SEC to Force Politician Disclosure Risk

This amazing story flashed briefly across the pages of the business press last week. If you blinked, you missed it.

Initial news reports indicated that the SEC had taken a party line vote compelling companies to disclose the potential effects of climate change on their business. OK, you might surmise, the Obama administration opened up another regulatory front to pursue its climate policies now that the Scott-heard-round-the-world shuttered the cap-and-trade bazaar in Congress. Aside from another dollop of boilerplate that companies will have to lard onto SEC filings, the practical impact of this political theater is minimal. After all, the actual risk of a shareholder lawsuit alleging that the ocean rose 20 feet and no one noticed in time to sell their stock is pretty small.

To get the real story, though, you have to dig deeper. Go to www.sec.gov and take a look at Interpretation: Commission Guidance Regarding Disclosure Related to Climate Change. On page 22 there is this nugget: "Registrants should consider specific risks they face as a result of climate change legislation or regulation and avoid generic risk factor disclosure that could apply to any company."

Whoa. Imagine Congress passes a law in a closed-door bargaining session saddling a group of companies like yours with an extra billion dollars in taxes to pay for some green jobs goodie. Next morning you wake up and not only has your stock cratered but the trial lawyers whose campaign donations put these Congressmen in a position to redistribute your income have filed class action lawsuits for failure to disclose your company's risk exposure to ... politicians.

Think about the broader implications of a politician risk disclosure requirement should it ooze its way into our financial regulatory apparatus. This racket puts the selling of indulgences to shame.

If health care legislation comes back from the grave and medical device manufactures get fleeced to pay for it, will they face shareholder litigation after their stocks tank?
If Congress decides that Twinkies and soft drinks are bad for the nation's health and passes a sugary snack tax, do Hostess and Coca Cola get hammered for not warning their shareholders?

Suppose Congress deregulates an industry, not that this is ever going to happen again in our lifetimes. Would a public company that owed its position to the protection of such regulations get sued for misleading shareholders after a crop of new competitors enters its formerly protected market?

If one of your competitors rents a Congressman and lands an earmark that he leverages to steal business away from you, do you get sued for not disclosing?

If the house passes an amendment to a bill that clobbers your stock and your lobbyist convinces the senate to rip that amendment out before the bill becomes law, can you still get sued on behalf of shareholders that sold on the dip?

It took me about five minutes to make these up. Imagine what a tort lawyer could do chasing millions in jackpot justice fees. What's disappearing faster, the rule of law or the Himalayan glaciers?

SEC Chairman Mary Schapiro claims she is just looking out for investors and is not wading into political policy debates. This from the folks that failed to recognize the unfunded casinos hawking credit default swaps, missed Bernie Madoff making off with $50 billion dollars, and blessed the ratings agencies that pimped toxic mortgage securities. Now that someone woke these snoozing bureaucrats up are you glad they're getting their priorities right?

The fundamental bargain a corporation makes when it sells stock to the public is that it will conduct business in the interests of all its far-flung shareholders. Because most of these shareholders have little practical say in running the company and can only vote with their feet, public companies must agree to abide by a clear set of communications standards. The combined expense of both complying with these standards and paying for the litigation that ensues when such standards are allegedly transgressed is a dead-weight loss on the business. A company bears this loss only if it believes it can make it up by reducing its cost of capital. If not it stays private, forgoing opportunities to grow.

Would a rule forcing companies to disclose the potential havoc that politicians might wreak make you more or less likely to invest in public companies? Shareholders should take note that Barney Frank hates us and has threatened to step on our air hose. Can you imagine what the trial bar is going to do with this? When did you learn that Nancy Pelosi was targeting your industry and what did you do about it?

Perhaps the SEC should be asked to explain how increasing both the cost of compliance and the risk of litigation in the midst of a recession is going to help public companies generate more jobs so we can climb out of the hole we're in. Meanwhile, can someone down there in wonderland ask the administration to stop digging?