Comment Letters in Favor of the Proposed Rule Mandating Disclosure of Corporate Political Spending

We are discussing possible Rulemaking Regarding Mandated Disclosure of Corporate Political Spending.

In August of 2011 the Committee on Disclosure of Corporate Political Spending (“Committee”) submitted a Petition for Rulemaking (“petition”) to the Securities and Exchange Commission (“SEC”) (the petition is available here). The petition sought rulemaking to require public companies to disclose to shareholders the use of corporate resources for political activities. The Committee’s petition focused on four justifications for the proposed rule: first, in response to changes in investor interests and needs, the SEC’s disclosure rules have evolved over time; second, data shows that public investors have become increasingly interested in receiving information about corporate political spending; third, a large number of public companies have voluntarily adopted policies requiring disclosure of political spending; and fourth, the importance of disclosing political spending for promoting corporate accountability. The petition concluded with preliminary comments about the design of the proposed disclosure rules. 

In response to the Committee’s proposal, the SEC received over one million comment letters, most of which were in favor the proposed rule. One such letter was written on behalf of the American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”) (the letter is available here). AFL-CIO pointed to the fact that, under the federal Labor-Management Reporting and Disclosure Act, the AFL-CIO, its affiliated unions, and thousands of their state and local affiliates are required to produce itemized reports disclosing political spending on an annual basis. In addition, federal and state lobbying laws require a certain measure of public disclosure regarding corporate and union spending on lobbying, additionally federal, state, and local campaign finance laws generally require certain categories of political spending to be disclosed by unions and businesses. On the other hand, despite the “critical importance” to shareholders and corporate accountability in general, AFL-CIO pointed out that “[n]o law requires corporations to disclose to their shareholders whether corporate funds have been spent in connection with candidate elections, ballot measures or direct or grassroots lobbying, or donated to other organizations that use those funds for any of those purposes.”

Moreover, AFL-CIO stated that without a rule mandating disclosure, there is a loss of accountability and an inherent risk to shareholders. This is because “[s]enior management and directors may allow their personal political preferences to motivate and influence decisions on corporate political spending, with inadequate regard for their obligations to shareholders and the company’s own success.” Furthermore, shareholders do not have the resources to access information about corporate political spending decisions on their own. AFL-CIO also asserted that the “absence of a uniform and comprehensive disclosure requirement may mislead shareholders about their companies’ political expenditures.” 

AFL-CIO also discussed the Citizens United decision and how it impels the need for prompt disclosure. In Citizens United the Supreme Court eliminated restrictions on independent expenditures by corporations in political campaigns. By doing so, AFL-CIO argued, corporate political spending has predictably increased, which in turn creates an even greater need for disclosure.

AFL-CIO concluded with a discussion of the possible scope of disclosure that should be required. Due to the need for shareholders to have a complete picture of political spending by public companies, AFL-CIO suggested that, in addition to what is already subject to public reporting, the SEC should consider requiring: (1) companies to report their voluntary donations to other entities that engage in political and lobbying activities under certain IRC and IRS provisions (specifically, AFL-CIO pointed to IRC Sections 501(c)(4) and c(6), and IRS Section 527); (2) companies to report their grassroots and direct lobbying spending, whether or not they are subject to disclosure under federal or state lobbying laws; and (3) companies to report all other payments to other entities and individuals that are earmarked for any of these purposes.  

Another letter in support of the proposed rule mandating disclosure of corporate political spending was sent on behalf of the International Brotherhood of Teamsters (“BT”) (the letter is available here). Like AFL-CIO, BT pointed to the need for unified disclosure, and to the fact that there is no federal system that requires political disclosure for publicly traded corporations. However, BT also discussed the tangible and significant financial impact of increased corporate political spending on investors. It asserted that the lack of federal disclosure requirements “leaves investors with few options for determining if a corporation is even adhering to its own self-imposed rules in the first place.” For example, despite FedEx’s “company policy” not to make corporate contributions to groups organized under Section 527 of the Internal Revenue Code with a few exceptions—a policy that was reiterated in a recent proxy statement opposing a shareholder proposal to require disclosure of all political spending—FedEx “made contributions to at least three additional § 527 organizations between 2011 and 2013, totaling $63,400.” Absent disclosure requirements, shareholders are misled and prevented from taking any corrective action when this type of conduct occurs. BT stated that “[i]nvestors should not have to wait for fallout from poor political or advocacy investments in order to hold their corporate governors accountable. They should have the tools to make these investment decisions from the outset.”

BT also proposed that, in order to “effectively identify the business vulnerabilities created by political spending, strong disclosure should be required across all fronts of corporate political activities.” Just as AFL-CIO suggested, BT recommended that disclosure policies include not only direct political spending, “but all issue-based lobbying undertaken on a corporation’s behalf.” Additionally, it requested that the SEC “specifically consider requiring public companies to report their voluntary donations to all other entities that engage in political and lobbying activities under IRC Sections 501(c)4 and c(6), as well as under IRC Section 527, which covers all ‘political organizations’ regardless of how and whether they otherwise register or report their activities.” Finally, BT noted, just like AFL-CIO, the increased need for disclosure requirements post Citizens United.