Running the D.C. Circuit Gauntlet on Cost-Benefit Analysis after Citizens United: Empirical Evidence from Sarbanes-Oxley and the JOBS Act

TORRES-SPELLISCY 9.22.2014 (DO NOT DELETE) 1/7/2015 4:35 PM RUNNING THE D.C. CIRCUIT GAUNTLET ON COST-BENEFIT ANALYSIS AFTER CITIZENS UNITED: EMPIRICAL EVIDENCE FROM SARBANES-OXLEY AND THE JOBS ACT CIARA TORRES-SPELLISCY, KATHY FOGEL, & RWAN EL-KHATIB “The more strictly we are watched, the better we behave.” 1 -Jeremy Bentham INTRODUCTION “To require disclosure or not to require disclosure?” That is the question faced by regulators, including the Securities and Exchange 2 Commission (SEC), in light of the Supreme Court’s 2010 decision in Copyright © 2014 Ciara Torres-Spelliscy, Kathy Fogel, & Rwan El-Khatib.  Associate Professor, Stetson University College of Law, 1401 61st Street South, Gulfport, FL 33707-3299.  Associate Professor of Finance, Sawyer Business School, Suffolk University, 8 Ashburton Place, Boston, MA 02108. .  Assistant Professor of Finance, College of Business, Zayed University, Dubai, UAE. . We thank Hien Nguyen and Nicole Fuller for the most capable research assistance. Kathy Fogel acknowledges financial support from the Public Citizen Foundation, Washington D.C. Professor Torres-Spelliscy thanks Jared Bernstein, the Director of Congress Watch Lisa Gilbert, Professors John C. Coates IV, Jennifer S. Taub, Brian Galle, Glynn Torres-Spelliscy for their helpful feedback on earlier drafts, her Stetson Law research assistants, Adam Labonte, Christian Moriarty, Laurelyn Schaefer, Kevin Crews, Raphael Rashkin, Cherylin Blitch, Courtney Chaipel, Alex Farris, and Stetson Law Librarian Sally Waters for their research assistance, and Stetson University College of Law for the grant to support this research. 1. Jeremy Bentham, Farming Defended, in 1 WRITINGS ON THE POOR LAWS 276–77 (Michael Quinn ed., Oxford University Press 2001) (1796). 2. Lucian A. Bebchuk & Robert J. Jackson, Jr., Shining Light on Corporate Political Spending, 101 GEO. L.J. 923, 966 (2011). TORRES-SPELLISCY 9.22.2014 (DO NOT DELETE) 136 1/7/2015 4:35 PM DUKE JOURNAL OF CONSTITUTIONAL LAW & PUBLIC POLICY [VOL. 9:1 3 Citizens United v. FEC, which allowed for a new free flow of 4 corporate money into the American political system. Since 2011, a petition by ten law professors asking for transparency of corporate 5 political spending has been pending before the SEC. Over one million people have written to the SEC asking the Commission to act 6 on this petition. The political spending of publicly traded corporations is significant for two reasons: (1) public corporations tend to be larger, affording them greater potential influence over the political process, and (2) they tend to have more shareholders whose interests will be implicated by campaign spending. Here, “political spending” is meant to encompass all spending in the electoral process, whether directly or indirectly, and not, unless otherwise noted, disclosure of lobbying expenses. This article anticipates the SEC’s eventual promulgation of 7 rules requiring disclosure of corporate political spending. Many of the core questions that we can now study about the market’s reaction to increased regulation of listed companies are likely to be implicated in the debate about corporate political spending disclosures. Corporations that do not want to disclose their political spending 8 are likely to challenge any rule that the SEC issues on the subject. 3. Andrew Joseph, Poll: Most Voters Oppose Citizens United Decision, NAT. J. BLOG (Jan. 20, 2012), http://www.nationaljournal.com/blogs/influencealley/2012/01/poll-most-votersoppose-citizens-united-decision-20 (“The poll found that 62 percent of all voters oppose the Supreme Court's Citizens United decision (the two-year anniversary of which is tomorrow) and 46 percent of voters strongly oppose it. Meanwhile, 55 percent of voters do not believe that corporations should have the same rights as people.”). 4. Citizens United v. FEC, 558 U.S. 310, 371 (2010); Nell Minow, Editor & Co-Founder, The Corporate Library, The Diane Sanger Memorial Lecture to the SEC Historical Society (Mar. 17, 2010), available at http://c0403731.cdn.cloudfiles.rackspacecloud.com/collection/ programs/sechistorical-podcast-031710-transcript.pdf. 5. The ten professors are Lucian A. Bebchuk, Bernard S. Black, John C. Coffee, Jr., James D. Cox, Ronald J. Gilson, Jeffrey N. Gordon, Henry Hansmann, Robert J. Jackson, Jr., Donald C. Langevoort, and Hillary Sale. Petition for Rulemaking from the Committee on Disclosure of Corporate Political Spending, to Ms. Elizabeth M. Murphy, Sec’y, U.S. Sec. & Exch. Comm’n 1 (Aug. 3, 2011) [hereinafter Disclosure Comm. Petition], available at http://www.sec.gov/rules/petitions/2011/petn4-637.pdf). 6. See Comments on Rulemaking Petition: Petition to Require Public Companies to Disclose to Shareholders the Use of Corporate Resources for Political Activities, U.S. SEC. & EXCH. COMM. (2014), http://www.sec.gov/comments/4-637/4-637.shtml (last visited Aug. 22, 2014). 7. 15 U.S.C.A. § 78q-1(b)(8) (West 2014) (authorizing the SEC to adopt “such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest, for the protection of investors”). 8. Comment letter from the U.S. Chamber of Commerce et al., to Ms. Elizabeth M. Murphy, Sec’y, U.S. Sec. & Exch. Comm’n (Jan. 4, 2013), available at http://www.sec.gov/comments/4-637/4637-1198.pdf. TORRES-SPELLISCY 9.22.2014 (DO NOT DELETE) 2014] RUNNING THE D.C. CIRCUIT 1/7/2015 4:35 PM 137 Such a legal challenge is destined to be heard by the D.C. Circuit, which examines many federal regulations with an increasingly 9 jaundiced eye. This article addresses the hostility that the D.C. Circuit may harbor against a new SEC rule requiring greater corporate transparency in election activities and provides some data that might assist the SEC in navigating this gauntlet. Of late, the D.C. Circuit has stuck down new regulations on numerous grounds, including finding that the SEC did not do a sufficiently rigorous cost-benefit analysis, that the rule does not foster market efficiency, or that it somehow conflicts with the First 10 Amendment. If the SEC promulgates a new rule on corporate political spending, then neither the SEC nor the D.C. Circuit will be 11 writing on a blank slate; both will stake a position in a long-running 12 debate over what types of regulations foster efficient markets. On 9. John C. Coates, IV, Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications 26 (European Corporate Governance Institute Law Working Paper No. 234/2014, 2014) [hereinafter Coates, Cost-Benefit Analysis of Financial Regulation], available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2375396 (“In the seven years after Chamber of Commerce [v. SEC, 412 F.3d 133 (D.C. Cir. 2005)], the D.C. Circuit handed down six more similar decisions, striking down a range of SEC actions, an average of one per year, representing one in seven of the SEC’s major rules over that period.”). 10. 15 U.S.C. (...truncated)