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The SEC Sends Its Regrets

By Bartlett Naylor

Given that Securities and Exchange Commission (SEC) has recently proposed to reduce the disclosures that companies must provide to investors– even though those same investors are clamoring for additional information about companies– we took it upon ourselves to read between the lines and translate what the SEC’s Chair, Jay Clayton, is really saying to stockholders:

Dear investors,

A number of you have sent invitations to the SEC asking us to require additional corporate disclosures on critical subjects.

As chair of the Commission, I must let you know that the SEC sends its regrets.

You’ve asked for more information to be released through what we call Form S-K, which is the basic annual report provided by big American companies. We adopted this form in 1977. Many of you have pointed out that much has changed in the last half century. New technologies have emerged, such as the internet, with new industries to manage it. The most valuable companies as measured by market capitalization today are not General Motors or Coca Cola, but the likes of Google, Facebook and Microsoft.

So, what are these invitations we must regretably turn down?

You’ve noted that you’d like more information on the workforce, or human capital, that’s critical to these digital companies.

Many of you note climate change, and how this will affect every company. Or, where companies do and don’t pay taxes, since this also potentially poses a risk to share value. Fair points.

And, many of you wonder how companies are spending your investment dollars on politics. Got it; it’s your money.

I say “a number” of you have requested this information, and, with respect, acknowledge that the “number” may be close to two million. For example, one invitation to ask us to require that corporations disclose their political spending was signed by more than 1.2 million people. Gosh, we appreciate all the attention. You’d think we were an investor protection agency.

Several of these invitations regard human capital. To date, the SEC only requires two disclosures regarding its employees: their number and the median pay for workers at the firm. With the likes of Google and Facebook looming large in industry, investors say they want information on worker recruitment, employment practices, and hiring practices; employee benefits and grievance mechanisms. The Human Capital Management Coalition, composed of more than 20 institutional investors, marshalled dozens of studies demonstrating the material impact of various employment practices, in their invitation to us. Others have asked for disclosures on gender pay ratios on an annual basis; human rights policies, practices, and impacts; and tax practices. Instead of giving you all more information on companies’ workforces , what we’re proposing to do is to eliminate one of our requirements. No longer will companies need to tell investors how many workers they employ.

Other recent invitations we’ve received addressed the wish for more environmental reporting for shareholders. In 2018, investors representing $5 trillion in assets-under-management submitted a new petition for a rulemaking at the SEC that would create a standard disclosure framework on environmental, social and governance (ESG) issues. What we’re proposing to do is reduce the current standards for reporting environmental lawsuits. You might say more is more. We say less is more.

Other invitations from you sought greater political spending disclosure. Each year, shareholder resolutions calling for such disclosures count among the most common, including 93 separate resolutions in 2019. Currently, 292 companies are voluntarily disclosing some or all of their political spending done with corporate money. In 2011, a bipartisan committee of leading corporate and securities law professors, including now-Commissioner Robert Jackson, filed a petition requesting a rulemaking requiring that all public companies disclose their political expenditures. As I mentioned earlier, more than 1.2 million signatories were on that petition. Additionally, more than 26,000 commenters sought more political spending disclosure in response to our latest exercise at the SEC to reform basic Form S-K corporate reporting. When it comes to disclosing the money that companies spend to play in politics, what we’re proposing to do is nothing. I hope nothing works for you.

I realize that the first line in my job description is to promote the interest of investors. Several of you cited the Securities Act of 1933, which requires that “investors receive financial and other significant information concerning securities being offered for public sale,” and to “prohibit deceit, misrepresentations, and other fraud in the sale of securities.”

And it might make some sense that those who know best what is significant to investors are, well, investors. But my fellow commissoner, Hester Peirce, said  these investors are a “shrill . . . crowd of self-appointed, self-righteous authorities.” Instead of listening to the people who are trusting companies with their money, I decided that a better source for understanding the interest of investors is the companies themselves. That’s why we quoted Federal Express 20 times in our latest proposal for disclosure reductions.  FedEx doesn’t think shareholders should know where it spends their money on politics. For FedEx, it’s especially inconveneient since some goes to the U.S. Chamber of Commerce, which is one of the biggest lobbies in Washington. The Chamber claims to represent small business, which sells better as a talking point in Washington. That’s helpful for the likes of FedEx, which isn’t small business. Investors, migbt be upset if they knew this, so it’s best not to upset you, yes?

So thanks for all the invitations, we appreciate the thoughtful asks, apologies that we must turn you down.