In December, Congress passed, and the president signed, an omnibus federal budget. Attached was a “rider” prohibiting the Securities and Exchange Commission from requiring disclosure of corporate political contributions.

The Supreme Court decision in Citizens United v. Federal Election Commission established the right of corporations to make political contributions. Many saw it as re-enforcement of the constitutional right of free speech, others as democracy’s death knell.

Underneath the policy issue is a complex legal matrix. This column identifies historical points in this matrix, focusing on proposed SEC action and corporate fiduciary duties.

In the beginning …

Entering the 2008 elections, federal law prohibited corporations from using treasury funds to “speak” through “electioneering communication” or through express advocacy of a particular candidate. Electioneering communication was defined as a public broadcast within 30 days of a primary supporting a candidate for federal office.

Corporations could establish PACs, but corporate contributions to PACs were limited to support and administration; financial contributions were prohibited.

Citizens United, a non-profit corporation, proposed to release a film critical of presidential candidate Hillary Clinton, and television spots advertising the film, within 30 days of primaries, and sought injunctive protection against being held in violation of law.

The Federal Election Commission denied issuing an injunction. Citizens United appealed to the Supreme Court.

Although Citizens United’s legal arguments in court were narrow, turning on the definitions of “electioneering communication” and “expressed advocacy,” the Supreme Court majority held that the case required considering the entire question of political speech under the First Amendment.

‘Citizens United’ holding

The majority held that prohibiting “independent” corporate expenditures (expenditures not given directly to a candidate or party) violated the free speech provisions of the First Amendment: Corporations must be allowed to spend treasury funds in electioneering communications and for advocating the election or defeat of candidates. (Corporations still could not contribute directly to candidates or parties.)

Corporations were simply one form of association by individuals, and since individuals have the right of free speech, then corporations shared that right. Since money facilitates speech, prohibiting expenditures is constitutionally impermissible.

The court overruled prior authority, which held that corporate expenditures would have a “distorting effect” on elections, risking corruption or the appearance of corruption.

Citizens United boldly (and erroneously) stated that “there is no such thing as too much speech.” (Tell that to the judge when you yell the proverbial “fire” in the movie theater.)

The decision validated federal law in requiring disclosure of contributions in FEC filings, as disclosure “can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are simply ‘in the pocket’ of so-called moneyed interests.”

Three justices joined in Justice John Paul Stevens’ 90-page dissent. His arguments: money isn’t speech; it distorts democratic elections with undue influence; distortion is not necessarily direct; contributors gain access to the political process; money creates the “appearance of corruption”; corporations have perpetual life, large amounts of money, limited liability, no vote, no morality, and no purpose beyond making money; large amounts of money will swamp the airwaves with one message, destroying the marketplace of ideas.

Most germane to SEC public disclosure issues, Stevens contended that the decision ignored stockholder rights. Holding directors and management responsible for improper expenditure of corporate funds would require expensive litigation, beyond the means of average shareholders. And since many shareholders invest through intermediaries (IRAs, mutual funds), shareholders would learn of improper expenditures well after the damage was done.

Political Action Committees

PACs existed prior to Citizens United, but the so-called “super PAC,” permitting donations of any amount not only from individuals but also from corporations, is the product of the decision together with the 2010 case of speechnow.org v. Federal Election Commission, wherein the Federal Court of Appeals (D.C. Circuit) permitted PACs to receive unlimited corporate contributions. Super-PACs could support particular candidates but could not contribute to candidates’ campaigns or coordinate campaign strategy.

Super-PACs must disclose donors in FEC filings. But because of timing requirements, Super-PAC contributions late in an election will not be disclosed until after the election occurs.

Super-PACs have become a lightning rod for criticism of the Citizens United decision, blamed for the explosion of campaign expenditures, and were seen as a funnel for corporate funds, even though many were funded by wealthy individual donors.

SEC disclosure

The SEC has a mission to maintain fair and informed capital markets. Disclosure is the essence of this mission. Anyone with even a cursory knowledge of the disclosure requirements under federal securities laws knows that SEC disclosure is almost boundless.

The SEC’s disclosure regimen requires fine-line reporting of many expenditures. The SEC also requires reporting under XBRL, a format allowing inter-corporate comparisons of expenditures on a line-by-line basis.

And the SEC has a record of acting to affect campaign contributions, even from individuals. A few months after the Citizens United decision, the SEC issued a rule prohibiting investment advisors from providing services to government clients for two years after the advisor, or certain related individual executives and employees, made contributions to certain elected officials or candidates.

Further, as Citizens United noted, corporate management, and boards, owe fiduciary duties to shareholders. The function of a corporation is to earn money for shareholders; political expenditures are of funds that “belong” to shareholders.

With the decision’s emphasis on disclosure as backdrop, in 2010 legislation was first introduced in both the House and Senate requiring corporate disclosure of campaign expenditures in SEC filings, where shareholders could have access to that information in a practical manner. In ensuing years, however, such legislation has failed passage.

Statutory efforts, reflecting concepts of fiduciary duty, continue. Last year, on the fifth anniversary of Citizens United, Rep. Michael Capuano and Sen. Robert Menendez introduced legislation requiring CEOs to obtain pre-authorization of a majority of shareholders before corporations could fund political activities. That proposed legislation required board approval of political expenditures over $50,000; disclosure of political spending to shareholders, the SEC and the public on a quarterly basis; and 48-hour disclosure of board approval of significant expenditures.

Separate from legislative efforts, in 2011 a Select Committee on Disclosure of Corporate Political Spending — composed of 10 leading corporate academics including Lucian Bebchuk of Harvard Law and John Coffee of Columbia Law — filed a formal petition with the SEC seeking a rule requiring disclosure.

The petition’s preamble states that while signatories differed on whether corporate political spending was beneficial or detrimental to shareholders, they all agreed on one thing: “information about corporate spending on politics is important to shareholders — and that the Commission’s rules should require this information to be disclosed.”

The petition called on the commission to “promptly initiate a rule making project to require disclosure of corporate political spending to public-company shareholders.”

The professors noted that the SEC often had responded to evolving shareholder interests by requiring different disclosures over time, and that investor polls, proxy proposals and policy statements by institutional investors made it clear that investors have a strong interest in political contributions.

The petition asserted that proxy proposals concerning political spending exceeded the number of proposals related to other important corporate governance issues such as board declassification, separating chairmanship from the CEO position, super majority voting, golden parachutes, claw-backs of incentive compensation and executive equity retention. Over 50 percent of S&P 100 firms were voluntarily disclosing such expenditures.

Finally, the petition cited Citizens United, which stated that “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.”

Notwithstanding, no SEC rule-making proposals eventuated.

When the SEC propounded its draft strategic plan for the fiscal years 2014 to 2018, that plan (to the chagrin of numerous public commentators on the SEC website) failed to call for disclosure of corporate political spending, although the vast majority of the three-quarters of a million comments filed with the SEC concerning the petition favored disclosure.

No doubt as part of a political compromise (in that President Obama supports repeal of Citizens United), and notwithstanding that SEC disclosure rules call for detailed disclosure of a wide range of expenditures, the current budget signed by Obama expressly bars any SEC action on corporate political contributions.

End note

Last April, members of Congress instituted a House resolution to amend the Constitution to make clear that corporations are not “people” with constitutional rights. The “We the People” amendment” goes to the heart of Citizens United. Section 1 provides that constitutional rights are enjoyed by natural persons only. Section 2 establishes the right of federal, state and local governments to regulate, limit or prohibit contributions and expenditures in campaigns. Federal, state and local governments “shall” require that permissible contributions must be disclosed. Finally, courts are enjoined from equating expenditure of money to influence elections as constituting speech under the First Amendment.

While the approved 2016 budget prohibits the SEC from issuing any rule, regulation or order regarding corporate political spending disclosures, 95 members of Congress (including Sens. Warren, Menendez, Schumer, Brown and Feinstein and Rep. Capuano) on Dec. 22 sent a letter to SEC Chair Mary Jo White, urging the SEC to move forward with planning for the adoption of a disclosure rule.

Noting that the budget bans action but not discussion and planning, the letter urged a public roundtable and “other actions to prepare a rule on the disclosure of political contributions,” and promised that Congress “will periodically ask for updates on this issue.”

Stephen M. Honig practices at Duane Morris in Boston.