The House passed the Democratic majority’s signature government ethics and election reform legislation with two securities law provisions in tow. While prospects for enactment of the For the People Act of 2019 (H.R. 1) are uncertain, the bill, which passed by a vote of 234-193, would lift the ban on SEC rulemaking regarding public company disclosures of political spending activities. The bill also would require public companies to adopt procedures to assess their shareholders’ preferences regarding corporate political spending. The latter provision was introduced as stand-alone legislation earlier this year and was added to the For the People Act via an amendment.
The For the People Act is primarily a wide-ranging government ethics and election reform bill. The Congressional Budget Office's first evaluation of the bill attempted to put a price tag on some of its components, including the Freedom From Influence Fund, which would, among other things, provide matching funds for smaller donations to House campaigns; the CBO estimated that the Fund's costs could exceed $1 billion, but that funding would come from future legislation. A second CBO estimate addressed potential assessments on civil and criminal fines.
The White House issued a veto threat in response to the For the People Act, citing separation of powers, federalism, and First Amendment concerns about the election reform provisions of the bill. The Administration's statement also characterized the government ethics provisions as “well-intentioned but misguided” because they could limit executive branch functionality.
Shareholder preferences. Representative Jamie Raskin (D-Md) previously introduced the Shareholders United Act of 2019 (H.R. 936), a play on words invoking the Supreme Court's landmark opinion Citizens United, that would allow public company political donations only if a company has in place a procedure to assess the preferences of its shareholders. However, this requirement would not be met if a majority of the company’s shares are held by investors who are barred by law, contract, or fiduciary duty from expressing political views. The text of the Raskin bill was added via an amendment to the For the People Act by a vote of 219-215.
On the House floor, Rep. Raskin said that while a Constitutional amendment to reverse Citizens United is a long-term goal, Congress should now invoke Justice Kennedy’s admonition in Citizens United that the methods of “corporate democracy” can mitigate abuses by executives regarding corporate political spending. As a result, Rep. Raskin’s amendment to the For the People Act would require public companies “to get shareholder buy-in on the front end” in order for a public company to make political expenditures.
Citizens United provided an opportunity for the justices to opine on corporate democracy. Justice Kennedy began his opinion for the court by noting that while the government cannot entirely ban corporate political speech, it may impose disclaimer and disclosure requirements. In the section of the court’s opinion upholding a disclaimer and disclosure requirement, Justice Kennedy observed that corporate democracy (e.g., shareholder votes, derivative suits, and the selling of one’s shares) can provide effective checks on corporate executives’ political activities funded from a company’s general treasury. Justice Kennedy even posited that the Internet could make the methods of corporate democracy more potent. Justice Stevens, in his opinion concurring in part and dissenting in part, took issue with the court’s rejection of the government’s assertion that the government can protect dissenting shareholders from being compelled to finance speech unpalatable to them.
Specifically, Justice Stevens cited law review articles positing that corporate democracy is ineffective because officers and directors have disproportionate power versus shareholders and are likewise protected by the business judgment rule. Justice Stevens also noted that individual investors may lack the ability to adequately monitor or change their investments because they often invest through intermediary fund managers and, even if they wanted to sell their shares, they might incur taxes or tax penalties for doing so. Justices Kennedy and Stevens both cited the same passage and footnote in another case, Bellotti, in support of their divergent views on the efficacy of shareholder democracy. In Bellotti, the Supreme Court held unconstitutional a Massachusetts law that barred corporations from spending funds to influence or affect a vote on questions submitted to voters that do not materially affect the company's business, property, or assets; the law also said individual income tax items were not material to corporations (the law was enacted in the context of an effort to amend the state’s constitution to impose a graduated income tax on individuals). In the relevant passage in Bellotti, the court said shareholders could use the procedures of corporate democracy to guide corporate decisions on whether to get involved in public debates.
Representative Raskin also addressed the question of who is speaking when a public company makes a political donation. He said that, based on Citizens United, a company speaks on behalf of its shareholders, but the reality is that corporate political spending is often done by executives who lack shareholder approval to make such expenditures. “People invest in the stock market to save for retirement, or to send their kids to college, not to support their favorite political candidates, much less their most disfavored ones,” said Rep. Raskin.
When Rep. Raskin introduced the stand-alone version of the Shareholders United Act, he observed that even if shareholders have a right to voice their concerns about corporate political spending, the money they invest still should not be used without their consent. Speaking directly to the institutional investor issues presented by corporate political spending, Raskin said: "If most company shares are owned by entities forbidden to be involved in politics, the CEO literally has no one to speak for. Money should not be taken from shareholders and their owners to make political statements they are prevented by law from making."
By contrast, Rep. Rodney Davis (R-Ill) warned that, in addition to possibly violating the First Amendment, the Raskin amendment could transform corporations into explicitly “partisan political entities,” convert shareholder meetings into “political conventions,” and enable activists to press proxy advisory firms (which he said lack transparency) into using their leverage to push political agendas at companies. In Rep. Davis’s view, corporate political spending is driven by business decisions that the Raskin amendment may convert into partisan political decisions. Representative Davis also worried that trade associations could be hurt if companies stopped paying dues to these organizations as a result of the Raskin amendment.
Other prominent figures have recently weighed in on the question of corporate political spending and the role shareholders could play in approving political donations. For one, Sen. Warren’s (D-Mass) Accountable Capitalism Act (See Section 8) from the 115th Congress would have required super majority approval of political donations by boards and shareholders. Moreover, Delaware Supreme Court Chief Justice Leo Strine has published a paper that also urges super majority voting by shareholders.
Lifting the ban on SEC rules. The SEC has been barred for several years from finalizing rules that would require public companies to make disclosures about their political spending habits. That ban was contained in a rider inserted into appropriations legislation. Section 4501 of the For the People Act lifts the ban permanently, although the bill, as introduced, would have lifted the ban only for FY 2019.
Representative Warren Davidson (R-Ohio) offered an amendment to remove Section 4501 that was rejected by a vote of 194-238. According to Rep. Davidson, Congress should not acquiesce in the use of the securities laws to regulate non-economic behavior. The representative also told members that nearly 40 percent of Fortune 500 companies already voluntarily make some political spending disclosures, a percentage he suggested had increased from nearly 35 percent in 2015. While Rep. Davidson said voluntary disclosures are appropriate, he objected to “force[d]” disclosures of this type, especially in an environment where there are fewer initial public offerings.
Representative Davidson also cited a speech delivered by former SEC Chair Mary Jo White during the early months of her tenure in which she spoke about the SEC’s independence and its task of implementing the Dodd-Frank Act. The representative noted one of White’s remarks: “But other mandates, which invoke the Commission’s mandatory disclosure powers, seem more directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information that primarily informs investment decisions.” White had also qualified this statement by noting that, “as a citizen,” she may “share” some of the disclosure mandates’ goals (she mentioned the Dodd-Frank Act’s mine safety and conflict minerals provisions) but that, “as the [then-] Chair of the SEC,” White had to question this use of the securities laws. White concluded this section of her speech with the following: “We cannot say that a law does not comport with our mission as we see it, and ignore a Congressional mandate. We cannot put it in a drawer or tuck it away. That would be impermissible nullification of the law and independence run amok.” In the next paragraph, White suggested how the SEC could deal with non-traditional Congressional securities law mandates: “Instead, in such cases, we can, unless no leeway is given, write the rule in a way that best comports with our view of our mission and tries to mitigate the costs, so long as we faithfully carry out Congress’ mandate.”
Representative Andy Levin (D-Mich), opposing the Davidson amendment, said the GOP had “misused the appropriations process” to impose “anti-transparency measures” such as the ban on SEC political spending rules. According to Rep. Levin, congress should follow the lead of former Supreme Court Justice Scalia’s post-Citizens United concurrence in Doe v. Reed (holding that disclosure, in general, of a referendum petition does not violate the First Amendment), in which Justice Scalia said the following: “Requiring people to stand up in public for their political acts fosters civic courage, without which democracy is doomed.” Representative Levin recently introduced his own bill, the Transparency in Corporate Political Spending Act (H.R. 1176), which he announced via tweet and explained further in a Facebook post. The bill contains language that follows the original version of Section 4501 of the For the People Act.
Likewise, Rep. John Sarbanes (D-Md), sponsor of the For the People Act, speaking later and with reference to Rep. Davidson’s observation about Fortune 500 companies, observed that some “best practices” on political spending disclosure “have emerged.” He also said that if there is “merit” to these best practices, they should “be applied across the board.”
The For the People Act is primarily a wide-ranging government ethics and election reform bill. The Congressional Budget Office's first evaluation of the bill attempted to put a price tag on some of its components, including the Freedom From Influence Fund, which would, among other things, provide matching funds for smaller donations to House campaigns; the CBO estimated that the Fund's costs could exceed $1 billion, but that funding would come from future legislation. A second CBO estimate addressed potential assessments on civil and criminal fines.
The White House issued a veto threat in response to the For the People Act, citing separation of powers, federalism, and First Amendment concerns about the election reform provisions of the bill. The Administration's statement also characterized the government ethics provisions as “well-intentioned but misguided” because they could limit executive branch functionality.
Shareholder preferences. Representative Jamie Raskin (D-Md) previously introduced the Shareholders United Act of 2019 (H.R. 936), a play on words invoking the Supreme Court's landmark opinion Citizens United, that would allow public company political donations only if a company has in place a procedure to assess the preferences of its shareholders. However, this requirement would not be met if a majority of the company’s shares are held by investors who are barred by law, contract, or fiduciary duty from expressing political views. The text of the Raskin bill was added via an amendment to the For the People Act by a vote of 219-215.
On the House floor, Rep. Raskin said that while a Constitutional amendment to reverse Citizens United is a long-term goal, Congress should now invoke Justice Kennedy’s admonition in Citizens United that the methods of “corporate democracy” can mitigate abuses by executives regarding corporate political spending. As a result, Rep. Raskin’s amendment to the For the People Act would require public companies “to get shareholder buy-in on the front end” in order for a public company to make political expenditures.
Citizens United provided an opportunity for the justices to opine on corporate democracy. Justice Kennedy began his opinion for the court by noting that while the government cannot entirely ban corporate political speech, it may impose disclaimer and disclosure requirements. In the section of the court’s opinion upholding a disclaimer and disclosure requirement, Justice Kennedy observed that corporate democracy (e.g., shareholder votes, derivative suits, and the selling of one’s shares) can provide effective checks on corporate executives’ political activities funded from a company’s general treasury. Justice Kennedy even posited that the Internet could make the methods of corporate democracy more potent. Justice Stevens, in his opinion concurring in part and dissenting in part, took issue with the court’s rejection of the government’s assertion that the government can protect dissenting shareholders from being compelled to finance speech unpalatable to them.
Specifically, Justice Stevens cited law review articles positing that corporate democracy is ineffective because officers and directors have disproportionate power versus shareholders and are likewise protected by the business judgment rule. Justice Stevens also noted that individual investors may lack the ability to adequately monitor or change their investments because they often invest through intermediary fund managers and, even if they wanted to sell their shares, they might incur taxes or tax penalties for doing so. Justices Kennedy and Stevens both cited the same passage and footnote in another case, Bellotti, in support of their divergent views on the efficacy of shareholder democracy. In Bellotti, the Supreme Court held unconstitutional a Massachusetts law that barred corporations from spending funds to influence or affect a vote on questions submitted to voters that do not materially affect the company's business, property, or assets; the law also said individual income tax items were not material to corporations (the law was enacted in the context of an effort to amend the state’s constitution to impose a graduated income tax on individuals). In the relevant passage in Bellotti, the court said shareholders could use the procedures of corporate democracy to guide corporate decisions on whether to get involved in public debates.
Representative Raskin also addressed the question of who is speaking when a public company makes a political donation. He said that, based on Citizens United, a company speaks on behalf of its shareholders, but the reality is that corporate political spending is often done by executives who lack shareholder approval to make such expenditures. “People invest in the stock market to save for retirement, or to send their kids to college, not to support their favorite political candidates, much less their most disfavored ones,” said Rep. Raskin.
When Rep. Raskin introduced the stand-alone version of the Shareholders United Act, he observed that even if shareholders have a right to voice their concerns about corporate political spending, the money they invest still should not be used without their consent. Speaking directly to the institutional investor issues presented by corporate political spending, Raskin said: "If most company shares are owned by entities forbidden to be involved in politics, the CEO literally has no one to speak for. Money should not be taken from shareholders and their owners to make political statements they are prevented by law from making."
By contrast, Rep. Rodney Davis (R-Ill) warned that, in addition to possibly violating the First Amendment, the Raskin amendment could transform corporations into explicitly “partisan political entities,” convert shareholder meetings into “political conventions,” and enable activists to press proxy advisory firms (which he said lack transparency) into using their leverage to push political agendas at companies. In Rep. Davis’s view, corporate political spending is driven by business decisions that the Raskin amendment may convert into partisan political decisions. Representative Davis also worried that trade associations could be hurt if companies stopped paying dues to these organizations as a result of the Raskin amendment.
Other prominent figures have recently weighed in on the question of corporate political spending and the role shareholders could play in approving political donations. For one, Sen. Warren’s (D-Mass) Accountable Capitalism Act (See Section 8) from the 115th Congress would have required super majority approval of political donations by boards and shareholders. Moreover, Delaware Supreme Court Chief Justice Leo Strine has published a paper that also urges super majority voting by shareholders.
Lifting the ban on SEC rules. The SEC has been barred for several years from finalizing rules that would require public companies to make disclosures about their political spending habits. That ban was contained in a rider inserted into appropriations legislation. Section 4501 of the For the People Act lifts the ban permanently, although the bill, as introduced, would have lifted the ban only for FY 2019.
Representative Warren Davidson (R-Ohio) offered an amendment to remove Section 4501 that was rejected by a vote of 194-238. According to Rep. Davidson, Congress should not acquiesce in the use of the securities laws to regulate non-economic behavior. The representative also told members that nearly 40 percent of Fortune 500 companies already voluntarily make some political spending disclosures, a percentage he suggested had increased from nearly 35 percent in 2015. While Rep. Davidson said voluntary disclosures are appropriate, he objected to “force[d]” disclosures of this type, especially in an environment where there are fewer initial public offerings.
Representative Davidson also cited a speech delivered by former SEC Chair Mary Jo White during the early months of her tenure in which she spoke about the SEC’s independence and its task of implementing the Dodd-Frank Act. The representative noted one of White’s remarks: “But other mandates, which invoke the Commission’s mandatory disclosure powers, seem more directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information that primarily informs investment decisions.” White had also qualified this statement by noting that, “as a citizen,” she may “share” some of the disclosure mandates’ goals (she mentioned the Dodd-Frank Act’s mine safety and conflict minerals provisions) but that, “as the [then-] Chair of the SEC,” White had to question this use of the securities laws. White concluded this section of her speech with the following: “We cannot say that a law does not comport with our mission as we see it, and ignore a Congressional mandate. We cannot put it in a drawer or tuck it away. That would be impermissible nullification of the law and independence run amok.” In the next paragraph, White suggested how the SEC could deal with non-traditional Congressional securities law mandates: “Instead, in such cases, we can, unless no leeway is given, write the rule in a way that best comports with our view of our mission and tries to mitigate the costs, so long as we faithfully carry out Congress’ mandate.”
Representative Andy Levin (D-Mich), opposing the Davidson amendment, said the GOP had “misused the appropriations process” to impose “anti-transparency measures” such as the ban on SEC political spending rules. According to Rep. Levin, congress should follow the lead of former Supreme Court Justice Scalia’s post-Citizens United concurrence in Doe v. Reed (holding that disclosure, in general, of a referendum petition does not violate the First Amendment), in which Justice Scalia said the following: “Requiring people to stand up in public for their political acts fosters civic courage, without which democracy is doomed.” Representative Levin recently introduced his own bill, the Transparency in Corporate Political Spending Act (H.R. 1176), which he announced via tweet and explained further in a Facebook post. The bill contains language that follows the original version of Section 4501 of the For the People Act.
Likewise, Rep. John Sarbanes (D-Md), sponsor of the For the People Act, speaking later and with reference to Rep. Davidson’s observation about Fortune 500 companies, observed that some “best practices” on political spending disclosure “have emerged.” He also said that if there is “merit” to these best practices, they should “be applied across the board.”