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Proposed campaign contribution disclosure rules may be coming as early as April (but not likely)

Posted in Disclosure Guidance

Campaign diclosure rules to create administrative nighmareAs first reported by Professors  Lucian Bebchuk and Robert J. Jackson, Jr. in their recent posting on the Harvard Law School Forum on Corporate Governance and Financial Regulation, the SEC may take action to issue proposed rules on corporate political spending disclosures by public companies as early as the second quarter of this year. This is according to the most recently updated Current Unified Agenda and Regulatory Plan, where the SEC appears to have preliminarily scheduled a notice of proposed rulemaking on this subject for April. Realistically, the fact that these rules are scheduled on this regulatory agenda is probably not very significant and may have gotten there as a means to temporarily appease shareholder rights advocates that have recently been pressing for these disclosures. Additionally, considering that the current four-person commission is equally divided on the political front, it is not likely that anything significant will come out of the SEC in the near future until a replacement for Mary Schapiro is appointed and confirmed. 

If something does miraculously materialize, it would be an interesting move by the SEC considering that rules required to be adopted under the Dodd-Frank Act have yet to be fully implemented almost three years after the bill was signed into law in 2010. This fact was emphasized in Commissioner Gallagher’s recent comments to the U.S. Chamber Center for Capital Markets Competitiveness. In those comments, Commissioner Gallagher specifically noted that “the SEC, like other regulators, is now dealing with the problem of rushed, inadequate rule proposals that were pushed out in a bid to meet arbitrary congressional deadlines.”  With the backlog of Dodd-Frank and JOBS Act rules, why would the SEC even bat an eyelash at a rules proposal with no Congressional mandate? 

In any case, there’s no question that campaign contribution disclosure has been a hot topic, particularly in the wake of the Citizens United v. Federal Election Commission case as we have blogged about a number of times in the past (see our prior posts related to this case and campaign contribution disclosures here and here). This Supreme Court decision, along with the thousands of letters received by the SEC on this issue, may be the driving factor which may have fast-tracked this to near the top of the SEC’s rulemaking agenda despite the plethora of other rules the agency is still required to adopt. While I tend to agree that Supreme Court’s holding in the Citizens United case impliedly requires that shareholders be made aware of corporate political spending to permit the mechanics of corporate governance and shareholder democracy to properly function, I believe that full implementation of the JOBS Act rules are significantly more important at this point given the current state of the U.S. economy. 

Even without any such disclosure rules currently in place, shareholder activists have increasingly been seeking alternative means to obtain records related to political contributions. For example, as discussed by in a post by one of the premier U.S. corporate law scholars, Professor Stephen Bainbridge, New York State’s pension fund sued Qualcomm earlier this month seeking to inspect books and records detailing the use of company resources for political purposes. Generally, Section 220 of the Delaware General Corporation Law permits shareholders to inspect certain books and records of a Delaware corporation after making a demand which sets forth a proper purpose for such inspection. Delaware case law has generally refused to grant shareholder requests in cases which are purely pursuits of noneconomic social or political goals. However, political spending is arguably an appropriation of corporate assets which directly affects the economic interests of shareholders, assuming the amounts in question are material. It will be interesting to see how this particular case is resolved but it may become a moot point if the SEC does in fact adopt rules requiring this type of disclosure to be made (at least for public companies). But again, we’re not doubling down on the latter happening anytime soon. 

In my humble opinion, the SEC should be focusing on promulgating the JOBS Act rules, many of which will be a boon to small business capital raising. In tough economic times such as these, I think most would agree that rules which potentially help small business capital raising are significantly more important than so-called “social disclosure” rules which, although important in their own right, will add additional compliance costs to public companies. Furthermore, many legal commentators have questioned the value of implementing such rules. Some have gone as far to suggest that political contributions actually increase shareholder value. Politics aside, I think that most are in agreement that we need to grow our domestic businesses and help our entrepreneurial companies, especially in the technology industry where the U.S. has competitive advantages. The JOBS Act rules will help. Hopefully they are the SEC’s primary focus right now.