Corporations face growing demands for transparency and accountability in various aspects of governance and social responsibility.[1] Recent cases in the Fifth and Eighth Circuit Courts delve into the complexities of compelled speech[2], ideological expression[3], and constitutional scrutiny within the framework of securities law.[4] These decisions could have profound implications for regulatory practices, corporate disclosures, and the protection of corporate speech. Resolving these questions is crucial for stakeholders across the corporate and legal landscapes, and these decisions could reshape the boundaries of regulatory authority and redefine the parameters of corporate governance in the United States.
Alliance for Fair Board Recruitment v. SEC: Board Diversity Rules
The Fifth Circuit Court is tasked with determining the constitutionality of the SEC’s Board Diversity Rules.[5] The crux of the debate is whether these rules, which require disclosures of shareholder proposals related to race, gender, and sexual orientation, should be examined under the Commercial Speech Doctrine or subject to strict scrutiny, which is applied to content-based regulations of noncommercial speech.[6] Under the Commercial Speech Doctrine, a form of intermediate scrutiny is available for mandatory disclosures if (1) the speech concerns lawful activity and is not misleading: the disclosure must be purely factual and uncontroversial; (2) the asserted governmental interest is substantial; (3) the regulation directly advances the governmental interest asserted; and (4) the regulation is not more extensive than necessary to serve that interest.[7] The petitioners argue that the rules compel ideological expression, which is categorically not “purely factual and uncontroversial” and therefore infringes on First Amendment rights through viewpoint discrimination.[8] Furthermore, the petitioners warn that this could set a precedent for further ideological disclosures, affecting corporate speech and autonomy.[9] The SEC justifies the rules as necessary for investor information but petitioners argue that it overlooks the ideological implications.[10] The Court’s decision could significantly impact how corporations handle diversity and disclosure within legal boundaries, influencing corporate disclosure regulations and corporate free speech protections.
Examining Rule 14a-8: Shareholder Proposal Rule
Another case before the Fifth Circuit involves the SEC and its shareholder proposal rule.[11] This rule, Rule 14a-8, addresses when a corporation must include a shareholder proposal in its proxy statement.[12] The National Center for Public Policy Research challenges the rule, arguing it has shifted from its original purpose which was to inform shareholders, and now allows for the promotion of social and political agendas.[13] This shift raises constitutional concerns regarding compelled speech. Critics assert that the rule allows activist shareholders to pressure corporate boards on issues beyond their financial mandates.[14] Petitioners and amici curiae emphasize the necessity for First Amendment scrutiny, questioning securities regulations’ exemption from constitutional review.[15] The case also explores the limits of shareholder influence, especially when proposals may not align with broader shareholder interests.[16] This highlights the balance between shareholder rights and corporate governance, elucidating the need for clearer guidelines for appropriate shareholder proposals.
SEC Climate Rule: Authority and Free Speech
The Eighth Circuit examines the SEC’s Climate Rule, which is challenged by the State of Iowa among many others.[17] Petitioners argue that by enacting the rule – which broadly requires climate-related disclosures[18] – the SEC has exceeded its statutory authority by mandating disclosures on greenhouse gas emissions, which they claim lack alignment with investors’ financial interests.[19] The rule is seen as an overreach, potentially detracting from essential financial metrics.[20] The amici invoke the Major Questions Doctrine[21]asserting the absence of explicit congressional authorization for such regulations.[22] They also argue the Climate Rule compels speech on controversial topics, violating First Amendment rights through viewpoint discrimination.[23] This case highlights the tension between environmental advocacy and regulatory limits, questioning financial regulators’ roles in addressing global issues like climate change. The outcome could redefine relevant financial disclosure boundaries concerning environmental, social, and governance (ESG) criteria.
Conclusion
These cases collectively underscore the complex interplay between securities regulation and the First Amendment. They challenge the boundaries of regulatory authority, compelled speech, and investor protection. As the courts navigate these legal complexities, the outcomes will shape corporate governance, disclosure requirements, and free speech in the evolving securities law landscape. The ongoing debates necessitate careful consideration of constitutional principles and the protection of individual rights within regulatory frameworks. This evolving legal landscape will require careful navigation by corporations and regulators, balancing transparency with preserving freedom of speech and expression.
[1] Andrew Ramonas, Nasdaq’s Board Diversity Win Invigorates SEC Disclosure Plans, Bloomberg News, https://news.bloomberglaw.com/esg/nasdaqs-board-diversity-win-invigorates-sec-disclosure-plans (Nov. 9, 2023, 5:00am).
[2] Id.
[3] Sean J. Griffith, Corporate Speech and Corporate Purpose: A Theory of Corporate First Amendment Rights, (forthcoming, Journal of Free Speech Law 2024), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4709312
[4] Andrew Vollmer, Jennifer J. Schulp, and Thomas A. Berry, Iowa v. SEC, Cato Inst. (June 20, 2024), https://www.theusconstitution.org/litigation/iowa-v-sec/.
[5] Brief for Petitioner, Alliance for Fair Board Recruitment et al., v. SEC, 85 F.4th 226 (5th Cir. 2023) (No. 21-60626), 2023 WL 6862856.
[6] Id. at 20.
[7] See NIFLA v. Becerra, 585 U.S. 755, 768-69 (2018); see also Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, 471 U.S. 626, 651 (1985).
[8] Brief for Petitioner, supra note 5.
[9]Id.
[10] Brief for Respondents, Alliance for Fair Board Recruitment et al., v. SEC, 85 F.4th 226 (5th Cir. 2023) (No. 21-60626), 2023 WL 6162292.
[11] Brief for Petitioners, Ntl. Ctr. for Public Policy Research v. Securities and Exchange Commission, No. 23-60230, 2023 WL 4687025 (5th Cir. 2023).
[12] 17 CFR § 240.14a-8 – Shareholder proposals, Legal Information Institute, (database updated Nov. 2020), https://www.law.cornell.edu/cfr/text/17/240.14a-8.
[13] Brief for Petitioner, supra note 11.
[14] Brief for Alliance for Ntl. Ctr. For Public Policy Research as Amicus Curiae Supporting Petitioner, Ntl. Ctr. for Public Policy Research v. Securities and Exchange Commission, No. 23-60230, 2023 WL 7040187.
[15] See, e.g., Id.
[16] Brief for Petitioner, supra note 11 at 25.
[17] Consolidated Brief for Petitioners, State of Iowa, et al., v. Securities and Exchange Commission, et al., No. 24-1522, 2024 WL 3206934.
[18] See Eloise Wagner, How to approach the SEC’s final rules on climate-related disclosures, EY, https://www.ey.com/en_us/insights/assurance/sec-s-rules-to-standardize-climate-related-disclosures (June 10, 2024).
[19] See Brief of Amici Curiae Legal Scholars in support of Respondent, State of Iowa, et al., v. Securities and Exchange Commission, et al., No. 24-1522, 2024 WL 3893245.
[20] Id.; see also Brief for Petitioners, supra note 16.
[21] Kate R. Bowers, Cong. Rsch. Serv., The Major Questions Doctrine, (2022), https://crsreports.congress.gov/product/pdf/IF/IF12077.
[22] Supra note 17.
[23] Id.
