Should the SEC regulate corporate political speech?

Larry Ribstein —  4 August 2011

Ten leading corporate and securities law professors have petitioned the SEC to develop rules to require companies to disclose their political spending.

This is the latest iteration of efforts to end-run Citizens United’s restrictions on regulating corporate campaign activities by calling it corporate governance regulation.  See my recent post on the Shareholder Protection Act.  I’ve written on these issues in my recently published The First Amendment and Corporate Governance.

The proposed regulation has a good chance of passing muster under the First Amendment because it would focus on disclosure rather than imposing substantive restrictions on corporate speech. Nevertheless, the First Amendment is still relevant.  I have already noted my view that the SEC’s proxy access rule (which is also basically a disclosure rule) avoided a confrontation with the First Amendment only because the DC Circuit could invalidate it on other grounds. At some point mandatory disclosure can sufficiently burden corporate speech to be unconstitutional.  To give just one example, requiring firms to pre-disclose all of their spending for the coming year, thereby preventing them to respond flexibly to changes in the political environment, could push the line.

Even if the SEC rules are constitutional, they would still not necessarily be good policy.  Notably, the law professors’ rulemaking petition, while spending some time discussing the supposed importance to investors of corporate political spending, said nothing about whether an SEC rule was necessary.  The petition highlighted the fact that many corporations already were voluntarily disclosing political spending, sometimes even without shareholder request. Why not continue the experimentation and evolution rather than locking down a one-size-fits-all rule?  Do the benefits of standardization outweigh the costs of experimentation?

The petition cites precedents such as executive compensation disclosure as evidence of the “evolving nature of disclosure requirements.”  But there’s nothing about this evolution that suggests it needs to proceed toward more disclosure about every political hot-button issue.

No doubt the SEC will proceed as the petition requests.  After all, it needs a juicy political issue to deflect attention from the recent questions about the SEC’s soundness and competence as a financial cop. But let’s at least hope that the Commission has learned something from its most recent run-in with the DC Circuit and tries to get some data on exactly who would be helped and hurt by regulation of political disclosures and how much. As with proxy access, would this be all about empowering certain activists at the expense of others, or passive diversified shareholders?  My article discusses some of these tradeoffs. The SEC’s analysis  might benefit from data on exactly what was accomplished by the Commission’s past disclosure enhancements the petitioners highlight.

The danger that the SEC will fall prey to the arbitrariness the DC Circuit criticized is especially intense given the petitioners’ argument that the “symbolic significance of corporate spending on politics suggests setting an appropriately low threshold” on when disclosure is required. I don’t even want to think about the consequences of inviting the SEC to weigh the benefit of “symbolism” against the direct and indirect costs of disclosure.

Anyway, get ready for a contentious debate which, while providing an enjoyable distraction, does nothing to protect investors from the fraud and market dangers that are supposed to be the SEC’s top priority.

Larry Ribstein


Professor of Law, University of Illinois College of Law

One response to Should the SEC regulate corporate political speech?


    As a former securities and financial services regulator, I oppose the petition for the following reasons:
    •The disclosure burden on reporting companies is already significant and adoption of the proposal will add to those burdens. As the petitioners themselves point out, reporting companies are already subject to an “elaborate” disclosure scheme. One day, the camel’s back will be broken by the weight of the incremental burdens placed upon it.
    •The petitioners make the case that there is an increasing interest in political spending disclosures. Interest is not majority support. They point out that on average these proposals enjoyed 32.5% support during the most recent proxy season. This means that when asked 2/3 of the shareholders do not support political spending disclosures. In fact, the petitioners don’t provide evidence of a single political spending proposal that garnered majority support.
    •The proposal would be tantamount to a forced subsidy by the majority of the minority. The petitioners do not explain why it is fair or equitable to require the majority to financially support the interest, however legitimate, of the minority in such disclosures. According to the petitioners, the entities interested in these types of disclosures are behemoths. Many shareholders comprising the majority who do not support political spending proposals are likely to be of much more modest means. Why ask David to support Goliath?
    •The petitioners fail to make the case for the need for government intervention. Some of the petitioners’ arguments actually make the case that no intervention is needed. For example, they point out that an increasing number of companies have voluntarily elected to disclose political spending. The fact that so many proposals have been presented tells me that there is no problem in getting them before the shareholders. Why not simply let private ordering occur?