Why Commissioner Gallagher Is Not Mistaken On Political Spending Disclosure

In this post published on October 30, I observed:

According to Enver Fitch and Limor Bernstock at ISS ESG Proxy Research, shareholders associated with the Center for Political Accountability submitted 47 proposals this year.  The 32 that actually went to a vote only garnered an average of 28.5% of the vote.  That means that on average more than two-thirds of the shareholders opposed these proposals.  Since investors are the ones with actual “skin in the game”, their failure to get behind these proposals is telling.

A few days later, SEC Commissioner Daniel M. Gallagher wrote this letter to the editor of The New York Times in which he observed:

It is telling that both the number of and shareholder support for political spending proposals is down year over year.  As Institutional Shareholder Services invariably sides with these proposals, the fact that its own analysis highlights this contrary trend speaks volumes.  The hard numbers expose the inconvenient (to some) truth that shareholders overwhelmingly do not want companies wasting their money to make these immaterial disclosures in S.E.C. filings.

Mandatory political contribution disclosure deserves no place on the agency’s agenda, and I will fight to keep it that way.

Shortly thereafter, Harvard Law School Professor Lucian Bebchuk and Coumbia Law School Professor Robert J. Jackson Jr. published this post on The Harvard Law School Forum on Corporate Governance and Financial Regulation entitled "Why Commissioner Gallagher is Mistaken about Disclosure of Political Spending".  Attempting to counter the fact of tepid support, Professors Bebchuk and Jackson argue:

The Commissioner’s conclusion is unwarranted.  As we explained in our recent Article [sic] Shining Light on Corporate Political Spending, SEC rules are not designed to give investors only the information demanded by a majority of shareholders.  Instead, these rules are intended to make sure that information reasonably sought by a significant number of investors is disclosed.  Indeed, current SEC rules require companies to disclose many types of information that would likely not be demanded by a majority of investors if the subject were put to a vote.

Really?  Section 14(a) of the Securities Exchange Act of 1934 does grant the SEC authority to adopt proxy rules "necessary or appropriate in the public interest or for the protection of investors", but how is the "public interest" to be defined?  If more than two-thirds of investors oppose mandated disclosure, how is it in the public interest to force those shareholders to bear the costs of disclosure when there has been no showing that the proxy process has prevented a fair vote on the question?

More importantly, Professors Bebchuk and Jackson appear to be urging the SEC towards a constitutional precipice.  When Congress delegates decisionmaking authority to an agency, it must "lay down by legislative act an intelligible principle to which the person or body authorized to [act] is directed to conform." J. W. Hampton, Jr., & Co. v. United States, 276 U. S. 394, 409 (1928).  On its face, Section 14(a)'s principle of "necessary or appropriate in the public interest" arguably fails to provide the SEC with any "intelligible principle" for rulemaking.  Arguing that some people want it, would seem to invite a constitutional challenge.  Even if Section 14(a) was somehow found to articulate an "intelligible principle", the non-delegation doctrine militates in favor of a narrow interpretation of the statute.  Industrial Union Dept., AFL-CIO v. American Petroleum Institute, 448 U.S. 607 (1980).

For a thorough discussion of the exiguous legislative history of Section 14, see Professor Stephen Bainbridge's article, Redirecting State Takeover Laws at Proxy Contests, 1992 Wisc. L. Rev. 1071 (1992).