SEC should stay out of corporate political disclosure business


After Trump vs. Clinton, conflicts over the inside baseball issue of whether corporations should disclose information about their political spending may seem trivial.  But the issue could become a stubborn and unnecessary sticking point in efforts to avert a government shutdown when Congress reconvenes later this month.

A little history: In 2011, a group of academics asked the Securities & Exchange Commission to develop rules to force public companies to disclose information about their political spending.  Although the contours of the desired SEC rule are unclear, the activists pushing for it are likely to seek a rule that compels public companies to publicly disclose their contributions to so-called “dark money” groups, tax-exempt organizations that engage in some political activities.  Premised on the mistaken conviction that a large part of the “dark money” in U.S. elections is coming from public companies, the rulemaking petition generated over a million comments and, for a while, it looked like the proposed rule had some momentum.  But that momentum stalled and, in December 2015, a Congressional appropriations bill barred the SEC from using that year’s appropriated funds “to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.”  Then, in September 2016, Congress passed another continuing resolution which maintained that bar, keeping the government funded through Dec. 9. 

{mosads}Sen. Elizabeth Warren objected claiming that the Republicans were threatening a “government shutdown by demanding that corporate political spending remain secret.”  On the heels of invoking the government shutdown threat, Warren wrote an unprecedented letter to President Obama calling on him to demote SEC Chair Mary Jo White in large part because of the Commission’s failure to adopt a corporate political spending rule.  With entrenched positions on both sides, the corporate political disclosure issue may once again provoke talk of a government shutdown as another budget battle looms.         

Warren’s protestations aside, handing this hot-button political issue over to the SEC would be a mistake.  When it comes to regulating politics, the SEC’s track record does not hold up well.  In 2010, concerned about executives from investment firms making political contributions to state officials in order to increase the odds of receiving investments from public pension funds, the SEC effectively banned many investment firm employees and executives from making political contributions, even for purely ideological reasons.  The SEC’s “pay-to-play” rule prohibits investment firms from being paid to manage the investments of public pension funds and other public funds for two years after executives and employees of the investment firm make certain political contributions or ask others to make contributions.  Suppose, for example, a junior trader who spends some time pitching the investment firm’s business model to potential investors wants to make a $500 contribution to her hometown mayor.  That contribution might well be prohibited.  Or suppose a senior executive at a hedge fund wants to max out to a Presidential candidate who happens to be a sitting governor.  Depending on the hedge fund’s activities in the state, the contribution could be prohibited.  Even asking friends and family to make these contributions might be illegal.

While the SEC’s “pay-to-play” rules are intended to prevent corruption in the award of public pension fund business, they are too broad. As any practitioner in the field can attest, it is extremely rare to come across, among the hundreds and even thousands of contributions that undergo compliance review, a contribution that has any relationship to awarding pension fund business.  Nevertheless, investment firms still routinely have to tell their employees not to make contributions for fear of pay-to-play risks.  Indeed, in light of the potentially catastrophic consequences that arise from pay-to-play violations and the significant costs associated with paying lawyers to review every political contribution that a firm employee wants to make, many investment firms have adopted policies banning employees from making political contributions.  Most famously, Goldman Sachs this fall adopted a policy prohibiting partners from contributing to state and local candidates and political parties and to state and local officeholders running for federal office.

The SEC’s effort to regulate investment firms via its “pay-to-play” rule does not bode well for an SEC corporate political disclosure rule involving public companies.  While the precise wording of such a rule is not yet known, it is a safe bet that the rule — like the “pay-to-play” rule — will be unnecessarily broad, will impose unintended regulatory compliance costs on the companies, and may have a chilling effect on constitutionally protected corporate political engagement. 

Even if a corporate political disclosure rule was prudent, the SEC has no business regulating in this area when other regulators exist.  Congress has already imposed its own corporate political disclosure rules on businesses and those rules are enforced by the Federal Election Commission.  If, for example, a corporation spends its own money advocating for the election or defeat of a candidate, FEC regulations require the company to file a report with the FEC.  To the extent that activists want corporations to disclose more information about their political activities, it should be Congress that makes that decision and the FEC that writes those rules.  By leaving the politics to Congress and the FEC, the SEC can keep its focus on its core mission of protecting investors and maintaining fair markets.

Zachary Parks is an of counsel with Covington & Burling and part of its Election and Political Law practice.

The views expressed by authors are their own and not the views of The Hill.

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