Monday, March 02, 2020

House FSC reports political spending, workforce disclosure bill

By Mark S. Nelson, J.D.

The House Financial Services Committee advanced two securities bills that would mandate public companies make disclosures about their political spending habits and about the characteristics and satisfaction of their employees. The bills fall generally within the ambit of environmental, social, and governance (ESG) disclosures. A related measure expressing the House FSC majority’s views on the budget called for increased SEC enforcement but drew strong opposition from committee Republicans over the possibility that the majority statement could be seen as supporting a financial transactions tax.

Human capital. The Workforce Investment Disclosure Act of 2020 (H.R. 5930), sponsored by Rep. Cynthia Axne (D-Iowa), would require public companies to disclose information about their employees. Specifically, companies that file annual reports under Exchange Act Section 13(a) would have to disclose information about human capital management policies, practices, and performance. These disclosures would have to address a number of topics, including workforce demographics, stability, composition, skills and capabilities, culture and empowerment, health and safety, compensation and incentives, and recruiting. But the SEC could exempt emerging growth companies from some of these disclosures.

Representative Axne said the bill was consistent with trends in business which now consider intangible assets, such as human capital, to be greater than tangible assets. She also noted that the U.S. lags European developments on workforce disclosures by 20 years, that institutional investors are in favor of such disclosures, and that studies show firms that focus on employee development perform better than other firms. Representative Bill Huizenga (R-Mich) voiced concerns over the cost to companies of workforce disclosures. He also said companies may struggle to obtain relevant data while maintaining employee privacy and that the bill could discriminate against U.S.-based companies that have primarily U.S-based employees. The bill was favorably reported by a vote of 33-25.

A proposed amendment offered by Rep. Warren Davidson (R-Ohio) would have added language about the costs of complying with the bill, but the amendment was rejected by a vote of 25-33. Representative Bryan Steil (R-Wis) also offered an amendment to clarify that any workforce disclosures would have to be material. Representative Axne countered that the problem with materiality is that companies get to decide what to disclose and they may opt not to disclose absent a Congressional mandate. The materiality amendment likewise failed by a vote of 25-33. The Steil amendment also would fail with respect to the political spending disclosure bill discussed below.

Under the workforce bill, the SEC would have to adopt regulations implementing the human capital disclosure requirement within 270 days of enactment. However, if the SEC failed to adopt final rules within two years of enactment, companies could comply with the disclosure requirement by adhering to ISO 30414 published by the International Organization for Standardization.

Moreover, the SEC would have to report to Congress within a year of enactment regarding a study of how investors value specified types of information about companies. Specifically, the SEC would have to address: (1) companies’ human rights commitments; (2) companies’ violations of the Fair Labor Standards Act; (3) the disaggregation of data on full- and part-time employees and contingent and company management; and (4) employee satisfaction surveys.

Representative Axne noted that human capital had captured the attention of the SEC. For example, Chairman Jay Clayton has spoken on the importance of human capital at the SEC and he participated in a call with an SEC advisory committee in which he emphasized a flexible approach to disclosure of material human capital information that he said should be viewed through the eyes of company management, sentiments he reiterated in remarks to the Investor Advisory Committee's Investor-as-Owner Subcommittee. The SEC subcommittee itself issued a recommendation calling on the Commission to consider human capital as part of the Commission's ongoing disclosure effectiveness review. The SEC also has appointed its own chief human capital officer. Moreover, the Human Capital Management Coalition submitted a rulemaking petition asking the SEC to address human capital.

Political spending. The SEC has for a number of years been prohibited by Congressional appropriations bills from finalizing regulations requiring public companies to make disclosures about their political spending habits. That, however, has not stopped lawmakers from introducing a variety of bills that would approach the question of public companies’ political donations from different angles, such as board and shareholder approval (See e.g., H.R. 7294; S. 3348) or an assessment of shareholder preferences (the House passed the latter approach as part of the For the People Act (H.R. 1, Section 4502)).

The Shareholder Political Transparency Act of 2020 (H.R. 5929), sponsored by Rep. Bill Foster (D-Ill), would impose periodic and annual reporting requirements on public companies regarding political spending. A set of proposed Congressional findings would state that corporations are major political donors but that shareholders, for whom companies are supposed to conduct business, have little, if any, influence regarding whether and to whom a company makes political donations. The bill was favorably reported by a vote of 33-25.

The SEC would have to finalize regulations to implement quarterly and annual reporting disclosure requirements within 180 days of enactment. Quarterly disclosures by companies would have to: (1) describe the political expenditure; (2) provide dates of expenditures; (3) name the candidates, their political affiliations, and the offices sought (if an expenditure was made to support or oppose a candidate); and (4) name any trade associations to which the company paid dues. Quarterly reports would have to be available on the SEC’s website and in a searchable format on EDGAR.

Companies’ annual reports would have to summarize political expenditures. Specifically, total expenditures of more than $10,000 and expenditures on a particular election of more than $10,000 would have to be disclosed. Companies also would have to describe the "specific nature" (if known) of expenditures planned for the next fiscal year and state the intended amounts to be spent in the next fiscal year.

The SEC would have to report annually to Congress on its implementation of the political spending disclosure requirement. The GAO also would have to periodically report to Congress on the SEC’s oversight of the political disclosure requirement.

The bill’s sponsor, Rep. Foster, said the Supreme Court’s decision in Citizens United had altered the landscape and that his bill was a "common sense bill that should not be controversial." Moreover, according to Rep. Brad Sherman (D-Cal), 15 percent of S&P 500 companies already make such disclosures, as do European companies.

But Republican members sought to modify the bill text. Representative Huizenga, for example, offered an amendment that would delay the bill’s effective date until Rep. Huizenga’s bill mandating similar disclosures by unions becomes effective (See H.R. 5959). The amendment failed by a vote of 23-33. Representative Steil’s materiality amendment, similar to the amendment he offered to the workforce bill, also failed by a vote of 25-33.

Budget views and the FTT. The House FSC majority expressed its views on the FY 2021 appropriations process. Building upon the majority’s emphasis during the first session of the 116th Congress on consumers and investors, the majority said the SEC’s forthcoming budget should focus on enforcement, examinations, and finishing Dodd-Frank Act rulemakings. With respect to enforcement, the majority said the SEC should focus on initial coin offerings and fraud related to virtual currencies as well as manipulative trading practices. The majority also noted that the House has already tried to help the SEC by codifying the agency’s ability to seek disgorgement by passing legislation (See H.R. 4344) in November 2019 by a vote of 314-95. The majority budget views were approved by a vote of 32-25.

Although a tax haven disclosure bill missed the cut for this markup, the majority budget statement suggested it could be addressed at a future markup. The Disclosure of Tax Havens and Offshoring Act (H.R. 5933), also sponsored by Rep. Axne, would mandate that public companies with revenues in an amount to be determined by the SEC disclose information about their constituent entities’ residence for purposes of tax jurisdiction. The goal of the bill is to require companies to make such disclosures on a country-by-country basis. The disclosure requirement would be effective one year after the SEC adopts final rules implementing the requirement. Representative Axne emphasized the ways big multinational companies move profits to overseas jurisdictions in a press release announcing the tax haven bill.

House Ranking Member Patrick McHenry (R-NC) offered an amendment to the budget views that would include language in opposition to any proposal that harms capital formation, including a financial transactions tax (FTT). The McHenry amendment brought 2020 election year politics into the discussion of the House FSC’s budget views because five of the seven remaining Democratic presidential contenders have said they either support or would consider an FTT (i.e., Joe Biden, Michael Bloomberg, Pete Buttigieg, Sen. Bernie Sanders (I-Vt), and Sen. Elizabeth Warren (D-Mass)). By contrast, in December 2019, Treasury Secretary Steven Mnuchin testified before the House FSC and said "I am very concerned that [an FTT] would destroy our capital markets." Mnuchin added that he believed mutual fund investors would bear most of the costs of an FTT. Mnuchin also said Treasury would study the impact of an FTT at the request of Rep. McHenry.

Chairwoman Waters characterized the McHenry FTT amendment as a "political act" while suggesting that slowing high frequency trading via an FTT would demonstrate the benefits of a modest FTT, something that many other countries have already adopted. Representative McHenry countered that an FTT is "a serious policy concern" while adding that other countries that have adopted an FTT, such as the U.K., avoided the harmful results of the FTT only by creating "massive carve-outs." According to Rep. McHenry, a single transition in a mutual fund can produce hundreds or thousands of taxable transactions.

Future discussions by the House FSC of an FTT may focus on whether the committee has jurisdiction of the subject matter (Chairwoman Waters suggested it does not, while Rep. McHenry said it does). Matters of taxation typically would be taken up by the House Ways and Means Committee. The McHenry FTT amendment was rejected by a recorded vote of 27-30.

The majority budget views also spotlighted other areas the SEC should address. Specifically, the majority said the SEC should consider rules regarding ESG disclosures on cybersecurity and climate change. An amendment proposed by Rep. Andy Barr (R-Ky) would strike the budget statement’s ESG language. Representative Barr, citing speeches by SEC Chairman Jay Clayton (e.g., remarks to the Investor Advisory Committee) and Commissioner Hester Peirce (e.g., the "Scarlet Letters" speech), said such "multiple, onerous" disclosures could result in companies facing costly litigation. Chairwoman Waters said she "strongly opposed" the amendment, which failed by a recorded vote of 24-32.

Lastly, the majority urged the SEC to "rethink" its recent proxy proposals and stated its opposition to the Trump Administration’s attempt to eliminate the SEC’s reserve fund (which the majority said aids the SEC’s cybersecurity efforts) and to the Administration’s proposed consolidation/elimination of the PCAOB. The majority further said it would continue to pursue legislation on diversity and inclusion, while also supporting "responsible innovation" regarding fintech and artificial intelligence in the financial services sector.