Corporate Governance

Corporate Governance and Campaign Finance: Citizens United v. FEC (The Role of the SEC)

By J. Robert Brown

We are discussing Citizens United v. Federal Election Commission, No. 08–205,  Jan. 21, 2010, the Supreme Court's recent decision on campaign finance.

The first thing that needs to happen in this area is to require complete disclosure of campaign expenditures by public companies.  The Supreme Court foreclosed the application of the standards for political action committees.  Excessive pleading standards prevent access through state law inspection rights.  Congress may eventually intervene, with the majority all but inviting some kind of regulatory regime based upon disclosure.

In the short term, however, the Securities and Exchange Commission should act.  The SEC could put in place a new disclosure item as part of the quarterly disclosure system.  Companies would be required to disclose any expenditures made by the company in connection with elections that surpass a specified threshold.  An appropriate threshold would be the $120,000 standard used in Item 404 for related party transactions.  As for defining the types of expenditures, the Commission can borrow the definition of expenditures from the Federal Election Commission. See, e.g. 2 USC § 431. 

This type of disclosure will be useful but it will be after the fact.  The disclosure obligation should also require that companies reveal any plans to make such expenditures, including the nature of the campaigns that will be supported and the amount expected to be expended. 

Finally, as is increasingly the case, the disclosure obligations should place pressure on the board to supervise the expenditure process (which in turn increases their legal exposure if matters are mismanaged).  The disclosure obligations should, therefore, require disclosure of the role of the board in the approval of the expenditures, including the particular committee with responsibility.  To the extent the expenditures were not approved by the board, the provision should require an explanation as to why the board did not feel it was necessary to make the decision.

The approach will put pressure on the board to be more involved.  Moreover, it creates the risk of liability under Rule 10b-5 to the extent that the role of the board and the reasons for the decision are misstated.

The SEC cannot substantively regulate the expenditures but it can require their disclosure.  This should be done immediately.

Full post as published by The Race to the Bottom on February 10, 2010 (boomark / email).