The panel was moderated by FCD Chair Chris Cox, a former chairman of the Security and Exchange Commission and former longtime U.S. congressman from Orange County. Cox said the Nov. 4 election “will have an impact on everything, from health care to financial regulation.”

He pointed to the 2010 Dodd-Frank financial reform, which passed without a single Republican vote in the Senate or House. Although the bill was supposed to make another financial crash less likely, instead it imposed 2,379 new pages of regulations on banks and other businesses – yet just yesterday spurred the relaxation of housing lending.

The spotlight passed to Daniel Gallagher, one of two members of the U.S. Securities and Exchange Commission who yesterday objected to the new relaxation. “Three U.S. agencies signed off on relaxed mortgage-lending rules Wednesday, helping complete a long-stalled provision of the 2010 Dodd-Frank financial law,” the Wall Street Journal reported this morning. “Two Republican SEC commissioners, Daniel Gallagher and Michael Piwowar, objected to the rules.” The three approving agencies were the Federal Reserve Board, the Securities and Exchange Commission and the Department of Housing and Urban Development.

The paper quoted Gallagher, “Today’s rule-making takes the untenable housing policy that injected irrational exuberance into mortgage lending and, as a result, caused a catastrophic financial crisis and chisels that failed policy into the stone tablets of the code of federal regulations.”

At the event in Costa Mesa, Gallagher said that, when reforms were proposed in 2011, a 20 percent down payment was going to be required for loans. But yesterday’s action dropped that to zero percent. “Here was a chance to make right what was wrong in the sub-prime bubble” of a decade ago, he said, when a similar easy-money policy first hit the housing market, then cascaded through the capital markets.

Gallagher also said the Dodd-Frank bill made the mistake of regulating the capital markets, which raise investment money, the same as banks. Which means bank regulators will be in charge of investments. The problem, Gallagher said, is that “bankers don’t understand other types of regulation.”

Fatal Conceit

Dodd-Frank’s deficiencies also were highlighted by Paul Atkins, CEO of Patomak Global Partners and a former SEC member. He referred to “The Fatal Conceit: The Errors of Socialism,” the final book of Nobel economics laureate Friedrich Hayek.

For Hayek, the “conceit” was that a group of really smart people could run millions of people’s lives better than they can themselves. Dodd-Frank’s fatal conceit, Atkins said, was to “get all the best people in Washington together and make the capital markets stable. But they’re inherently unstable. That’s the underlying falsity of the Financial Stability Oversight Council,” one of the new bureaucracies Dodd-Frank created.

Atkins was seconded by Brian Cartwright, a senior advisor at Potomak and former general counsel at the SEC. “The powers of the FSOC are broadly and vaguely enumerated,” he said. He pointed back to 50 years ago, when banks were the primary investment vehicle in America. By contrast, today “80 percent of financing comes from capital markets, not banks. There is a tension between traditional banking and capital markets, and it’s not just the U.S., it’s global.”

He said banking regulation was “fairly good,” and has to be because banks “leverage” deposits – meaning leading out money – at 10 times deposits. So stiffer regulation is needed to make sure the deposits are lent out responsibly.

By contrast, capital market leveraging is much smaller. “The notion you would impose bank regulation on this is pretty wild stuff,” he cautioned. “I’m hoping this won’t happen.”

Rep. Ed Royce

“This is worse than the Fatal Conceit,” charged Rep. Ed Royce, R-Calif., the senior member of the House Committee on Financial Services and the chairman of the Committee on Foreign Affairs. “It’s not just a bank-centric model of regulation, it’s more like a utility.”

By that, he meant government was allowing banks to gain a certain profit for a highly regulated service, such as electricity or water. But that means, “You’re not allowing bankers to be bankers. And you’re putting such additional costs on local community banks, you’re allowing them to be gobbled up” by the big banks that more easily can absorb regulatory costs.

Royce said now is the time for reforming the Dodd-Frank reform because “my Democratic colleagues are getting skittish about waiting for the economic recovery.” His analysis of the economic situation was confirmed a couple hours later at the latest Cal State Fullerton Center for Economic Analysis forecast. “Mediocre growth seems to be the new norm,” said director Anil Puri, as reported in the Orange County Register.

Royce continued that the over-regulation of Dodd-Frank was “seeping out into the rest of the capitalist system,” retarding growth.

Royce said some action could come in the lame-duck session of Congress after the Nov. 4 election. But if Republicans take over the Senate, the real action would come next year. President Obama could veto any potential straightening out of the Dodd-Frank regulations. But if some Democrats join with the potential Republican majority to comprise 2/3 of both houses, “presidents tend to take a second look at such legislation.”

“We see political spending as distorting markets in policy making and creating a skewed playing field,” said Bruce Freed, founder of the Center for Political Accountability, in a recent debate over corporate political speech.

Freed’s organization and other leftist groups have been pressuring corporations to eliminate or at least disclose their political spending. But a recent Common Cause study of $220 million in independent expenditures for candidates in California from 2000 to 2012 shows that unions spend much more than businesses.

“[L]abor unions are the largest source of independent spending, focusing primarily on governor’s races,” the study states.

Some findings:

— Union-backed independent expenditure committees outspent business-backed committees three-to-one: $90 million to $27.7 million.

— Three-quarters of the donations exceeding $1 million came from unions.

— Seven unions are among the top 10 donors.

— Business-backed committees accounted for 12.5 percent of independent expenditures.

— Chevron, the largest corporate contributor to independent expenditure committees, ranked 28th among all donors.

Professors target corporate speech

But a political playing field skewed in favor of unions hasn’t deterred a group of law professors from filing a petition with the Securities and Exchange Commission that has the potential to significantly decrease corporate political spending.

“We ask that the Commission develop rules to require public companies to disclose to shareholders the use of corporate resources for political activities,” the July 2011 petition states.

It makes several assertions:

— Public investors have become increasingly interested in receiving information about corporate political spending.

— In response, a large number of public companies have voluntarily adopted policies requiring disclosure of the company’s spending on politics.

— Disclosure is important for the operation of corporate accountability mechanisms, including those that the courts have relied upon in their analysis of corporate political speech.

Fifty of the 465 shareholder proposals on company proxy statements in 2011 were related to political spending, including one-fourth of the S&P 100, according to the petition.

The petition addresses the pro-corporate speech argument that there are already numerous regulations governing corporate political spending. It states that the information is scattered “among several federal, state and local government agencies, presented in widely varying formats, and is ill-suited to giving shareholders a good picture of a particular corporation’s political spending.”

And much information remains undisclosed, the petition states, including contributions to intermediaries like 501(c)(4) organizations that are not required to disclose their donors. The petition concludes:

“Shareholders in public companies have increasingly expressed strong interest in receiving information about corporate spending on politics, and such spending is likely to become even more important to public investors in the future. Furthermore, shareholders need to receive such information for markets and the procedures of corporate democracy to ensure that such spending is in shareholders’ interest. Still, while many large public companies have begun to provide such information, no existing rule requires disclosure of this information to investors, and corporate political spending remains opaque to investors in most publicly traded companies. The Commission should address this lack of transparency and, drawing on its expertise and experience in designing rules for disclosure of other information that is of interest to investors, should adopt rules concerning disclosure of corporate political spending.”

Not a priority for SEC — so far

The SEC has yet to act on the petition, and may take its time doing so. The petition was recently placed in the long-term action category of the “reg flex” agenda, said SEC general counsel Brian Cartwright at the Society of Corporate Secretaries & Governance Professionals conference.

“If I were advising [SEC Chairman] Mary Jo White, and she decided this is something she was not interested in, I would advise her to put it in the long-term action category rather than take it off the reg flex agenda altogether,” said Cartwright. “Because you would have to take a whole bunch of arrows you don’t need to take if you do that. So I would say for the near term this has been very substantially downgraded for SEC action. This late in the year nothing could impact the 2014 proxy season.”

When the petition does reach the SEC board, at least one commissioner, Daniel M. Gallagher, may be skeptical, judging by his remarks at the SCS&GP conference on July 11. He agreed that there are benefits for investors from more disclosure, but he draws a tighter line on how much needs to be disclosed.

“[T]he disclosure regime was [not] meant to guarantee that investors receive all information known to a public company, much less to eliminate all risk from investing in that company,” said Gallagher. “Instead, the point has always been to ensure that they have access to material investment information.”

‘Regulatory creep’ leads to information overload

He went on to say:

“Arguably, the Commission’s disclosure regime has been subject to the classic Washington scourge of regulatory creep, in spite of the principle that investors should have access to ‘basic facts.’ The beauty of the disclosure regime as created by Congress almost 80 years ago was that it did not require government regulators to judge the merits of a company, its board or management structure, or its business practices –– those judgments were intended to remain in the hands of investors armed with the knowledge provided by the disclosure of material information. Today, however, some of our disclosure rules are being used by special interest groups, who do not necessarily have the best interests of all shareholders in mind, to pressure public companies on certain governance and business practices.”

Gallagher also warned about the potential for information overload:

“As Justice Thurgood Marshall warned almost 40 years ago, disclosure requirements with ‘unnecessarily low’ materiality standards risk ‘simply bur[ying] the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decision making.’ When investors are inundated with immaterial information, it increases the likelihood that they will miss key disclosures. Even more likely is the possibility that investors, despairing about the voluminous compilations of corporate minutiae contained in company filings, will never even look at disclosure documents. In either case, the result is that investors are left less informed when making investing decisions than they would be if presented with a document that didn’t require a magnifying glass to read and a PhD to understand.”

The quantity and length of the documents needing to be reviewed by shareholders has increased by about 50 percent from 2003 to 2011, he said. As a result, Gallagher pushed for streamlining regulations.

“Given the importance of this issue, it is critical for the Commission to engage with issuers and shareholders to rethink whether the mandatory disclosure rules in their current form are still valuable, and whether in some cases it may be better for investors if there was a lower volume, but an overall higher quality, of disclosure,” he said. “As I’ve noted repeatedly, disclosure is not costless to issuers, and we cannot forget — because far too many policy makers do forget — that it’s the shareholders who ultimately bear the burden of increased costs on issuers.”

Overreach of SEC authority seen

Former SEC Commissioner Paul Atkins is strongly opposed to the disclosure petition. He discussed the issue at a Pacific Research Institute luncheon in San Francisco last year, and wrote a petition response, “Materiality: A Bedrock Principle Protecting Legitimate Shareholder Interests Against Disguised Political Agendas.” It makes several arguments:

— The SEC does not have the authority to require disclosure of information on these sorts of expenditures because such information is immaterial.

— Should the Commission decide to proceed, which would harm rather than protect investors, the Commission would be unable to satisfy its legally mandated cost-benefit analysis because the alleged benefits are outweighed by the significant costs of mandated disclosure.

— It would be inappropriate for the Commission to move forward with a rule-making related to corporate public policy spending at a time when it must address myriad issues related to the financial crisis of 2008, as well as those that are central to the economically important capital-raising functions of the capital markets.

“Ultimately, the SEC is not the appropriate body to address this issue, primarily because SEC does not have the authority to require disclosure of information on these sorts of immaterial expenditures,” wrote Atkins. “Rational shareholders, considering their economic interests and not political interests, do not consider this information material to their investment decision making.

“Even if the SEC were to forge ahead and consider a rule, an impartial economic analysis of the costs and benefits of such a requirement would find that the costs exceed the purported benefits, because the narrow interests of an extremely vocal minority of shareholders (and even non-shareholder activists) could more easily intimidate value-creating corporate behavior, create brand damage to the disclosing companies, and stifle corporate speech, all of which would have a detrimental economic effect on the company and its shareholders.”

One of the disclosure advocates, Freed, suggested that he might not be bothered were the SEC to reject the disclosure petition.

“I think when you’re looking at the work we have done on political disclosure, we are not talking about regulations,” he said. “We are talking about companies adopting policies that govern their political spending practices. This is very, very important. Voluntary disclosure as a result of shareholder engagement has laid a strong foundation for broader disclosure.”

Even if SEC passes, state-level action proceeding

But if the petition is rejected, corporations won’t be able to breathe easy. Disclosure advocates have started lobbying state legislatures.

“At the state level there’s quite a bit of ferment,” said Freed. “Disclosure laws have passed in Iowa and Maryland. There’s strong support for disclosure legislation in Texas and Montana. The Texas legislature passed a very strong disclosure bill that was vetoed. In Montana there was very strong bipartisan support. In New York state, regulations were issued by the attorney general requiring  501(c)(4) disclosure. California is getting very active in this area. So there’s quite a bit of ferment there.”

Between the fomenting from disclosure activists and the regulatory fermenting in state legislatures, free market supporters will need to stay alert lest the already-skewed political playing field be totally forfeited to one team.

By Dave Roberts

SAN FRANCISCO — The left, which has championed the media and legislative crusade against bullying, is itself engaged in the bullying of one of the few groups you’re still allowed to demonize in this country: corporations. Not content with dominating the media, academia, unions, the courts and much of the government, leftists are now trying to shut down the free speech of businesses.

“What they are trying to do is to cow corporations from supporting free market-oriented groups, including trade associations and even government affairs type of operations,” said former Securities and Exchange Commissioner Paul Atkins, speaking at a Pacific Research Institute luncheon in San Francisco on June 27. “In the wake of Citizens United, the unions and state pension funds and shareholder activists have been agitating because they are, of course, not happy about Citizens United.”

The Supreme Court in that 2010 case upheld the free speech rights of corporations and unions to make political contributions. So, having lost in the highest court, leftists are taking the low road, a chapter out of the Saul Alinsky playbook, in an attempt to muzzle opposition to their political agenda. Alinsky advocated getting individual and institutional shareholders in corporations to assign their proxy votes to leftist groups in order to pressure boards of directors to do their bidding.

The latest campaign seeks to push corporations into disclosing their contributions to political action committees, advocacy organizations, trade associations and any other political or quasi-political activities. That information will then be used to organize boycotts, shareholder meeting protests and other campaigns in an effort to shut off corporate contributions to groups and causes with whom they disagree.

“They are basically trying to subvert the shareholder proposal process in order to try to influence corporate behavior,” said Atkins. “Usually corporations, especially in the retail area, want to try to avoid controversy. Because they are pulled and tugged by people on both sides. And so they don’t want to be subject to boycotts or negative publicity or things like that.”

Target boycott

A good example is the 2010 boycott against Target. The retail giant had committed the “crime” of contributing $150,000 to Minnesota Forward, a political group that supported the campaign of a gubernatorial candidate who opposed gay marriage. In response to the boycott, Target apologized for the contribution.

“Going forward, we will soon begin a strategic review and analysis of our decision-making process for financial contributions in the public policy arena,” said Target CEO Gregg Steinhafel in a letter. “Target will take a leadership role in bringing together a group of companies and partner organizations for a dialogue focused on diversity and inclusion in the workplace, including GLBT issues.”

Caving into leftist groups like Moveon.org worked — the boycott fizzled out. Target’s website notes that, while the company continues to belong to trade associations and other policy-based organizations, “the positions they take do not always reflect Target’s views.” A Target pie chart shows nearly equal contributions to Republican and Democratic PACs.

Attacking ALEC

Having tasted Target’s blood in the water, the leftist sharks recently went after corporations that had joined the American Legislative Exchange Council.

“It’s kind of a nerdy group, sort of behind the scenes,” said Atkins. “They work towards building model statutes for state legislatures, things like tax reform, regulation and health care and all sorts of things. Among the things they were asked to help with was ‘Stand Your Ground’ laws and also ‘Voter Identification.’ So, in the wake of the Trayvon Martin shooting, Van Jones’ group called Color of Change and another group figured out that Pepsi and Coke and Wendy’s and McDonald’s and a few other companies had contributed to ALEC. So they blew all this up and said, ‘Ah ha, look, Pepsi, Coke and all of these other companies are helping Voter ID, so it’s racial profiling’ or whatever their charge was.”

More than a dozen corporations have reportedly dropped out of supporting ALEC, producing more blood in the water.

Now some companies are considering buckling under to the latest pressure to disclose their contributions — or perhaps get out of politics altogether in order to make the sharks go away. But Atkins is hoping that the companies stand their ground.

“Sure you have some corporations that might support something that might not be in the best interest of their shareholders,” he said. “But overall, for the most part, corporations really do support things like a push for a better tax system, push for a better regulatory system, support things like the National Association of Manufacturers, the Chamber of Commerce, the American Petroleum Institute and things like that, which really do a lot of good.

“For example, in Washington right now, one of the big issues before the SEC is the Conflict Mineral provision of the Dodd-Frank rule. The American Petroleum Institute is doing a great job in trying to argue against this particular provision of Dodd-Frank, which will be very harmful to business and cost shareholders a huge amount of money. The reason why you have trade groups is so they have the guts, hopefully, to stand up. Because one individual corporation can always get cut down and have pressure put against it. That’s why you need the trade groups to get into it, or groups like PRI or others who are supported by corporations, or the Competitive Enterprise Institute in Washington, which has filed suit against Dodd-Frank and they had sued against the public company accounting oversight board in Sarbanes-Oxley before that. So, these groups are very valuable with respect to some of the disputes with government and regulation and those sorts of things.”

PRI, the Pacific Research Institute, is CalWatchDog.com’s parent think tank.

One of the challenges for corporations in resisting leftist pressure is that the issue is framed in terms of the laudable goal of seeking more information and transparency for shareholders.

‘Materiality’

“Why not just put all the chips out on the table and let the chips fall where they may?” asked Atkins rhetorically. “Well, the thing is when we talk about disclosure with public companies, the main rubric behind the securities laws and behind SEC rules is ‘materiality.’ Materiality means what a reasonable, rational investor would take to be an important fact that he would want to know in trying to decide whether to buy, sell or hold a particular company’s stock. This materiality concept goes back and is embedded in the Securities Act and been upheld by the Supreme Court time and again as giving a standard by which companies should decide what to disclose and what to put into their prospectus and annual report and what to leave out.

“So these sorts of contributions by public companies are clearly not material. They don’t rise to any level that would affect the corporation as far as the bottom line. A number of these shareholder activists argue, ‘Well, it’s material in that it could be controversial, and shareholders need to know it because it might cause a boycott like you saw with Target or whatever.’ But that’s very much a circular argument. Because the very same groups who are arguing for disclosure are the ones who then light the fuse to have these boycotts and other things go on. Ultimately, it’s the board of directors that oversees these sorts of contributions in the end who have a fiduciary duty to the shareholders to decide what is or is not in their best interest and how they should build shareholder value.”

Atkins pointed out that disclosure requirements are already in place for contributions to candidates, and that Congress always has the option of requiring similar disclosure for super PACs.

“But it should not be where the shareholders themselves disarm unilaterally and say, ‘OK, we will disclose and open ourselves up to criticism and what not,’” he said. “So what we are trying to do is encourage boards and others basically to stand their ground if they choose to do so. Some companies disclose and others don’t. But it is a very slippery slope if you start going down that road.”