pacs are everywhere and corporate money seems to be sloshing through the system.

Even some on the Supreme Court are concerned.  In a statement appended to the decision to stay the Montana Supreme Court, Justices Ginsburg and Bryer all but asked for an appropriate cert petition to permit reconsideration of the decision.  As they noted:

Montana’s experience, and experience elsewhere since this Court’s decision in Citizens United v. Federal Election Comm’n, 558 U. S. ___ (2010), make it exceedingly difficult to maintain that independent expenditures by corporations "do not give rise to corruption or the appearance of corruption." Id., at ___ (slip op., at 42). A petition for certiorari will give the Court an opportunity to consider whether, in light of the huge sums currently deployed to buy candidates’ allegiance, Citizens United should continue to hold sway. 

It wasn't supposed to be this way.  Justice Kennedy saw a solution:  Corporate governance.  As he reasoned in Citizens United:   

Shareholder objections raised through the procedures of corporate democracy, . . . can be more effective today because modern technology makes disclosures rapid and informative. A campaign finance system that pairs corporate independent expenditures with effective disclosure has not existed before today. . . . With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens withthe information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’spolitical speech advances the corporation’s interest inmaking profits, and citizens can see whether elected officials are "‘in the pocket’ of so-called moneyed interests." . . . The First Amendment protects political speech;and disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.  

In effect, for Justice Kennedy, disclosure was enough.  With disclosure, shareholders could determine whether contributions are profit maximizing behavior and, if not, could hold management "accountable".  

We have already discussed the fallacy of this approach.  It reflects a lack of understanding of the governance process, particularly the limits imposed under state law on shareholder authority.  But whatever the weaknesses, the approach presupposes that political contributions will be subject to clear disclosure requirements. 

Disclosure is for the most past the responsibility of the SEC.  Moreover, disclosure is the principle mechanism behind private ordering.  The market is informed and companies can respond in the most efficient way. That is not to say that all disclosure is a good thing.  Disclosure burdens can become excessive.  This has been a particular concern with respect to proxy disclosure.  

SEC intervention in this area, however, does not seem to fit the "excessive disclosure" concern.  Rather than merely add complexity, the information is something shareholders seem to want.  More importantly, inaction may result in significant administrative consequences. 

Congress has proposed legislation that could preempt the area.  The legislation would require companies to report political contributions to the the Federal Election Commission (FEC).  In addition, however, the legislation would require disclosure to shareholders.  Only the DISCLOSURE 2012 ACT leaves execution of these requirements to the FEC, not the SEC.  In other words, congressional intervention would oust the SEC for the disclosure process.   

SEC rulemaking efforts in this area might head off the legislation.  So is the SEC moving forward in this area?  We will discuss this in the next post. 


J Robert Brown Jr.