While it’s non-binding, the SEC’s suggestion that corporate political spending should be more transparent deals a blow against the controversial Citizens United ruling

The staff of the US Securities and Exchange Commission (SEC) recently issued a “no-action letter” that suggests shareholders should be allowed to direct companies both to hold advisory votes on their political spending, and to increase disclosure on these issues, as part of the annual proxy process.


However, the no-action letter – which is a non-binding guide to the SEC staff’s current thinking– does not overturn the controversial 2010 Citizens United decision. This invalidated certain restrictions on corporate spending on political speech on the grounds that they violated the free speech and free association guarantees of the first amendment of the US constitution.


“Shareholders may get a lot more say over what companies are doing in the corporate political spending area,” says Elizabeth Powers, partner at the law firm Dewey & LeBoeuf.


The no-action letter was prompted by a series of actions. Initially, NorthStar Asset Management had proposed that Home Depot’s shareholders request that the company discloses its political spending, and holds a shareholder advisory vote on the spending each year. Home Depot wrote the no-action letter request to the SEC, seeking guidance on whether it could exclude NorthStar’s proposal from its 2011 proxy statement.


While the no-action letter is non-binding, it may “result in companies opting to spend or not spend in ways that a company’s shareholders approve, rather than in the form that management might approve”, Powers says.


Citizens United under threat?


The Home Depot no-action letter marks an incremental policy change, rather than a major shift, and is not per se a response to the Citizens United decision. Although any advisory vote would not be binding on company management, Powers points out that even a non-majority, but “substantial” shareholder vote on a company’s political spending could have an impact, since “companies might be pressured to do something” because a substantial number of shareholders feels they should do so. 


Proposed legislation, likely to be introduced in the US Congress shortly,would take things further and actually require shareholders to approve any expenditure of corporate funds for political purposes. A similar system failed to be adopted in the US during the last session of Congress and is unlikely to pass anytime soon.


“The prospects for progressive legislation [in the US] at the moment are slim,” says Lisa Gilbert, deputy director of Congress Watch. But, “whether or not this bill is adopted in this session of Congress, similar pieces of legislation are moving forward in key states – including California and Wisconsin.” Maryland passed an enhanced disclosure measure in April.


At a federal level the SEC action is just one of several initiatives that could chip away at the scope of Citizens United.


The White House has disseminated a draft executive order that would mandate enhanced public disclosure of political expenditure, including funding for independent political broadcasts, by any company bidding for government contracts. Both the Federal Communications Commission and the Federal Election Commission are also considering their own mandatory disclosure policies. Democratic appointees to these commissions broadly favour such measures, while Republican commissioners oppose them.


Some legal experts argue that any attempts to overturn or limit the Citizens United ruling will be difficult. “The administration’s efforts will likely be held to violate the constitution because they are regulations specifically aimed at or singling out political speech,” says James Moody, a Washington-based public interest lawyer whose practice focuses on the protection of constitutional rights.


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