By Lisa Gilbert
Now that the dust has begun to settle from the IRS scandal and lawmakers are considering solutions such as clear bright lines to guide the IRS in granting 501(c), nonprofit status, (as recommended by Public Citizen’s Bright Lines Project), it is important also to focus on the underlying issue that caused so many new nonprofits to spring up in the first place: the secrecy that 501(c)4 status provides for those who want to play in politics.
Social welfare organizations and other tax-exempt entities, such as trade associations (which are 501(c)(6) organizations), may believe they can spend as much as 49 percent of their annual expenditures on political activity and keep the donors of such expenditures secret. Nonprofits like Karl Rove’s Crossroads GPS were set up explicitly for the purpose of taking advantage of this secrecy, and they and other nonprofits and trade associations have become significant conduits for indirect, or funneled, corporate political spending.
We should continue to seek increased disclosure of political spending by all types of incorporated entities through legislative action. However, one very real avenue to disclosure of public company spending in elections in the near-term is for the Securities and Exchange Commission (SEC) to require publicly traded companies to disclose their political spending—both indirect and direct. More than 600,000 public comments (an all-time record at the agency) have poured into the SEC urging it to act, and in response, the SEC has put the issue on its formal regulatory agenda.
The SEC has been a leader in this space before. In the post-Watergate era SEC Chair Arthur Levitt made fighting pay to play corruption in the profitable municipal bonds market – essentially, rigging the awarding of government contracts – a top priority for commission regulation. The commission can and should require that publicly traded corporations disclose all political expenditures so that shareholders have a full and complete picture of how much corporate money is distorting the political sphere.
Corporate political activity presents broad concerns to the general public and significant risks to our economy. A study conducted by the International Monetary Fund, for example, drew a link between banks’ political spending and heavy involvement in risky subprime mortgages. The Financial Crisis Inquiry Commission concluded that deregulation was a contributing cause of the financial crisis. Corporate campaign contributions helped pave the way in catalyzing deregulation and protecting fraudulent and destructive companies and their leaders from just prosecution.
Many key SEC stakeholders care about this topic. Among those urging the SEC to act are five state treasurers writing as fiduciaries, Vanguard Founder and former CEO John Bogle, the Council of Institutional Investors (which has combined assets exceeding $3 trillion), and a global coalition of investors managing more than $690 billion.
Investors have been seeking full disclosure of the funds corporations spend to influence elections for more than 10 years, but with increasing urgency since the U.S. Supreme Court’s ruling in Citizens United v. Federal Election Commission, which exponentially amplified the magnitude, secrecy and risks of this spending. The SEC is the only agency with the clear authority to mandate disclosure of this information, which is so necessary to enable fully informed investment decisions.
Corporate political transparency is necessary for the efficient functioning of our capital markets and as a risk management tool for shareholders, corporate management and directors. Corporations claim this spending is necessary to protect their interests, but the public and investors have no way to monitor these activities or assess their risks without disclosure.
The time for sunshine is here. We need to move forward on a two-pronged track: focusing on bright line standards to restore credibility and functionality to the IRS’s oversight of nonprofits, and implementing transparency requirements by the SEC to deal with the underlying problem of companies converting shareholder money into political favors without oversight.
Lisa Gilbert is director of Public Citizen’s Congress Watch Division.