Citizens United and the SEC (Part 3)
So what might happen if the SEC doesn't propose rules requiring disclosure of political contributions?
Efforts are afoot in Congress to provide a legislative solution. Congressman Van Hollen recently reintroduced the DISCLOSE 2012 Act. This is legislation that would impose a variety of disclosure requirements on corporations in connection with campaign contributions.
Most of the proposed legislation deals with mandatory reports to the Federal Election Commission. Tucked away inside, however, is a proposed amendment to the Federal Election Campaign Act that would add a mandatory disclosure requirement aimed at shareholders. While the provision also applies to non-profits and their donors, the title of the proposed section identifies its primary intent: "Shareholders' Right to Know."
The provision applies to a "covered organization which submits regular, periodic reports to its shareholders, members, or donors on its finances or activities". Because a covered organization includes a corporation, this language would presumably apply to any public company that distributes proxy materials to shareholders.
The language, however, could be much broader and apply to non-public companies that routinely distribute financial materials to shareholders. Companies may do so because of state law requirements (perhaps to conform with the duty of complete honesty), contractual obligations, and on a voluntary basis in order to keep shareholders informed.
The proposed legislation provides that the information distributed to shareholders must include "in a clear and conspicuous manner, the information included in the statements filed by the organization under section 324 with respect to the campaign-related disbursements made by the organization during the period covered by the report." The proposed requirement also mandates that companies maintaining a web site include a link to the disclosure at the FEC web site. The link must go up within 24 hours of posting at the FEC site and remain in place at least one year from the date of the relevant election.
The provision requires disclosure to shareholders. Yet the agency with more than 70 years of experience crafting shareholder disclosure -- the SEC -- is nowhere mentioned in the legislation. To the extent there is a need for implementing regulations, therefore, the task presumably falls to the FEC. An agency with no experience in shareholder disclosure owuld become primarily responsible for shareholder disclosure.
The approach also opens the door for conflicting regulation. Nothing in the legislation changes the SEC's general authority to regulate the content of a proxy statement. Thus, whatever disclosure the FEC imposes, the SEC could add to it. Moreover, even if the SEC did not impose additional requirements, the antifraud provisions would still be available for actions against companies in the event of incomplete disclosure. Thus, the SEC (and private parties) could bring actions against companies conforming to the FEC disclosure requirements where the disclosure was viewed as materially incomplete.
In short, companies confront the risk of disclosure regulation by a second agency not necessarily equipped for the task. They confront the risk of conflicting regulatory regimes. And the SEC confronts the possibility that the proxy disclosure requirements will need to be shared with another agency.
None of this sounds particularly appealing. Can this be headed off? Presumably if the SEC acts, there will either be less reason (or no reason) for legislation designed to regulate disclosure to shareholders. Moreover, the requirements will be ensconced in regulations rather than statutes, providing greater flexibility in crafting the standards. Finally, it will leave corporate disclosure where it belongs, with the SEC.
Of course, the concern over congressional intervention is only as serious as the likelihood the legislation will be adopted. It has 117 co-sponsors. Nevertheless, Congress is very divided these days and likely to remain without a consensus on this issue, at least through the November elections. But after that, all bets are off. Pressure for reform will likely continue to build. Moreover, serious abuse or scandal may cause Congress to act with unscheduled alacrity. Recall that Sarbanes Oxley was moribund until the collapse of Worldcom. Campaign finance disclosure could easily undergo a similar reincarnation.
The Commission needs to take control of this issue and not cede away such an important disclosure issue to another agency. For that to occur, the Commission will need to move forward with rulemaking in this area.