The NCPPR Lawsuit Could Put the SEC Back in Its Place

The Securities and Exchange Commission is now a central combatant in America’s culture wars. Originally conceived as a simple guardian of financial transparency and a sentinel against fraud, the SEC has seen its role gradually reshaped by progressives who envision the agency as a force for cultural change. The SEC has even begun trying to compel corporate speech on woke issues indirectly, but a recent lawsuit could help steer it back on the right path.

The SEC, under the stewardship of Biden-appointed Chairman Gary Gensler, has ratcheted up its authority over proxy voting to turn mundane company ballots into battlegrounds of cultural conflict. These ballots were once the simple mechanism through which shareholders asserted their voice on board elections and merger decisions. Today they have become engulfed in ideological warfare.

For decades, the SEC maintained that proposals concerning the ordinary business or everyday workings of a company weren’t fit for inclusion in proxy statements. It was a sensible position, acknowledging that decisions about what a company should sell or how it should operate were best left to the professionals running the business, not shareholder plebiscites.

Yet on Mr. Gensler’s watch the SEC executed a dramatic reversal. The agency determined in November 2021 that shareholder proposals could be exempt from the ordinary-business rule as long as they “raise significant social policy issues.” That reinterpretation has not only turned a neutral and sensible process into a political fight but has also put the SEC in a position to decide arbitrarily what counts as “significant social policy issues.” This has allowed the agency essentially to compel progressive speech, according to the National Association of Manufacturers’ intervention in a recent lawsuit by the National Center for Public Policy Research against the SEC.

The NCPPR sued the SEC after it denied the conservative foundation’s proxy proposal that retail giant Kroger issue a report on the risks of not guarding against viewpoint discrimination in its equal employment opportunity policy. The NCPPR is a longtime Kroger investor and submitted the proposal after the company paid $180,000 to settle claims from former employees that they were fired for refusing to wear aprons they thought endorsed the LGBT community. By any reasonable interpretation, the NCPPR proposal dealt with a significant social policy issue that could be material to Kroger and investors. Yet the SEC still denied it, even though it approved similar proposals dealing with discrimination regarding race and sexual orientation, such as a Pfizer proposal to report on its diversity, equity and inclusion efforts.

The SEC has sought to have the NCPPR’s suit dismissed because Kroger ultimately included NCPPR’s proposal for a shareholder vote, but the larger issues raised by the NCPRR and the National Association of Manufacturers remain unaddressed by the SEC. The National Association of Manufacturers argues that the SEC is violating the First Amendment by compelling corporate speech. As an example, its court filing alleges that the agency compelled Mastercard to include an antigun proposal in its proxy statement but allowed American Express to exclude a very similarly worded pro-gun-rights proposal. The National Association of Manufacturers also contends this runs afoul of securities law, which doesn’t give the agency the authority to dictate proxy statements’ content.

This suit could help steer the SEC back toward its original purpose of mandating disclosures of basic financial information and policing fraud.

Anything further is principally the purview of state law, not the SEC. The Supreme Court’s “internal affairs doctrine” approach to interpreting federal securities laws recognizes state law as the primary regulator of the internal governance matters between shareholders and boards. It is states that can intervene in the selection of company directors, changes to major governance policies in company bylaws, and major mergers and acquisitions decisions. By extending the reach of shareholder proposals, the SEC may be overstepping its bounds, encroaching on an area traditionally under state jurisdiction.

The Gensler proxy interpretation also seems to contravene the will of investors, who mostly seem to be rejecting social proposals outright. In the past year alone, investors voted down the overwhelming majority of socially framed proposals. The SEC still harms companies, however, by forcing them to deal with the costs associated with such proposals and potential reputational damage. And of course, it gives an important opportunity to investors who want to play social activist.

The SEC’s transformation into a tool for cultural conflict marks a departure from its original mission. It is a shift that may have turned the ratchet one too many times, possibly breaking the system it was designed to uphold. Hopefully, the courts can put things back in working order.

Mr. Verret is associate professor at the Antonin Scalia Law School at George Mason University and a former member of the SEC Investor Advisory Committee.