Under the U.S. Supreme Court: Corporate political funds may be unmasked

By MICHAEL KIRKLAND  |  Sept. 4, 2011 at 3:30 AM
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WASHINGTON, Sept. 4 (UPI) -- A U.S. Supreme Court ruling last year opened the floodgates to corporate political donations, much of it secret, but a process begun in another government agency may force those donations into the light of day.

The 2002 Bipartisan Campaign Reform Act, better known as McCain-Feingold, prohibited corporations -- and unions -- from using their general treasury funds to make independent expenditures for an "electioneering communication" or for speech that expressly advocates the election or defeat of a candidate.

Corporations could still set up a political action committee, but PACs are subject to even more restrictions and disclosures. And PAC money has to come from the pockets of corporate executives, not from the corporate treasury, and they could only donate $2,500 in every election cycle.

Much of that -- including similar restrictions on corporate spending in two dozen states -- was swept away in January 2010 in the Supreme Court's narrow decision in Citizens United vs. the Federal Election Commission.

Writing for the 5-4 majority, Justice Anthony Kennedy said the political speech of corporations was protected by the First Amendment. That applied even if the funds corporations were spending in political races belonged to stockholders.

"A PAC is a separate association from the corporation," he wrote. "So the PAC exemption from (the law's) expenditure ban ... does not allow corporations to speak. Even if a PAC could somehow allow a corporation to speak -- and it does not -- the option to form PACs does not alleviate the First Amendment problems with (the core provision of the McCain-Feingold Act). PACs are burdensome alternatives; they are expensive to administer and subject to extensive regulations. For example, every PAC must appoint a treasurer, forward donations to the treasurer promptly, keep detailed records of the identities of the persons making donations, preserve receipts for three years and file an organization statement and report changes to this information within 10 days.

"And that is just the beginning," Kennedy said. "PACs must file detailed monthly reports with the FEC, which are due at different times depending on the type of election that is about to occur."

Kennedy said limiting corporate political contributions was an exercise in thought control.

"When government seeks to use its full power, including the criminal law, to command where a person may get his or her information or what distrusted source he or she may not hear, it uses censorship to control thought," he said. "This is unlawful. The First Amendment confirms the freedom to think for ourselves."

The ruling did not mean corporations could contribute directly to candidates, only that they could make independent expenditures to support a candidate or party. But that could change. The federal courts are already taking up the question of whether the Citizens United decision invalidates bans on corporate contributions directly to candidates.

The Supreme Court's four-member liberal bloc dissented from the majority's main holding.

"When corporations use general treasury funds to praise or attack a particular candidate for office," Justice John Paul Sevens wrote in dissent, "it is the shareholders, as the residual claimants, who are effectively footing the bill. Those shareholders who disagree with the corporation's electoral message may find their financial investments being used to undermine their political convictions."

But -- in a little discussed side issue -- eight of the nine justices agreed Congress could force corporations to make donations public.

This evoked an anguished dissent, only to that part of the main ruling, from conservative Justice Clarence Thomas, who insisted some contributions must be allowed to remain secret.

Citing high court precedent, Thomas wrote, "Congress may not abridge the 'right to anonymous speech' based on the 'simple interest in providing voters with additional relevant information.'"

Thomas referred to friends of the court briefs that cited alleged horror stories of retaliation by political activists and elected officials against conservative fundraisers.

"I cannot endorse a view of the First Amendment," Thomas said, "that subjects citizens of this nation to death threats, ruined careers, damaged or defaced property, or pre-emptive and threatening warning letters as the price for engaging in 'core political speech,' the 'primary object of First Amendment protection.'"

The effect of the January Supreme Court decision was evident on that year's November election.

Common Cause said the 2010 midterm election was the most expensive in U.S. history. When all the money is finally added up, the cost is expected to exceed $4 billion -- compared with the last midterm election in 2006, which cost $2.6 billion.

Common Cause also said 2010 numbers compiled by the Center for Responsive Politics show "$293 million came from groups operating independently of the candidates or political parties. Those groups, known as 'super PACs,' '527 organizations' and '501(c) organizations,' were free to spend without limits and accept unlimited donations from corporations, trade associations and unions."

A little less than half of that independent money, $138 million, came from 501(c) groups -- named for a section of federal law -- that are not required to report donors to the FEC.

Secret money.

Post-Citizens United, Americans were faced with the prospect of increasingly expensive elections funded by increasingly covert political donations from corporations, not from individuals, with both major parties, Democratic and Republican, scrambling for their share of unlimited money.

Riding to the rescue were 10 corporate law professors who call themselves the "Committee on Disclosure of Corporate Political Spending." In August, the group submitted a "petition for rulemaking" to the Securities and Exchange Commission with a simple message: "We ask that the commission develop rules to require public companies to disclose to shareholders the use of corporate resources for political activities."

In other words, if executives want to participate in high-stakes politics using corporate funds, they should have to publicly tell stockholders what they're doing. After all, those corporate funds belong to the stockholders, not corporate management with their own political agendas.

The committee is composed of "10 academics [from Harvard, Columbia, Yale and similar institutions] whose teaching and research focus on corporate and securities law."

"We differ in our views on the extent to which corporate political spending is beneficial for, or detrimental to, shareholder interests," the group told the SEC. "We all share, however, the view that information about corporate spending on politics is important to shareholders -- and that the commission's rules should require this information to be disclosed."

As early as 2006, the petition argued, "polls indicated that 85 percent of shareholders held the view that there is a lack of transparency surrounding corporate political activity. According to these polls, 'intensity among shareholder opinion was pronounced,' with 57 percent of shareholders 'strongly agreeing' that there is too little transparency with respect to corporate spending on politics."

However, the petition said, the interest of shareholders is not the only driving force supporting disclosure.

"Disclosure of corporate political spending is necessary not only because shareholders are interested in receiving such information, but also because such information is necessary for corporate accountability and oversight mechanisms to work," the petition argued. "The Supreme Court has often recognized, and indeed relied upon, these accountability mechanisms, particularly when corporations use shareholder resources for political purposes. In particular, in its recent decision in Citizens United vs. FEC, the court relied upon 'shareholder objections raised through the procedures of corporate democracy' as a means through which investors could monitor the use of corporate resources on political activities. ...

"For this mechanism to work, however, shareholders must have information about the company's political speech; otherwise, shareholders are unable to know whether such speech 'advances the corporation's interest in making profits,'" the petition said. "Because the commission's current rules do not require public companies to give shareholders detailed information on corporate spending on politics, shareholders cannot play the role the court described. Absent disclosure, shareholders are unable to hold directors and executives accountable when they spend corporate funds on politics in a way that departs from shareholder interests."

The committee petition said its members "differ in their views on the extent to which, even with perfect information, the existing procedures of corporate democracy will ensure that corporate political activity is aligned with shareholder interests. We unanimously agree, however, that these mechanisms cannot work without strong disclosure rules providing investors the information they need to assess and respond to corporate political spending. Thus, [SEC] rulemaking is needed in order for the governance mechanisms the Supreme Court has relied upon to work effectively."

The petition said "a substantial amount of the public-company resources spent on politics are currently not disclosed in any public filing and thus would be hidden even from someone who invested significant effort in trying to put together all the publicly available information about a company's public spending. For example, a substantial amount of corporate spending on politics is conducted through intermediaries not required to disclose the sources of their contributions to the public."

For example, "five large intermediaries that likely receive substantial sums from public companies whose identities are not publicly known spent more than $130 million on lobbying and politics during the 2008 election cycle alone. Even a determined individual shareholder willing to collect all available public information on a public company's spending on politics would be unable to measure any spending through these intermediaries. Thus, in order to make use of the procedures of corporate democracy that the court relied upon in Citizens United, shareholders will need more information than is currently publicly available."

The petition also conceded that in light of the Supreme Court ruling in Citizens United, "it might be argued that the commission, and even the Congress, is precluded by the First Amendment from adopting rules requiring disclosure of this information. The Constitution, however, leaves ample room for effective disclosure rules in this area. The (Supreme) Court in Citizens United upheld the disclosure rules challenged in that case by an 8-1 vote. The court has long given the commission considerable deference in the development of rules designed to give investors information necessary to facilitate the functioning of securities markets."

The committee urges the SEC to include a "de minimis" provision in any reporting regulation -- donations may be so small that they do not require disclosure. "Highly frequent reporting would be disruptive and costly for many companies, and the commission should, where possible, use existing disclosure mechanisms to minimize the costs of the rule," the committee said.

It also urged the commission to "determine the types of political spending subject to disclosure. In particular, the commission may consider whether contributions that are restricted from political use will be subject to these rules. On the other hand, there are cases, such as corporate contributions to intermediaries that spend a large fraction of their funds on politics, for which inclusion within the scope of the commission's rules seems warranted."

The petition was filed using Rule 192. Under the rule, if the SEC decides to act on the petition it must file notice in the Federal Register of the time and place of the rulemaking procedure.

But the SEC is under no compunction to act on the petition at all. Meanwhile, the money is flowing and the clock is ticking toward the 2012 election.

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