Americans for Tax Reform is concerned that the Securities and Exchange Commission could be violating federal law with the finalization of the rulemaking entitled: Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers.
The proxy voting rule recently finalized by the SEC requires institutional investment managers, such as broker-dealers, pension funds, or investment advisers, “to identify the subject matter of each reported proxy voting item.” The SEC has divided proxy voting topics into categories such as executive compensation; environment or climate; human rights; and diversity, equity, and inclusion. The rule would also require the disclosure of “other social issues” such as “lobbying” and “political or charitable activities.”
The disclosure of “other social issues” appears to directly conflict with the law. Since 2015, Congress has passed appropriations bills with a provision that prohibits the SEC from writing or finalizing a rulemaking that would require the disclosure of lobbying, political contributions, and donations to tax-exempt organizations. For fiscal year 2022 appropriations, Congress codified this explicit prohibition:
SEC. 633. None of the funds made available by this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.
The final rule will likely embolden and normalize environmental, social, and governance (ESG) shareholder proposals regardless of whether they directly affect a company’s future financial performance. A Democratically controlled SEC is bound to be favorable to allowing shareholder proposals that could exploit nonprofit entities and political contributions that fail to align with the political preferences of the Biden administration.
The rule will make it easier for institutional investors (e.g., BlackRock, Vanguard, State Street, pension fund boards) to compel their portfolio companies to disclose what has traditionally been proprietary donor information, and potentially use this information to exploit political enemies.
This is further proof that ESG is no more than a mechanism to impose political decisions through corporate governance instead of an elected legislative body.
Members of Congress and affected parties should closely examine this issue and inquire as to whether the SEC is conforming with the law.