Ex-SEC Official: Stay Tuned for Congress To Require More Social, Political Disclosures
By Yin Wilczek
Sept. 13 –Congress likely will continue utilizing the Securities and Exchange Commission’s disclosure rules to effect social and political goals, Meredith Cross, the former director of the agency’s Division of Corporation Finance, said Sept. 11.
“Requiring companies to post potentially embarrassing information” on Edgar–the commission’s financial reporting system– “even if the information is not qualitatively or quantitatively material to investors, can be a very powerful motivator to change corporate behavior,” said Cross, now a partner at Wilmer Cutler Pickering Hale & Dorr LLP, Washington.
“Congress has figured this out, and the dam” has broken, she said. “And I think there is a significant risk that people will keep pushing for it.”
Cross suggested that based on current “hot topics,” areas that may see future disclosure requirements include corporate political spending, the steps taken by companies to prevent cybersecurity risks, and business dealings with Syria.
The attorney spoke at a disclosure panel at the Practising Law Institute Directors’ Institute on Corporate Governance.
In the meantime, the SEC is put in the “nearly impossible position” of trying to determine at rulemaking how these regulations would impact competition, capital formation, and efficiency, Cross said. “I’m not sure what the SEC will do with that in the future but it is certainly a very difficult” challenge.
Cross served as Corp Fin director from June 2009 to December 2012, during which the division recommended about 60 rulemakings to the commission (44 SRLR 2222, 12/10/12). These included requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act to implement a disclosure regime for the use of conflict minerals, and for resource extraction payments.
Dodd-Frank Section 1502 directed the SEC to promulgate rules to require public companies and foreign private issuers in the United States to report their use of so-called “conflict minerals”–gold, tantalum, tin, and tungsten–from the Democratic Republic of Congo and adjacent countries. The legislation was aimed at stemming the funding of armed conflict in the region.
In the meantime, Dodd-Frank Section 1504 directed the SEC to require resource extraction issuers to annually disclose payments made to governments to further the commercial development of oil, natural gas, or minerals. That provision sought to shed light on the governmental process for allocating resource contracts.
Cross noted that the conflict minerals and resource extraction provisions were the first time that Congress had used the federal securities laws for social and political goals.
“When I worked in the SEC in the 1990s, one of my big jobs was to try to keep that from happening,” she told the audience. Cross was Corp Fin deputy director during this period. She noted that while providing technical assistance to lawmakers, the SEC staff would try to get the point across that if they required corporate disclosures about issues such as glass ceilings, “they would break the dam” leading to “endless amounts” of disclosures.
The SEC adopted disclosure rules for conflict minerals and resource extraction payments in August 2012 (44 SRLR 1595, 8/27/12). Business groups challenged both regulations in court, and the U.S. District Court for the District of Columbia vacated the resource extraction rule (45 SRLR 1245, 7/8/13), but upheld the conflict minerals rule (45 SRLR 1378, 7/29/13). The SEC did not appeal the decision invalidating the resource rule but said it will undertake further rulemaking pursuant to the court’s directions [see related report in this issue].
The decision affirming the conflict minerals rule is on appeal before the U.S. Court of Appeals for the District of Columbia Circuit (45 SRLR 1522, 8/19/13).
Cross observed that the district court might have set the SEC on an “interesting slippery slope” by faulting the commission for not using its general authority under the 1934 Securities Exchange Act to carve out exemptions from the resource extraction rule. Resource payments are not within the SEC’s expertise, and thus they are a challenging topic on which to conduct the commission’s traditional cost-benefit analysis, Cross said. Under these circumstances, “if you start using exemptive authority, where do you stop?”
On the hand, the district court’s conflict minerals decision included language helpful to the SEC by rejecting the argument that the agency had to consider whether the regulation achieved the humanitarian benefits that Congress intended, said co-panelist Jennifer Zapralka, another WilmerHale partner in Washington.
Zapralka served as Cross’s senior special counsel from 2009 to 2013, when she left the SEC to return to private practice.
In other observations on the litigation, Cross noted that First Amendment challenges have followed on the heels of the socially and politically motivated disclosure requirements. “It’s interesting” that the business community is using the First Amendment to challenge securities laws, she said. “It’s a watch-this-space area.”
In its next politically motivated disclosure legislation, Congress bypassed the SEC and directly required companies to report their dealings in Iran, Cross said. “The big policy point here is that the temptation to require companies to provide disclosure about an activity as opposed to regulating the activity directly is extremely strong,” she said.
Congress takes this approach “where it would be too expensive, or complex or controversial to regulate the behavior directly,” Cross continued. “You need to think of other areas where this could happen.”
The Iran sanctions law–which President Barack Obama signed in August 2012 (44 SRLR 1567, 8/20/12)–includes a provision that requires public companies to report Iran-related dealings to the SEC.
In other comments, Matthew Lepore, corporate secretary and chief governance counsel at Pfizer Inc., (PFE) said it has been “a ton of work” for his company to comply with the Iran and conflict minerals requirements. “We’ve been working on these two provisions for a very, very long time, and it’s been very, very expensive,” he said.
To contact the reporter on this story: Yin Wilczek in Washington at firstname.lastname@example.org.
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