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SEC Considering New Rule for Political Contributions by Public Companies

The SEC is considering a proposal to require publicly traded companies to disclose money donated for politics to shareholders — a conflict to the Supreme Court’s Citizens United decision. Ray Suarez hears both sides of the debate from Robert J. Jackson of Columbia University Law School and former SEC commissioner Paul Atkins.

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    We turn to the intersection of business and politics.

    The Supreme Court's 2010 Citizens United decision wiped away limits on corporate and labor union campaign spending. Corporations do not have to disclose donors for issue campaigns, but the Securities and Exchange Commission may change that rule.

    A group of law professors has asked the SEC to adopt a rule requiring public companies to disclose money donated for politics to shareholders. So far, their petition has garnered over 500,000 comments, more than any in the agency's history, and SEC officials have indicated they will consider the proposal.

    What is each side arguing?

    We're joined by Robert J. Jackson Jr., a Columbia University law school professor who helped write the original petition, and Paul Atkins, a former SEC commissioner. He's the chief executive of Patomak Global Partners, a financial services consulting firm.

    And, Paul Atkins, today, if Acme Company wants to use corporate funds to support a specific issue around, let's say, election time, do the shareholders have to be told in any way?

  • PAUL ATKINS, Patomak Global Partners:

    Well, I mean, it depends on exactly what that is.

    Corporations right now, if they're giving to political campaigns, they have to disclose what they do through PACs or that sort of thing, if it's done through other sorts of groups, not necessarily something that depends on what the actual facts are there.


    Professor Jackson, what would your proposal to the SEC require corporations to do?

  • ROBERT J. JACKSON JR., Columbia University Law School:

    Our proposal would require all public companies to tell their shareholders whether and how they have spent shareholder money on politics, and in particular, the kinds of donations that are made to intermediaries, such as the Chamber of Commerce and other large organizations that today exist largely for the purpose of conveying corporate money into politics.

    Those kinds of donations would have to be disclosed to the investors. And the basic principle underlying the petition is that this is investors' money. And for that reason, they should know how the corporation has gone about spending it.


    You know, Paul Atkins, the shareholders, if you want to bother to look at the annual report, there's sometimes pages of agate type with tiny figures on it, but you're required to be told about matters facing the company routinely, executive compensation, audits, board members. Why not tell them this?


    Well, Ray, what this comes down to, first of all, is, as far as the SEC goes, is whether or not the information is material.

    And that's what guides the — from the Supreme Court cases and from SEC rules and even from the statute that authorizes the SEC to require disclosure, it comes down to, what's material. What …


    And for the purposes of this conversation, what is — what does material mean?


    Material means for a shareholder to decide whether to buy, sell or hold that particular stock, and so whether it will change the total mix of information that the shareholder has.

    And shareholders have been confronted with these questions through a lot of shareholder proposals time and again, 100-some companies this year and last year as well. And over and over, shareholders vote overwhelmingly against it. Why? Because it's not material. And it doesn't really matter to them.

    This is not about disclosure. This is about special interests pushing to try to have information disclosed in public, and then to use that information against corporate management and directors to try to get them not to engage in — we're not even talking, as I said before, about the politics of political campaigns, but against — to try to have them not engage in political advocacy.


    Well, Professor Jackson, apparently, there's already a legal standard here. And you heard Paul Atkins explain that these payments might not be material. What's your reply?


    Well, two points about that I think are important.

    First is we have no way to know whether the spending is material in the way the commissioner has described because there's no disclosure of these payments. So, it's absolutely impossible for anybody to know with certainty whether or not they're material enough in terms of financial significance to meet the standard he has described.

    But second, and much more importantly, there are lots of ways in which information can be made material to investors. It can be material because of the amounts. But they can also be material because of what they represent. And I would say that corporate spending on politics has unique, expressive significance that goes far beyond the bottom line of the corporation.

    That's why, for example, executive compensation is required to be disclosed. Even though it might not be material in terms of amount, shareholders have made clear that they care about this information and want to have it. For the same reason, there's no real basis for concluding that shareholders — corporate spending on politics is likely not to be material.

    And, to the contrary, I think shareholders have good reason to care about it. And the evidence shows that they do.


    How can you judge materiality if the access is opaque, if you can't see the figures?


    Well, even — well, first of all, if it's material to any particular company, the rules already will require that that amount be disclosed.

    And, in fact, in the actual rules that govern how the financial statements are made up, it even would say that it would have to be broken out if it's a material amount in the context of that particular corporation.

    And to Professor Jackson's point, even if you take all of the money that's given to these C-4 sorts of associations and it comes to how many other hundreds of millions of dollars, even if it all comes from corporations and not from labor unions and other things like that, it would still be immaterial in the whole context of all public company spending in the United States.


    But is materiality an objective standard?


    Yes, it is.


    Or is there subjectivity to it, if I'm a shareholder and money that's not going into capital investment, that's not going into paying me dividends, is going into furthering political aims that I may support or I may detest?


    Well, about 30 years or so ago, Thurgood Marshall wrote an opinion for the Supreme Court in which he basically set out the seminal test for materiality. And it is what a reasonable shareholder would judge to be important for — in judging the total mix of information available to him or her to decide whether or not to buy, sell or hold that particular company's stock.

    So it is an objective test in the way the law is done. And so the other things with respect to executive compensation and other sorts of disclosure like that that the professor cited are all things that have to do — they have been long in the SEC's history of disclosure that deal with the board and things like that.


    Professor Jackson, can your petition survive that test involving whether or not these amounts are material?


    Absolutely, it can.

    And with all due respect to the commissioner, the executive compensation rules that require disclosure of relatively small amounts for large public companies were only really expanded in 1992, many decades after Thurgood Marshall wrote the opinion he's describing.

    The fact is the SEC has plenary discretion to determine what is material. And what they have said very consistently over the years with respect to executive compensation, with respect to decisions where directors have a financial interest in the transaction, with respect to disclosures about the director's oversight of risk, all of these recent disclosures have been held by the SEC to be material because it's clear that investors are interested in this information.

    And in the case of political spending, it could not be more clear that investors want this information. The shareholder proposals requesting that companies publicly disclose their spending on politics is by far the most common corporate governance proposal at public corporations today.

    And I will tell you that the executive compensation rules that were expanded in 1992, when the SEC did that, they gave as a reason shareholder interest. And the shareholder interest in this subject far exceeds the shareholder interest in executive compensation.

    Because these amounts have expressive significance that have nothing to do with the bottom line, and because it would be fully consistent with the SEC's precedents, I think it's very clear that the materiality standard provides no bar at all to the SEC adopting these rules.


    Professor Jackson, Mr. Atkins, we will watch the evolution of this issue. Thank you both.


    Thank you very much.

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